Cochlear Limited
Annual Report
2020
Our story
Graeme Clark wanted to fix ears
From a young age, Professor Graeme Clark knew what he
wanted to do: “I want to fix ears.” He had watched his
father, a pharmacist, struggle with hearing loss, and
wanted to save others from the same hardship and
isolation.
Then he spotted a shell
Professor Clark had a concept – and the ambition to see it
through – but the challenges of the time made it difficult to
turn idea into action. It was an encounter on a beach that
was the final step Graeme needed. In a shell and a blade of
grass – rigid at its roots but malleable at the tip – Graeme
saw the structure that would allow an electrode array to
adapt to any curve. It was here that the opportunity to
connect hundreds of thousands of people to a life of
hearing first came to light.
It helped to establish a company to
bring that vision to life
Professor Clark changed the world – he and his team developed a new way of treating hearing loss. From the realisation of one
man’s dream, our global company was formed and hundreds of thousands of people have now experienced life’s opportunities
through hearing. Today we continue Professor Clark’s dream and connect hearing implant recipients everywhere.
Our work is far from over
The history of our organisation has always been about transforming lives – giving people the opportunity to enjoy a life of
hearing. Professor Clark was inspired to “fix ears” – and so too was Dr Anders Tjellström, who performed the world's first bone
conduction hearing implant surgery in Gothenburg in 1977.
The work of these pioneering researchers – and their brave first recipients – laid the foundation for our company. This drive
has always been a part of our DNA – we gain our inspiration from the people we serve and support. That’s what inspires our
journey forward.
Cochlear Limited Annual Report 2020
Contents
2
3
Financial history
Letter to shareholders
11 Market leadership
40
58
63
Remuneration report
Directors’ report
Financial statements
15
33
36
Operating and financial review
112
Shareholder information
Board of directors
Executive team
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 section of the website,
www.cochlear.com.
Strategy Overview
The Strategy Overview provides an
insight into Cochlear’s strategy to
retain market leadership, grow the
hearing implant market and deliver
consistent revenue and earnings
growth over the long term.
Corporate Governance
Statement
Corporate
summarises
Governance
The
the
Statement
Company’s corporate governance
practices and
incorporates the
disclosures required by the ASX
Corporate Governance Council’s
Corporate Governance Principles
and
(3rd
Recommendations
Edition).
ESG Report
The ESG (Environmental, Social
and Governance) Report outlines
how we aim to improve the impact
we have on our communities, the
environment and our employees
and reflects our commitment to
high
corporate
governance.
standards of
Tax Contribution
Report
The Tax Contribution Report
covers Cochlear’s taxes paid in
Australia and globally and details
the global tax strategy.
1
Financial history
Cochlear has a long track record of delivering growing sales revenue,
profits* and dividends, disrupted in FY20 by the impact of COVID‐19.
7%
in FY20
Cochlear implants
units
31,662
FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
6%
in FY20
Sales revenue
$million
1,352
FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
42%
in FY20
Net profit
$million – adjusted*
154
FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
52%
in FY20
Dividends
per share
$1.60
FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
* Excludes the following items after tax: FY12 ‐ product recall costs of $101 million, FY14 ‐ patent dispute provision of $16 million, FY19 ‐ $11 million
innovation fund gains and FY20 ‐ $416 million patent litigation expense and $24 million innovation fund gains.
2 Cochlear Limited Annual Report 2020
Letter to shareholders
Cochlear had a strong start to FY20 with cochlear implants delivering a 13% increase in unit
growth in the first half. The launch of the Cochlear™ Nucleus® Profile™ Plus Series cochlear
implant was well‐received, driving share gains in many markets. The impact of COVID‐19
on the business during the second half was substantial, with the deferral of cochlear
implant surgeries across the world. As COVID‐19 started to impact the business, we were
very clear that we wanted to emerge from the pandemic in a stronger competitive
position, placing a high priority on keeping our valuable workforce intact and continuing
to invest in our R&D programs and market growth activities. While still early days, surgeries
have resumed in many markets.
The impact of COVID‐19 on profitability was significant with underlying net profit declining by 42% to $153.8 million. After
factoring in patent litigation expenses and innovation fund gains, Cochlear recorded a net loss of $238.3 million for FY20. In
response, we have taken actions to strengthen our balance sheet and liquidity position to enable the business to weather the
expected business disruption caused by COVID‐19.
Throughout this time, Cochlear has been focused on keeping all employees safe, and supporting customers and communities,
while following all local and country guidance in the regions we operate throughout the world. The team at Cochlear shares its
heartfelt empathy with the communities impacted worldwide by COVID‐19. As the world responds to this pandemic, we remain
committed to supporting our customers, employees and communities to ensure that the vital work of delivering implantable
hearing solutions to patients continues.
Cochlear implants
The cochlear implant business delivered strong growth in the first half of the year as the Nucleus Profile Plus Series cochlear
implant was successfully launched across major markets. The positive momentum was however disrupted in the second half
by COVID‐19 with elective surgeries deferred across the world as infection rates grew. We experienced a significant and rapid
decline in revenue from mid‐March to early‐May, the point at which surgeries began to resume.
By the end of June, market conditions still varied greatly across our markets with surgery volumes recovering quickly in China,
the US, Germany, Benelux and Australia and more slowly in the UK, Spain and Italy. Surgeries across most emerging markets,
including India and Latin America, have remained very low as COVID‐19 cases continue to grow.
The portfolio was boosted by the addition of a number of new products including the Cochlear™ Nucleus® Profile Plus with
Slim 20 Electrode and the Cochlear™ Nucleus® Kanso® 2 Sound Processor which are currently being launched across major
markets.
3
Services
Services were materially impacted by COVID‐19 in the fourth quarter of FY20. While some recipients have been able to access
sound processor upgrades remotely, clinic closures have delayed access to sound processor upgrades for many people.
Cochlear’s remote servicing capability, with tools including Cochlear™ Link and Remote Check, are assisting clinicians and
recipients with performance, mapping, and troubleshooting in markets where they are approved. Many countries and clinics
have been adapting, enabling greater levels of remote access and programming to assist recipients unable to visit clinics as a
result of COVID‐19. In recognition of the importance of providing support, the FDA fast‐tracked approval of Remote Check in
April.
Acoustics
In the first half, we experienced some loss of market share from competitor product launches. The market also slowed more
than expected in anticipation of the launch of the next generation bone conduction implant, the Cochlear™ Osia® 2 System,
which commenced its rollout in the US in February. Like cochlear implants, the second half was materially impacted by COVID‐
19 due to the delay of elective surgeries.
Acoustics revenue is largely generated from the US and the UK. Surgery volumes have improved in the US since May with
increasing demand for the Osia 2 System. Acoustic implant surgeries in the UK, however, have not yet restarted following the
COVID‐19 shutdowns.
Managing through the pandemic
Since the outbreak of COVID‐19, the normal structures of business life needed to rapidly and radically adapt. We changed the
way we managed the business, setting aside the normal planning cycles, and enacting our business continuity plan. Guided by
our mission, our immediate priorities were to:
Ensure the health and safety of our employees;
Provide ongoing support to our recipients, clinics and professional partners; and
Maintain the financial health of the Company.
Our employees represent around two‐thirds of our operating costs. They have valuable experience and make great
contributions to Cochlear’s mission. We do not want to reduce our workforce as we believe the disruption will be temporary.
We have however significantly reduced non‐essential spending and capital expenditure and will continue to do so until there
is a sustained increase in surgeries. We also implemented a hiring freeze, with temporary pay reductions for the Board and
senior management across the business in the last quarter of FY20.
sharing
sessions,
We changed the way we worked together with the majority of employees working from home across the globe from mid‐
March. The rapid and successful transition
to communicating via video meetings, best
practice
rebalancing
workloads across the business via our
‘marketplace’
initiative and conducting
weekly global town hall meetings has
actually enhanced workplace engagement
for most, with many of the new ways of
doing business to continue post pandemic.
Cochlear’s teams have remained focused on
providing support to recipients, while
continuing their outreach programs with
candidates through the Company’s direct‐
to‐consumer marketing efforts. The rapid
adoption of online and video conferencing
tools with our professional partners,
to be
candidates and
commended and has ensured that we can
continue to provide valuable education and
support throughout the pandemic.
recipients
is
4 Cochlear Limited Annual Report 2020
Keeping people connected and informed via regular
employee video briefings
We have continued to invest in the R&D pipeline with the
majority of projects progressing to schedule, including
products currently in the regulatory approval process.
With the rapid changes in the operating landscape,
including clinic closures and access to telemedicine in
some markets, we took the opportunity to review our R&D
priorities, opting to scale up our connected care efforts
even more.
We have spent many years developing our remote care
solutions, with the connectivity of the Cochlear™ Nucleus®
7 Sound Processor to the cloud enabling a suite of remote
capability. We are now starting to gain regulatory approval
for remote care solutions that can provide recipients and
audiologists with the ability to access efficient and
convenient care. We continue to work on securing
reimbursement for these solutions as a way to drive
greater adoption.
Customer servicing has been largely unaffected with the
Global Repair Centre
fully operational. Cochlear’s
manufacturing and service and repair centres have been
deemed as essential services and continue to operate.
Manufacturing output of cochlear and acoustic implant
systems has been reduced to manage inventory levels.
The supply chain continues to be largely intact. Our
conservative approach to inventory management and
long‐term supplier relations ensured that there were no
supply shortages for components. The business continues
to carry adequate levels of inventory for most components
and is managing distribution in line with customer demand
to enable continued supply of products to customers.
Maintaining the financial health of Cochlear ultimately
enables us to pursue our mission. The liquidity position has
been strengthened through a $1.1 billion capital raising
and $225 million increase in debt facilities during March
and April.
Cochlear webinars providing online education
and support for professionals and recipients
15%
10%
5%
0%
-5%
-10%
-15%
-20%
R&D expenditure
14%
185
250
200
150
100
50
-
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
R&D expenditure ($m)
R&D / Sales revenue %
Continuing to progress the R&D pipeline
There is no doubt the last few months have been very challenging. As we progressively return to working from the office, we
are also taking the opportunity to learn. Many of the new ways of doing business both internally and with our customers will
be continued post pandemic.
Retaining market leadership
Cochlear has been the global leader in implantable hearing solutions for 40 years. The
investment in R&D aims to strengthen our leadership position through the development of
market‐leading technology.
In FY20, we invested $185 million in R&D, in line with FY19 levels, and representing 14% of
sales revenue. Investment in the R&D pipeline continued despite COVID‐19 with the
majority of projects progressing to schedule, including products currently in the regulatory
approval process.
The highlight for the year has been the approval of a number of important new products
spanning all components of the product portfolio, with many approvals received either just
before, or during, the COVID‐19 shutdowns. These include:
Cochlear™
Nucleus® Kanso® 2
Sound Processor
5
Implants and electrodes
Cochlear™ Osia® 2 System
Cochlear™ Nucleus® Profile™ Plus with Slim 20 Electrode
Sound processors
Cochlear™ Nucleus® Kanso® 2 Sound Processor
Cochlear™ Nucleus® 7 Sound Processor for Nucleus 22
implant recipients
Clinical and surgical support tools
Custom Sound® Pro fitting software
Nucleus® SmartNav System
Connected care
Remote Check solution for cochlear implants
Cochlear™ Osia® 2
System
Nucleus® SmartNav
System
Growing the market for hearing implants
As the global leader, Cochlear is focused on driving long‐term market growth by transforming the way people understand and
treat moderately severe to profound hearing loss through awareness and access activities. In FY20, we continued to invest in
expanding our programs for driving growth of the adults and seniors segment which include direct‐to‐consumer marketing
activities, building hearing aid channel referrals from the hearing aid and ENT channels, and standard of care initiatives aimed
at building a consistent treatment pathway for adults with severe to profound hearing loss.
The Cochlear Provider Network continued to expand and is building education of the indications and benefits of cochlear
implants to hearing aid audiologists in the US and is starting to provide a referral pathway to cochlear implant surgeons.
We also hit some key milestones with improved indications and/or funding for our products across a number of markets
including:
Expanded indications
US: approval to lower the age of paediatric cochlear implantation from 12 to nine months for Cochlear’s implant portfolio
Belgium: expansion of reimbursement criteria for cochlear implants to include candidates with a severe hearing loss
Czech Republic: funding for cochlear implants for adults
France: reimbursement approved for Baha sound processors
FDA approval lowers the age of paediatric cochlear implantation to nine months
In March, Cochlear™ Nucleus® implants obtained FDA approval to be implanted in children from nine months of age, down
from 12 months, for children with bilateral, profound sensorineural hearing loss.
Cochlear’s Nucleus implants have been FDA approved for use in children
since 1990, with the last indication change for lowering the age of
implantation for children, achieved in 2000. Decades of research and current
surgical and clinical practice underscore the efficacy of earlier implantation
for children so that they can achieve their personal best language and speech
outcomes.
The research and support in practice by trained hearing health professionals
provided the foundation to approve the lowering of the indication to nine
months, along with the considerable developments in technology and
evolving speech coding strategies in modern day cochlear implant devices.
Our market access teams endeavour to expand the availability and/or
funding of our products to those who can most benefit. This approval
ensures children born deaf can have access to sound via cochlear
implantation sooner and provide them with earlier opportunities to develop
speech and language which can help them meet developmental milestones
with their peers born with hearing.
6 Cochlear Limited Annual Report 2020
Early intervention is important for
developing language and social
skills
Cost‐effectiveness of cochlear implants in adults
As we look to the future, we believe the cost‐effectiveness of health
interventions will become a more important consideration in the allocation
of healthcare spending.
Payers are increasingly demanding cost‐effectiveness data to support
funding for health interventions. We believe Cochlear is well positioned
with numerous studies demonstrating the cost‐effectiveness of cochlear
implants for both children and adults.
For a pre‐lingual deaf child, the return to society is more than 13 times
every dollar spent on a cochlear implant solution based on the cost savings
in education and improved productivity as an adult.
Dementia and other cognitive decline diseases are some of the costliest
conditions to treat in the world, at an estimated US$1 trillion in 2018 and
estimated to double by 2030. Unfortunately, individuals with severe
hearing loss are almost five times more likely to develop dementia than
people without hearing loss. The effective use of hearing aids and implants
is cost‐effective and has been proven in adults and seniors with an
estimated return on investment of 10:1.
Studies demonstrate the
cost‐effectiveness of
cochlear implants for adults
China manufacturing facility and new US head office
In 2017, after more than 20 years operating in China,
Cochlear announced plans to establish a A$90
million manufacturing facility in Chengdu, Sichuan
Province. This China Expansion Project is part of our
supply chain strategy, to ensure we expand our
global manufacturing capacity to facilitate local
additional
market
manufacturing support for products in China and
emerging markets.
provide
growth
and
Major construction milestones were completed by
the end of June, with finalisation of interiors and
commissioning expected by the end of 2020. The
regulatory approval process is expected to take
around two years, with manufacturing to commence
once we have received the necessary regulatory
approvals.
In May, our US team celebrated the opening of our
new US headquarters located in Denver, Colorado.
The new US$20 million headquarters has been
designed to meet the growth needs of the business
over the coming years. The new, larger office
includes training rooms, a customer experience
centre, a fitness centre and café.
7
Construction of Cochlear’s China manufacturing
facility to be completed by the end of 2020
Cochlear’s new US head office in Denver, Colorado
opened in May
Adverse litigation outcome
In March, the US Court of Appeals for the Federal Circuit in Washington, DC affirmed the US District Court award of patent
infringement damages against Cochlear and its US subsidiary Cochlear Americas in the lawsuit by the Alfred E Mann Foundation
for Scientific Research (AMF) and Advanced Bionics LLC (AB), with payment of US$280 million, including post judgment interest,
made in June. Cochlear intends to lodge an appeal with the US Supreme Court against the Judgment.
The case related to two patents that have long expired. The Court had previously invalidated the first patent with the remaining
patent much narrower in scope. We believe the amount of damages awarded was out of proportion with the limited application
of the patented feature, acknowledging that inflated damages awards are a risk of patent disputes in the US.
Subsequent to year‐end, Cochlear agreed to a settlement with AMF and AB of pre‐judgment interest and attorneys’ fees
totalling US$75 million. At 30 June 2020, Cochlear has provided US$75 million in relation to this settlement which is included
in the patent litigation expense within the Income Statement. The settlement is conditional upon the outcome of an appeal by
Cochlear to the US Supreme Court against the US$280 million Judgment. If Cochlear’s Supreme Court appeal is successful,
there may be a new trial to redetermine the quantum of damages.
As the patent at issue in the litigation has expired, the judgment will not disrupt Cochlear’s business or customers in the US.
Board renewal
Over recent years we have implemented a Board renewal process, bringing onto the Board a number of new directors with
diverse backgrounds and relevant experience. We have sought to maintain a balance of continuity, and to introduce new skill
sets. We have been pleased with all the recent appointments, with the new directors adding great perspective and value to
our Board discussions.
Two new directors join the Board this year, Michael Daniell and Christine McLoughlin. Michael was appointed in January and
has worked in the medical device industry for over 40 years. He has extensive executive leadership experience and was
Managing Director and CEO of Fisher & Paykel Healthcare Corporation Ltd from November 2001 to March 2016.
Christine will join in November and is a highly respected company director with domestic and international experience in
financial and health services and telecommunications. She is recognised for her achievements in driving continuous
improvements in organisational culture and performance, and her focus on creating value for shareholders by delivering for
customers.
Long‐serving non‐executive director Donal O’Dwyer will be retiring from the Company’s board at the end of the 2020 annual
general meeting. Donal has provided invaluable counsel in his 15 years of service to the Cochlear board. His extensive technical
expertise in the medical device and healthcare industries, along with his significant management experience globally in these
industries, have contributed greatly to Cochlear’s strategic direction. On behalf of the board, I would like to sincerely thank
Donal for his service and contribution to Cochlear and wish him well for the future.
Establishment of gender diversity targets
Our Diversity and Inclusion Framework, launched just over two years ago, is driving greater awareness across the organisation
of the importance of a diverse and inclusive workplace.
Achieving gender equality is one important element of our Diversity and Inclusion strategy. We strive for gender balance of
40:40:20, which means that 40‐60 per cent of either gender is represented (40% women, 40% men, 20% open). While over
50% of Cochlear’s employees are female, the representation of females reduces as the level of seniority increases.
In this context, we have set a target to achieve at least 40% female representation amongst our senior leaders within three
years, from 36% today. At Board level, we are targeting 30% female representation over the next two years, from 20% today.
Achievement of this target is being supported by focused activities in the areas of Talent Succession and Talent Acquisition,
with the aim of increasing our pipeline of female talent. A range of
additional activities and policies recognised as key enablers to
gender equality continue to be implemented to support improved
access to work for all employees. These include a focus on
continuing to embed flexible working for employees globally,
further deployment of our Inclusive Leadership programs with a
focus on unconscious bias education for all leaders, and continuing
work to ensure gender pay equity across our global workforce.
Gender diversity targets
Board members
Senior leaders
Female Male
40%
30%
30%
20%
40%
40%
Open
8 Cochlear Limited Annual Report 2020
Trading update and FY21 outlook
As COVID‐19 started to impact the business, we were very clear that we wanted to emerge from the pandemic in a stronger
competitive position, placing a high priority on keeping our valuable workforce intact and continuing to invest in our R&D
programs and market growth activities. Our market position has strengthened during FY20, with growing share and a
continuing shift to our cochlear implants with perimodiolar electrodes, now representing around 60% of our implant mix in
markets where it is available. And the product portfolio has been expanded with a range of new products that are expected to
drive further improvements in share.
In April cochlear implant revenue fell by nearly 60%. We have been experiencing an improving trend in trading since May with
the recommencement of surgeries across most markets. In June/July cochlear implant revenue was 85% of last year as a result
of a combination of new surgeries and rescheduled surgeries. There continues to be a significant level of variability across
countries, with developed market momentum well ahead of the emerging markets.
For the developed markets, unit volumes were in line with last year for the June/July trading period, reflecting both a return
to surgery and market share gains. While the resumption of surgeries in the US, Germany, Japan and northern Europe has been
quite rapid, there are still a number of markets with lower levels of surgery activity including the UK, Italy and Spain.
It has also been pleasing to see that the segment mix, that is, the split between children, adults and seniors, reflects the pre‐
COVID‐19 mix across most countries. In countries where surgery rates remain relatively low, the clear priority continues to be
the implantation of children.
While the resumption of elective surgeries is positive, we caution that there is still risk, noting that second waves of COVID‐19
cases are likely to remain a reality for some time and may result in new restrictions to elective surgery, complicating recovery
plans and timing.
We also recognise that the surgeries currently occurring, particularly for adults and seniors, include a catch up of delayed
surgeries from March to May. We will get a clearer picture of the impact of clinic closures in April and May on the new candidate
pipeline over the next few months. While the majority of clinics have re‐opened, many are still running below capacity as they
recommence operations sensibly, mindful of the need to continue social distancing disciplines. As a result, we expect there to
be some impact on the number of patient assessments for cochlear and acoustic implants until clinic throughput normalises.
Our direct‐to‐consumer activities, which continued throughout COVID‐19 shutdowns, have been aimed at providing additional
support to candidates, and potential candidates, and it is hoped that these activities may assist in more quickly rebuilding the
candidate pipeline.
For the emerging markets, unit volumes were at 50% of last year for the June/July trading period. Surgeries in China are growing
quickly, and we remain committed to continuing to invest in further growth. In other markets, including India and Latin
America, surgeries have remained very low as COVID‐19 cases continue to grow.
Services revenue run rates have been improving since May with June/July revenue at around 70% of last year. The launch of
the Kanso 2 Sound Processor, the growing recipient base and the adoption of remote care tools are expected to underpin
demand for upgrades over the longer term. In the near term, however, we expect clinic capacity for upgrades to be lower than
normal.
Acoustic revenue run rates have also been improving since May with June/July revenue at around 70% of last year. Surgery
volumes have been recovering in the US since May with strong demand for the Osia 2 System. Acoustic implant surgeries in
the UK, however, have not yet restarted following the COVID‐19 shutdowns. We continue to be excited about the potential for
the Osia 2 System. It represents a significant improvement in performance, aesthetics and quality of life for bone conduction
patients and has received an enthusiastic response from surgeons and patients in the US since launch. We are aiming to get
regulatory approval for the Osia 2 System in Europe by mid 2021.
Cochlear’s liquidity position is strong following the $1.1 billion capital raising and expansion of debt facilities in March.
Combined net cash and undrawn debt facilities total $987 million as at 30 June. With revenues improving, operating cash flow
is currently around breakeven levels. In considering use of cash for FY21, we are forecasting around $90 million in capital
expenditure. It should also be noted that the payment of US$75 million in prejudgment interest and attorneys’ fees relating to
the litigation case is conditional upon the outcome of an appeal by Cochlear to the US Supreme Court. Cochlear will deposit
the funds into an escrow account pending the outcome of the appeal.
In March, Cochlear announced the suspension of the dividend until trading conditions improve. The Board expects to resume
payment of a dividend once a clear and sustained improvement in sales revenue has been established and cash flow generation
is sufficient to support its resumption.
9
Due to the uncertain timing of a global recovery from the pandemic, we cannot reliably estimate FY21 revenues, so will not be
providing earnings guidance. A trading update will be provided at the annual general meeting on 20 October. Our investment
priorities for FY21 will be focused on market growth activities and strengthening our competitive position, while continuing to
limit non‐essential spending until we have greater confidence in the outlook. There are a number of cost base considerations
for FY21, which may be adapted if trading conditions materially change:
Operating expenses (excluding R&D) are forecast to increase by around 4% with the growing investment in market growth
activities and re‐instatement of the short‐term incentive provision, partly offset by lower levels of more discretionary
spending;
Investment in R&D is expected to increase to around $190‐195 million;
We expect to receive some further government support following the receipt in FY20 of $24 million in COVID‐19‐related
government assistance from a number of countries;
FX contracts gains/(losses) are expected to be close to zero as a result of minimal hedging in FY21; and
Depreciation and amortisation (including AASB16‐related) is expected to be around $80 million.
Longer‐term outlook
As we look to the future, we remain confident about the opportunity to grow our markets. There remains a significant, unmet
and addressable clinical need for cochlear and acoustic implants that is expected to continue to underpin the long‐term
sustainable growth of the business.
As we transition from dealing with a health crisis to assessing the long‐term economic impacts of the pandemic, we are thinking
more about what may change in the hearing implant landscape. There will no doubt be opportunities as well as risks that mean
we may need to adapt our strategy.
Front of mind is the debt burden that economies will face and the increased competition for health funding. We see a real
potential for payers to accelerate the adoption of health economic considerations, allocating spending to more cost‐effective
interventions. Cochlear implants provide a cost‐effective solution for all age groups, delivering significant returns on the
investment made by the healthcare system. While we believe our intervention is well‐positioned, it is too early to understand
what, if any, implications there will be for healthcare spending or how our products may be prioritised.
The pandemic has also driven the rapid adoption of telehealth and telemedicine which may lead to faster than expected
structural changes in healthcare delivery. We experienced this first hand with the FDA fast‐tracking the approval of our Remote
Check solution in the US. Our professional partners too have shown greater interest and demand for our connected care
solutions over the last few months which also include Cochlear Link and Remote Programming in many markets. We have been
investing in connected care solutions for many years and believe they provide the opportunity to open up access to our
products and optimise outcomes for recipients by transforming the care model while delivering efficiencies to clinics.
We are also aware that there may be other risks and we are carefully monitoring business performance.
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 4,000 people and sell our products in over 180 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.
Our employees understand the importance of Cochlear being successful over the long term so that we can continue to support
our recipients. There are few companies that start a lifetime journey with each new customer every day.
On behalf of the Board, we congratulate and thank all Cochlear employees for their outstanding efforts and contributions this
year.
Rick Holliday‐Smith
Chairman
Dig Howitt
CEO & President
10 Cochlear Limited Annual Report 2020
Market leadership
Cochlear has been the global leader in implantable hearing solutions for 40 years. The investment in R&D aims to strengthen
our leadership position through the development of market‐leading technology. In FY20, we invested $185 million in R&D, in
line with FY19 levels, and representing 14% of sales revenue. Investment in the R&D pipeline continued despite COVID‐19 with
the majority of projects progressing to schedule, including products currently in the regulatory approval process.
New product approvals
The highlight for the year has been the approval of a number of important new products spanning all components of the
product portfolio, with many approvals received either just before, or during, the COVID‐19 shutdowns. These include:
Cochlear™ Osia® 2
System
Cochlear™ Nucleus®
Profile™ Plus with
Slim 20 Electrode
Cochlear™ Nucleus® 7 Sound
Processor for Nucleus® 22
implant recipients
Cochlear™
Nucleus® Kanso® 2
Sound Processor
Custom Sound® Pro
fitting software
Nucleus® SmartNav
System
Remote Check solution for
cochlear implants
11
Cochlear™ Osia® 2 System
The Cochlear™ Osia® 2 System expands the Acoustics portfolio into the next
generation of bone conduction hearing solutions. It is the world’s first active
osseointegrated steady‐state implant, using digital piezoelectric stimulation to
bypass damaged areas of the natural hearing system, sending sound vibrations
directly to the cochlea. Pre‐market trials have demonstrated significant
improvements in outcomes for patients1 over traditional bone conduction hearing
solutions, and we are already experiencing high demand for the new implant in the
US.
We believe the Osia 2 System is the right product to drive category growth and
deepen penetration of bone conduction implants over time. The new implant
provides a significant improvement in performance and aesthetics for bone
conduction patients with an enthusiastic response from surgeons and patients over
the past few months.
Cochlear™ Nucleus® Profile™ Plus with Slim 20
Electrode
In February, Cochlear received FDA approval for the Cochlear™ Nucleus® Profile™
Plus with Slim 20 Electrode (CI624). The Slim 20 Electrode expands Cochlear’s
portfolio which consists of the slimmest atraumatic electrodes on the market,
providing an option for surgeons who prefer an insertion depth of up to 20mm with
a lateral wall electrode.
The addition of the Slim 20 Electrode further strengthens Cochlear’s market‐leading
portfolio of electrodes designed for structural preservation, hearing performance,
and surgeon preference.
Cochlear™ Nucleus® Kanso® 2 Sound Processor
In July, we received FDA approval for the Cochlear™ Nucleus® Kanso® 2 Sound
Processor, the world’s smallest2 off‐the‐ear cochlear implant with proven hearing
performance technologies3‐6. It is the first and only off‐the‐ear cochlear implant
sound processor to offer direct streaming from compatible Apple or Android™
devices, and is compatible with the Nucleus Smart App, enabling control of device
settings, functions and information.
The Kanso 2 Sound Processor features an integrated rechargeable battery7 and the
highest possible water resistance rating for any off‐the‐ear cochlear implant sound
processor, giving users the freedom to live an active lifestyle.
To help users hear more of what they want to listen to, the Nucleus Kanso 2 Sound
Processor features proven hearing performance technologies. Dual microphones
filter out background noise to help provide better hearing performance in noise
compared to a single microphone4. With ForwardFocus, users can reduce noise from
behind them to help them focus on conversations in front of them6. SmartSound® IQ
with SCAN helps users to hear more clearly in a range of listening environments by
capturing sound through dual microphones and analysing surroundings before
automatically adjusting the settings for the hearing conditions3‐5.
The Kanso 2 Sound Processor features a simple, durable all‐in‐one design that makes
it easy to use. Unique button‐free control with an automatic on/off function helps to
simplify the experience. The device is a practical choice for children as it is simple for
parents to check microphone functionality, monitor their child's hearing
performance or locate a missing processor using the Nucleus Smart App.
12 Cochlear Limited Annual Report 2020
The Cochlear™ Osia® 2 System
provides a significant
improvement in performance
and aesthetics for bone
conduction patients
Cochlear™ Nucleus®
Profile™ Plus with Slim 20
Electrode (CI624)
The Cochlear™ Nucleus®
Kanso® 2 Sound Processor is
the world’s smallest off‐the‐
ear cochlear implant sound
processor, and the first to
offer direct streaming from
compatible Apple or Android™
devices
Cochlear™ Nucleus® 7 Sound Processor for
Nucleus® 22 implant recipients
The Cochlear™ Nucleus® 7 Sound Processor is now compatible for cochlear implant
recipients with a Nucleus 22 implant. This means that Nucleus 22 implant recipients
can now upgrade to Cochlear’s latest behind‐the‐ear sound processor and, for the
first time, access direct smartphone connectivity and streaming.
The Nucleus 7 Sound Processor is the world’s first and only behind‐the‐ear cochlear
implant sound processor to offer direct streaming, connectivity and control from a
compatible Apple or Android™ device. It is also the smallest and lightest6 behind‐
the‐ear cochlear implant sound processor, designed for comfort and to help
improve hearing performance3,8.
The Nucleus 22 implant was Cochlear’s first commercial implant, first released in
1982. There are more than 17,000 people around the world with a Nucleus 22
implant. This upgrade means that for the first time people who have benefited
from their implant for almost 40 years can access direct smartphone connectivity
in a smaller and lighter design.
Custom Sound® Pro fitting software
Custom Sound® Pro supports clinicians in fitting Cochlear implant sound
processors. The software harnesses almost 40 years of experience and
input from thousands of clinicians worldwide9.
Enabling people who have
benefited from their implant
for almost 40 years to access
direct smartphone
connectivity
The Custom Sound Pro fitting software keeps the patient at the centre of
care with a new patient dashboard and Patient Goals feature, promoting
patient engagement and facilitating more effective tracking of progress
between appointments10. With an
integrated
workflow for bilateral fittings and increased on‐air time, the software is
designed to enhance the fitting experience for clinicians and their
patients.
layout, an
intuitive
To help patients experience the best possible hearing performance, it is
important that programming software for cochlear implant sound
processors provide flexibility and be easy to use. The new Custom Sound
Pro fitting software was created by clinicians, for clinicians, enabling
hearing health professionals to deliver tailored care for every patient.
Nucleus® SmartNav System
The Nucleus® SmartNav System is a new tool to support surgeons in
optimising electrode placement during cochlear implant surgery.
The Nucleus SmartNav System delivers wireless, actionable intraoperative
insights to support electrode insertion with real‐time navigation, providing
surgeons with added assurance of a successful surgical outcome for their
patients.
The system consists of an innovative iPad‐based solution and a surgical
sound processor that presents an intuitive workflow to support surgery,
giving surgeons additional feedback for in‐theatre decision making.
13
Custom Sound® Pro fitting software
Nucleus® SmartNav System
Remote Check solution for cochlear implants
In April, Cochlear obtained FDA approval for its Remote Check solution. Remote
Check is the first telehealth patient assessment tool for cochlear implant recipients.
It is designed to be a convenient, at‐home testing tool that allows people with a
Nucleus 7 Sound Processor to complete a series of hearing checks from their
compatible iOS device using the Nucleus Smart App. Results are then sent remotely
to the recipient’s clinic for review by their clinician.
Remote Check was developed to conduct routine cochlear implant checks outside the
hearing clinic. The technology has been tested in previous pilots in five countries
worldwide. Following increased demand for remote care due to the COVID‐19
pandemic, the FDA expedited its approval. Remote Check will enable hearing
healthcare providers and hospitals to quickly identify those most in need of
audiological care during the COVID‐19 pandemic, as well as those who would benefit
from Remote Check as part of their routine care over the longer term.
Remote care has been a core pillar of Cochlear’s long‐term innovation strategy, with
access to care crucial to people who rely on a cochlear implant. With many people
around the world now practising social distancing, Remote Check provides recipients
with the ability to continue to access a level of care at a time when many clinics are
closed to in‐person visits. The FDA’s expedited approval of Remote Check during the
COVID‐19 crisis underscores the importance of remote hearing care solutions – now
more than ever – with many healthcare authorities already recognising the value in
reimbursing remote care consultations for clinicians.
For recipients with a Nucleus 7 Sound Processor, Remote Check can provide
significant cost savings by offering a convenient, time‐saving option for care that
does not require travel to a clinic. Using this technology, clinicians will not only be
able to provide a more convenient care option, post the COVID‐19 pandemic
disruption, they can also free up time to manage the anticipated growth in the
number of people needing cochlear implants, and redirect in‐clinic time to manage
patients with the greatest need.
Remote Check solution
for cochlear implants
Convenient, at‐home testing
for people with a Nucleus® 7
Sound Processor
14 Cochlear Limited Annual Report 2020
Operating and financial review
About Cochlear
For 40 years, Cochlear has been the global leader in implantable hearing
solutions.
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$12 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 people with conductive hearing loss, mixed hearing loss and single‐sided deafness.
The Company has provided more than 600,000 implant devices to people who benefit from one – or two – of the Company’s
implantable solutions. Whether these hearing solutions were implanted today or many years ago, Cochlear continues to bring
innovative new products to market as well as sound processor upgrades for all generations of recipients.
Cochlear invests more than $180 million each year in R&D and currently participates in over 100 collaborative research
programs worldwide. The global headquarters are on the campus of Macquarie University in Sydney, with regional offices in
Asia Pacific, Europe and the Americas. Cochlear has a deep geographical reach, selling in over 180 countries, with a direct
presence in over 30 countries and a global workforce of over 4,000 employees.
Cochlear’s mission
Cochlear’s mission is the passion that drives the organisation and, at a high level, focuses the strategy.
15
Cochlear at a glance
Key products
Cochlear™
Nucleus®
Profile™ Plus
with Slim
Modiolar
Electrode (CI632)
Cochlear™
Nucleus® 7
Sound Processor
(CP1000)
Cochlear™
Nucleus® Kanso® 2
Sound Processor
(CP950)
Cochlear
implants*
61%
Services*
29%
Acoustics*
10%
Global sales
~$1.4b
in sales revenue
49%
Americas*
35%
EMEA*
16%
Asia Pacific*
~80%
Developed
markets*
~20%
Emerging
markets*
Cochlear™
Baha® 5,
Baha 5 Power and
Baha 5 SuperPower
Cochlear™
Osia® 2 System
Market leader
Growing scale
$180m+
in annual R&D
~60%
global market
share**
600,000+
implants sold***
+
4,000
employees
+
100
collaborative
research programs
+
30
6
countries with
direct operations
key manufacturing
sites
* % of sales revenue ** based on Cochlear estimates for cochlear implants *** includes cochlear and acoustic implants
16 Cochlear Limited Annual Report 2020
Investment proposition
Cochlear provides shareholders with an opportunity to invest in the global
leader in implantable hearing solutions, in an industry that has the potential to
grow over the long term.
Global leader in implantable hearing solutions for 40 years with ~60% global
market share and more than 600,000 devices sold
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 sound processor 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*
$1000 invested in Cochlear at listing
worth ~$140,000
as at 30 June 2020
1995
1997
1998
2000
2001
2003
2004
2005
2007
2008
2010
2011
2012
2014
2015
2017
2018
2020
Cochlear total shareholder return since listing
*cash flow generation and dividends disrupted in FY20 by impact of COVID‐19 and cost of adverse litigation outcome
17
Hearing loss is prevalent and under‐treated
The World Health Organization estimates that there are over 460 million people
worldwide – over 5% of the world’s population – who experience disabling11
hearing loss. By 2050, this is expected to rise to over 900 million people – or 1
in every 10 people.12
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 decline.13
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
world.14
Cochlear’s challenge, and opportunity, is that less than 5% of the people that could benefit from an implantable hearing
solution are being treated.15
There remains a significant, unmet and addressable clinical need that is expected to continue to underpin the long‐term
sustainable growth of the business.
Global prevalence of hearing loss
>460 million
people globally with a disabling hearing loss
1 in 3
people over the age of 65 affected by disabling hearing loss
>15,000,000
people could benefit from a cochlear or bone conduction implant
<5%
market penetration of implantable hearing solutions
18 Cochlear Limited Annual Report 2020
Cochlear implants a cost‐effective solution
Cochlear implants provide life changing outcomes for recipients, empowering
them to connect with others and live a full life. They also provide a cost‐
effective solution for all age groups, delivering significant returns on the
investment made by the healthcare system.
Children
The estimated aggregate lifetime societal costs for a pre‐lingual deaf child in
developed markets is estimated to exceed US$1.5 million in 2019 dollars16,17.
This is almost entirely attributed to reduced work productivity and/or the
cost of special education.
Once lifetime medical costs are excluded from the total costs, it is estimated
that the return on investment of a cochlear implantation for a pre‐lingual deaf
child is 13.5:1, meaning each dollar spent on a cochlear implant has the
potential to result in up to $13.5 in return to society18.
Adults
The aggregate societal costs of an adult with severe to profound hearing loss
is estimated to range between US$702,000 (for those under 45 years of age)
and US$392,000 (for those between 45 and 65 years of age) in 2019 dollars.
These societal costs are driven almost exclusively by reduced work
productivity.
One study reported that when compared to those with normal hearing,
adults with hearing loss were reported to be more than three times more
likely to have low educational attainment and were almost twice as likely to
be unemployed or under employed20.
In another study, individuals with severe and profound hearing loss were also
found to earn approximately 77% of the average income of those with mild
hearing loss. The lost income due to untreated hearing loss has even greater
socioeconomic implications when consideration is given to the value of
unrealised taxes associated with this lost income21.
Seniors
Dementia and other cognitive decline diseases are some of the costliest
conditions to treat in the world22. The estimated worldwide cost of dementia
was predicted to reach US$1 trillion in 2018 – rapidly rising to US$2 trillion by
2030. The number of affected individuals is predicted to almost double every
20 years23.
Unfortunately, individuals with severe hearing loss are almost five times
more likely to develop dementia than people without hearing loss24.
The effective use of hearing aids and implants is cost‐effective and has been
proven in adults and seniors with an estimated return on investment of
10:125.
19
Estimated lifetime societal costs
for a pre‐lingual deaf child in
developed markets exceeds
US$1.5 million
The effective use of implants is
cost‐effective in adults and
seniors with an estimated return
on investment of 10:1
Growing demand for cochlear implants
Demand for cochlear implants is increasingly being driven by older adults in
developed markets and by children across the emerging markets.
Cochlear implants started as a solution for people with a profound hearing loss, equivalent to a hearing loss of greater than 90
decibels (dB), almost 40 years ago. Adoption of cochlear implantation for children grew rapidly, driven by the widespread
implementation of neonatal hearing screening which allowed for early detection of hearing loss in newborns. Today, cochlear
implantation has become the standard of care for newborns across the developed markets.
Cochlear’s multi‐decade investment in innovation has materially improved the hearing outcomes provided by cochlear
implants, improving the quality of life of recipients. It has also driven the expansion of indications for the implants in many
countries to include people with lower levels of hearing loss, which has seen the addressable market for cochlear implants
grow significantly.
Over the last 10 years, 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 good 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.
Growth is shifting to under‐penetrated
segments
Children in developed markets
s
r
e
v
i
r
d
h
t
w
o
r
g
t
n
a
p
m
l
i
l
r
a
e
h
c
o
C
• Focus on children
• Neonatal hearing
screening
• Growing
reimbursement
• Funding expands to
bilateral implants
• Improved outcomes
leads to expansion
of indications across
many markets
Adults and seniors in
developed markets
Greater uptake by adults
and seniors as awareness
grows and evidence
builds connecting hearing
with healthy ageing
Children in emerging
markets
Funding expands in
emerging markets as
awareness of cochlear
implants grows and
wealth increases
1980
1990
2000
2010
2020
20 Cochlear Limited Annual Report 2020
Strategic priorities
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 people with conductive hearing loss,
mixed hearing loss and single‐sided deafness.
Cochlear is committed to maintaining its technology leadership position in the industry by investing in R&D to improve hearing
outcomes and expand the indications for implantable solutions. We aim to grow the hearing implant market by growing
awareness and access for implant candidates. And with a growing recipient base, Cochlear is actively strengthening its servicing
capability to provide products, programs and services to support the lifetime relationship with recipients.
Cochlear’s strategic priorities
Retain market leadership
Market‐leading technology I World‐class customer experience
Grow the hearing implant market
Awareness I Market access I Clinical evidence
Deliver consistent revenue and earnings growth
Invest to grow I Operational improvement I Strong financial position
For an in‐depth review of Cochlear’s strategy and financial history, please refer to the Strategy Overview which is available at
www.cochlear.com.
21
Operational review
Product and service highlights
$m
2020
2019
Change %
(reported)
Change %
(CC)*
Sales mix
Cochlear implants (units)
31,662
34,083
7%
Sales revenue
Cochlear implants
Services (sound processor upgrades and other)
Acoustics
Total sales revenue
817.9
395.5
138.9
845.1
427.2
173.8
1,352.3
1,446.1
3%
7%
20%
6%
8%
12%
24%
11%
61%
29%
10%
100%
* Constant currency (CC) removes the impact of exchange rate movements and foreign exchange (FX) contract gains/(losses) to facilitate comparability. See
Notes on page 28 for further detail.
Cochlear implants
Cochlear implant units declined 7% with first half units up 13% and second half units down 26%.
In the first half, cochlear implant units increased 13% as the Nucleus Profile Plus Series cochlear implant was launched across
major markets. The new implant has been well‐received by professionals and consumers with improvements in market share
experienced across many markets.
From January to mid‐March, cochlear implant volumes across the developed markets were tracking in line with expectations.
However, from mid‐March we experienced a substantial, short‐term negative impact on cochlear implant surgeries, particularly
in the US and Western Europe, as healthcare systems diverted resources to meet the increasing demands of managing COVID‐
19.
In April, cochlear implant unit sales across the developed markets declined by around 80% (compared to April 2019), with most
elective surgeries postponed. To the extent there were surgeries, they were predominantly for children.
Surgeries recommenced across many markets from early‐May. Market conditions however still varied across our developed
markets by the end of June with surgery volumes recovering relatively quickly in the US, Germany, Benelux and Australia and
more slowly in the UK, Spain and Italy. By the end of June, over 80% of cochlear implant surgical centres in the developed
markets had recommenced surgeries.
Emerging markets, which represent around 20% of cochlear implant revenue, delivered a strong start to the year with volumes
up over 20% in the first half. January/February volumes were weaker as surgeries were delayed in China, Cochlear’s largest
emerging market, due to COVID‐19. Surgeries recommenced in China in March and have recovered quickly. Surgeries in China
continue to grow as a result of the market opportunity and investments we have made to expand our presence over the last
few years. Surgeries however across most other markets, including India and Latin America, have remained very low as COVID‐
19 cases continue to grow.
Services (sound processor upgrades and other)
Services revenue declined 7% (12% in CC) with first half revenue up 9% and second half revenue down 23%.
Services were materially impacted by COVID‐19 in the fourth quarter of FY20. While some recipients have been able to access
sound processor upgrades remotely, clinic closures have delayed access to sound processor upgrades for many people.
Cochlear’s remote servicing capability, with tools including Cochlear™ Link and Remote Check, are assisting clinicians and
recipients with performance, mapping, and troubleshooting in markets where they are approved. Many countries and clinics
have been adapting, enabling greater levels of remote access and programming to assist recipients unable to visit clinics as a
result of COVID‐19. In recognition of the importance of providing support, the FDA fast‐tracked approval of Remote Check in
April.
22 Cochlear Limited Annual Report 2020
Acoustics
Acoustics revenue declined by 20% (24% in CC) with first half revenue down 9% and second half revenue down 32%.
In the first half, we experienced some loss of market share from competitor product launches. The market also slowed more
than expected in anticipation of the launch of the next generation bone conduction implant, the Cochlear™ Osia® 2 System,
which commenced its rollout in the US in February. Like cochlear implants, the second half was materially impacted by COVID‐
19 due to the delay of elective surgeries.
Acoustics revenue is largely generated from the US and the UK. Surgery volumes have improved in the US since May with
increasing demand for the Osia 2 System. Acoustic implant surgeries in the UK, however, have not yet restarted following the
COVID‐19 shutdowns.
Regional review
$m
Americas
EMEA
Asia Pacific
2020
650.3
479.6
222.4
2019
688.6
519.2
238.3
Total sales revenue
1,352.3
1,446.1
Americas (US, Canada and Latin America)
Change %
(reported)
Change %
(CC)
Sales mix
6%
8%
7%
6%
11%
11%
10%
11%
49%
35%
16%
100%
Sales revenue declined by 6% (11% in CC) with the first half up 9% and second half down 21%.
H1: The Americas had a solid start to the year with strong cochlear implant revenue growth moderated by low growth in
Services revenue and a decline in Acoustics revenue. The launch of the Nucleus Profile Plus Series cochlear implant in the US
in late June 2019 was well‐received by the market, driving an uplift in market share throughout the year.
Services revenue in the US was flat in the first half as the business cycled very strong sales in HY19, with penetration rates
reaching high levels. Acoustics sales declined with some loss of share from competitor product launches and a slowdown in
surgeries in anticipation of the launch of the Osia 2 System.
H2: Second half revenue for the Americas declined by 21% (26% in CC), materially impacted by the elective surgery deferrals
from mid‐March. Surgeries have started to recommence across North America with clinics progressively reopening. There are
still very few surgeries in Latin America as COVID‐19 infection rates continue to rise. The decline in Latin American implant
revenue has been partly offset by growth in Services revenue.
EMEA (Europe, Middle East and Africa)
Sales revenue declined by 8% (11% in CC) with the first half up 6% and second half down 20%.
H1: EMEA delivered strong cochlear implant revenue growth in the first half moderated by low growth in Services revenue and
a decline in Acoustics revenue.
Like the US, Services revenue growth slowed in the first half as the business cycled very strong sales in HY19, with penetration
rates reaching high levels and Acoustics revenue declined. EMEA’s emerging markets grew in the first half as a result of the
timing of a number of tenders, underpinned by investments in the organisation in recent years.
H2: Second half revenue for EMEA declined by 20% (23% in CC), as a result of the deferral of elective surgery from mid‐March.
Surgery volumes across Western Europe started improving during May with significant variability across countries. Germany
and Benelux have recovered quickly while the UK, Italy and Spain continue to record a small, but growing number of surgeries.
23
Asia Pacific (Australasia and Asia)
Sales revenue declined by 7% (10% in CC) with the first half up 18% and second half down 29%.
H1: In the first half, Japan and South Korea experienced strong growth across both cochlear implant units and sound processor
upgrades. China recorded strong growth in sales revenue, benefiting from increased investment in sales and marketing
capability over the past few years.
H2: Second half revenue declined by 29% (32% in CC) as a result of the impact of the deferral of elective surgeries which varied
greatly by country. China has recovered quickly and is growing strongly. South Korea delivered strong growth in FY20 with
Cochlear gaining share in a market that continued to conduct elective surgeries throughout the pandemic. Australia and China
delivered solid growth in Services revenue. India however continues to experience high infection rates from COVID‐19 with
very few surgeries since April.
Financial review
Profit and loss
$m
Sales revenue
Cost of sales
% gross margin
Selling, marketing and general expenses
Research and development expenses
% of sales revenue
Administration expenses
Operating expenses
Other income / (expenses)
FX contract losses
EBIT (underlying)*
% of sales revenue
Net finance expense
Income tax expense*
% effective tax rate
Net profit (underlying)*
% net profit margin*
Innovation fund gains after‐tax
Patent litigation expense after‐tax
Net profit / (loss) (reported)
2020
2019
1,352.3
1,446.1
344.4
75%
470.0
185.1
14%
93.8
748.9
(20.4)
(31.7)
206.9
15%
8.9
44.2
22%
153.8
11%
24.2
(416.3)
(238.3)
351.1
76%
450.9
184.4
13%
94.8
730.1
13.8
(19.4)
359.3
25%
4.5
88.9
25%
265.9
18%
10.8
‐
276.7
Change %
(reported)
Change %
(CC)**
(6%)
(2%)
(1) pt
4%
0%
1 pt
(1%)
3%
(11%)
(5%)
0 pts
0%
(1%)
(1) pt
(1%)
0%
(42%)
(42%)
98%
(50%)
(42%)
(42%)
(186%)
(187%)
* Excluding innovation fund gains and patent litigation expense
** Constant currency (CC) removes the impact of exchange rate movements and FX contract gains/(losses) to facilitate comparability. See Notes on page 28
for further detail.
Sales revenue declined by 6% (11% in CC) to $1,352.3 million, with revenue up 9% in the first half and down 22% in the second
half. Underlying net profit declined 42% to $153.8 million due to the rapid fall in sales in the second half, a consequence of
COVID‐19‐related surgery deferrals and clinic closures. After factoring in patent litigation expenses and innovation fund gains,
Cochlear recorded a net loss of $238.3 million for FY20.
24 Cochlear Limited Annual Report 2020
Key points of note:
Cost of sales declined by 2% (5% in CC) to $344.4 million, reflecting declining sales in the fourth quarter. The gross margin
declined by 1 percentage point to 75%. Gross margin benefited from lower warranty costs, the result of improved sound
processor manufacturing and design that has resulted in lower warranty repairs. This benefit was offset by the impact of
lower overhead recovery arising from lower manufacturing volumes since May;
Selling, marketing and general expenses increased by 4% (0% in CC) to $470.0 million, with the first half up 9% in CC and
the second half down 8%. Continued investment was made in market growth activities including direct‐to‐consumer
marketing, standard of care and market access initiatives. The second half decline reflects actions to limit all non‐essential
spending from mid‐March and includes a hiring freeze and temporary pay reductions for the Board and senior
management across the business in the fourth quarter. These savings were partially offset by a $10.0 million increase in
the doubtful debts provision resulting from higher collections risk associated with COVID‐19;
Investment in R&D was in line with FY19 (down 1% in CC) at $185.1 million, representing 14% of sales revenue;
Operating expenses include a $23.6 million benefit from the suspension of short‐term incentive payments;
FX contract losses increased by $12.3 million to $31.7 million as a result of the weaker Australian dollar against major
trading currencies;
Net finance expenses increased by 98% to $8.9 million and includes $6.1 million in interest expense resulting from the
adoption of new leasing accounting standard AASB16. Net finance expenses (excluding the lease‐related expense) declined
by 38% to $2.8 million with the business benefitting from lower interest rates and interest on cash deposits from the
March capital raising;
$24.2 million in innovation fund gains after‐tax includes a $25.0 million gain from the revaluation of the Nyxoah
shareholding and $0.8 million in equity accounted losses; and
$416.3 million in patent litigation expenses after‐tax relates to an adverse litigation judgment in the long‐running AMF
patent infringement case. $420.1 million was paid in June and a provision was made for US$75 million in prejudgment
interest and attorneys’ fees with payment conditional upon the outcome of an appeal by Cochlear to the US Supreme
Court.
Other expenses
$m
Government assistance (COVID‐19‐related)
Release in the contingent consideration (Sycle)
Ineffective forward exchange contracts
Carina write‐down
Otoconsult NV write‐down
Other
Other income / (expenses)
2020
23.6
13.2
(26.1)
(17.3)
(12.5)
(1.3)
(20.4)
2019
‐
10.8
‐
‐
‐
3.0
13.8
Change
23.6
2.4
(26.1)
(17.3)
(12.5)
(4.3)
(34.2)
The Profit & loss includes other expenses of $20.4 million, which are largely one‐off in nature, including:
Due to the impact of COVID‐19, Cochlear has received $23.6 million in government assistance through the US Coronavirus
Aid, Relief and Economic Security Act (CARES Act), Australia’s JobKeeper Program and other assistance programs offered
in Europe and Asia;
$13.2 million non‐cash benefit related to the final release in the contingent consideration value of Sycle;
$26.1 million in expenses relating to ineffective forward exchange contracts, predominantly FY21 USD contracts, due to
the combined effects of COVID‐19 and the adverse litigation judgment on the probable foreign currency cash flows
anticipated to be received during that period. As a result, those cash flow hedges no longer met the criteria for hedge
accounting and were closed;
$17.3 million in the write‐down of assets associated with the Carina acoustic implant following the decision to cease sales
of the product due to low volumes; and
$12.5 million in the write‐down of assets and licencing costs associated with Otoconsult NV following the decision to
pursue the development of different AI‐assisted mapping in‐house.
25
Cash flow
$m
EBIT (underlying)
Depreciation and amortisation (excl AASB16 impact)
Depreciation and amortisation (AASB16‐related)
Changes in working capital and other
Cash impact of patent litigation expense
Net interest paid
Income taxes paid
Operating cash flow
Capital expenditure
Acquisition of other intangible assets
Other net investments
Free cash flow
Proceeds from issue of shares
Dividends paid
Payment of lease liability & other
Change in net debt – decrease / (increase)
2020
206.9
49.1
28.4
66.9
(420.1)
(8.9)
(80.1)
(157.8)
(111.4)
(19.1)
(14.2)
(302.5)
1,081.9
(193.7)
(25.7)
560.0
2019
359.3
38.5
‐
(6.6)
‐
(4.5)
(90.7)
296.0
(86.6)
(28.0)
(23.2)
158.2
7.4
(181.8)
(0.6)
(16.8)
Change
(152.4)
10.6
28.4
73.5
(420.1)
(4.4)
10.6
(453.8)
(24.8)
8.9
9.0
(460.7)
1,074.5
(11.9)
(25.1)
576.8
Free cash flow declined by $460.7 million to be an outflow of $302.5 million, driven by payment of costs associated with an
adverse litigation judgment in June and the impact on earnings from the COVID‐19‐related fall in revenue during the fourth
quarter. Cochlear’s financial position was bolstered by the $1.1 billion capital raising in March which resulted in net debt
declining by $560.0 million, more than offsetting the decline in free cash flow.
Key points of note:
EBIT (underlying) declined by $152.4 million as a result of the significant decline in sales revenue in the fourth quarter;
$420.1 million in cash impact of patent litigation expenses reflects the payment of damages and post judgment interest
associated with an adverse litigation judgment in June;
Changes in working capital and other of $66.9 million reflects the benefit of the reduction in trade receivables resulting
from lower sales revenue in the fourth quarter;
The $10.6 million reduction in income taxes paid reflects the impact of COVID‐19 during the second half. The tax credit
resulting from the patent litigation expenses will result in lower tax payments in FY21;
Capital expenditure (capex) increased by $24.8 million to $111.4 million, reflecting stay in business capex, the continued
development of the China manufacturing facility, fitout of the new, larger Denver office and IT platform development;
The acquisition of intangible assets includes the licencing of a range of R&D‐related assets; and
Other net investments primarily relate to the additional investment made in Nyxoah.
26 Cochlear Limited Annual Report 2020
Capital employed
$m
Trade receivables
Inventories
Less: Trade payables
Working capital
Working capital / sales revenue
Property, plant and equipment
Intangible assets
Investments (including equity accounted)
Other net liabilities
Capital employed
2020
211.4
223.8
(155.3)
279.9
21%
230.5
410.3
94.9
(71.1)
944.5
2019
299.5
195.4
(160.8)
334.1
23%
166.5
424.4
47.8
(143.9)
828.9
Change
(88.1)
28.4
5.5
(54.2)
64.0
(14.1)
47.1
72.8
115.6
Capital employed increased by $115.6 million to $944.5 million since June 2019 reflecting an increase in property, plant and
equipment and other net liabilities and a reduction in working capital.
Key points of note:
Trade receivables reduced by $88.1 million, a consequence of the reduced sales revenue;
Inventories increased by $28.4 million, a consequence of the reduced sales revenue and a decision to build inventory levels
to enable the business to cater to demand as surgeries recommence;
Property, plant and equipment increased by $64.0 million and includes the investment in the China manufacturing facility
and fitout of the new Denver office;
The increase in investments includes a $35.8 million pre‐tax increase in the value of Cochlear’s investment in Nyxoah;
Other net liabilities decreased by $72.8 million to $71.1 million reflecting movements across a number of other assets and
liabilities. Net current tax assets increased by $84.8 million reflecting refundable FY20 tax payments. Tax losses resulting
from the patent litigation expense and COVID‐19 impacts were incurred late in the year, resulting in an overpayment of
tax instalments for the year. The $85.9 million increase in provisions primarily reflects the US$75 million provision for
prejudgment interest and attorneys’ fees with payment conditional upon the outcome of an appeal by Cochlear to the US
Supreme Court. A $25.5 million reduction in net FX contract liabilities represents the mark‐to‐market value of all FX
hedging contracts as at 30 June 2020.
Net debt
$m
Loans and borrowings:
Current
Non‐current
Total loans and borrowings
Less: Cash, cash equivalents and term deposits
Net debt / (cash)
Facility limit
Debt drawn
Balance remaining
2020
2019
Change
393.1
79.9
473.0
(930.0)
(457.0)
1,003.8
473.9
529.9
3.3
178.3
181.6
(78.6)
103.0
414.5
182.4
232.1
389.8
(98.4)
291.4
(851.4)
(560.0)
589.3
291.5
297.8
Net debt declined by $560.0 million, resulting in a net cash position of $457.0 million. Cochlear’s liquidity position has increased
as a result of a $1.1 billion capital raising in March and expanded debt facilities. Combined net cash and undrawn debt facilities
total $986.9 million as at 30 June.
27
Dividends
$m
Interim ordinary dividend (per share)
Final ordinary dividend (per share)
Total ordinary dividends (per share)
% payout ratio (underlying)
% franking
2020
$1.60
‐
$1.60
60%
100%
2019
$1.55
$1.75
$3.30
72%
100%
Change %
3%
(100%)
(52%)
In March, Cochlear announced the suspension of the dividend until trading conditions improve. As a result, no final dividend
has been declared. Full year dividends declined by 52% to $1.60 per share, representing a payout of 60% of underlying net
profit. The Board expects to resume payment of a dividend once a clear and sustained improvement in sales revenue has
been established and cash flow generation is sufficient to support its resumption.
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
Sales revenue is the primary revenue reporting measure used by Cochlear for the purpose of assessing revenue performance
of the Consolidated Entity. It represents total revenue excluding foreign exchange contract losses on hedged sales. Given the
significance of foreign 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
$m
Net profit (underlying)
FX contract movement
Spot exchange rate effect to sales revenue and expenses*
Balance sheet revaluation*
Net profit (underlying) (CC)
Patent litigation expense and innovation fund gains after‐tax
Net profit (reported) (CC)
* FY20 actual v FY19 at FY20 rates.
2020
153.8
153.8
(392.1)
(238.3)
2019
Change %
265.9
(38.4)
37.9
(2.4)
263.0
10.8
273.8
(42%)
(42%)
(187%)
28 Cochlear Limited Annual Report 2020
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 2020 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 the
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 these risks cannot provide absolute assurance that a risk will not materialise.
Strategies used by Cochlear to mitigate the
risk
Cochlear
has well‐developed
business
continuity and crisis management plans, a
diverse range of customers and a range of
products and services that serve to mitigate or
manage the impact a pandemic may have on
our business.
In FY20, Cochlear invested 14% 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 also has a practice of identifying and
assessing potential disruptive technologies.
Cochlear has a comprehensive patent
portfolio across its technologies.
to operate
Cochlear conducts
searches as part of its internal processes
before launching new products.
freedom
Cochlear utilises internal and external legal
resources to manage any litigation issues.
its key systems and
Cochlear monitors
database, for inappropriate access from both
internal and external sources. Confidentiality
agreements are in place with key employees
and third parties that are exposed to
Cochlear’s
intellectual
property.
know‐how
and
Risk
Description and potential consequences
Pandemic
As COVID‐19 has demonstrated, pandemics have the
potential to impact our markets as elective surgeries
may be deferred in order to reduce the strain on
healthcare systems. Travel restrictions, government
mandated shutdowns and potential supply chain
impacts could also have adverse consequences to our
business.
Product innovation
and competition
Cochlear is exposed to the risk of failing to develop
and produce innovative products for customers.
Increased competition exposes Cochlear to the risk of
losing market share as well as a decrease in average
selling prices in the industry. Cochlear is also exposed
to the risk of medical, biological and/or technological
advancement by third parties where alternative
products or
treatments are developed and
commercialised that render Cochlear’s products
obsolete for future candidates. This could result in a
loss of new business.
Infringement litigation Cochlear operates in an industry that has substantial
intellectual property and patents, designs and
trademarks protecting that intellectual property.
Cochlear is exposed to the risk 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.
Misappropriation of
know‐how and
intellectual property
Cochlear is exposed to the risk of its know‐how and
intellectual property being misappropriated either
through hacking of its systems or by employees,
consultants and 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.
29
Strategies used by Cochlear to mitigate the
risk
Cochlear has a worldwide quality assurance
system in place.
Regulatory requirements and changes in the
regulatory
actively
monitored and assessed.
environment
are
continues
Cochlear
to work with
reimbursement and government agencies
throughout the world to emphasise the health
and economic benefits and cost effectiveness
of intervention to restore or improve hearing.
Cochlear maintains product liability insurance
and operates a worldwide quality assurance
system
testing,
manufacture and post‐market monitoring of
its products.
the design,
related
to
Cochlear monitors its suppliers and identifies
potential 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.
Risk
Description and potential consequences
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 and distribution
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
products.
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
implanted.
substitution costly,
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
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 or years.
30 Cochlear Limited Annual Report 2020
Risk
Description and potential consequences
Political, economic or
social instability
Cochlear sells in over 180 countries. Several of the
markets include significant tender sales. The future
outcome of tender sales is uncertain.
Foreign exchange
rates
Regional political, economic or social instability could
negatively impact sales and the receipt of payment
for sales.
Economic cycles could also impact negatively on the
healthcare industry, including within the hearing
healthcare sector.
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.
Strategies used by Cochlear to mitigate the
risk
Cochlear assesses the countries it sells into
and does not have a significant concentration
of sales in countries impacted by material
political, economic or social instability.
Cochlear utilises global scanning software to
assess partners, distributors and suppliers
against sanctions checklists on an ongoing
basis.
Cochlear conducts and promotes research
into the economic benefits of hearing health.
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.
financial
Over the longer term, permanent changes in
market rates will have an impact on earnings.
Derivative
(forward
exchange contracts) are used to hedge
exposure to fluctuations in foreign exchange
rates in a declining level of cover out to three
years.
instruments
for
and
administration
procedures
and
credit
Policies
management
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,
future
shipments and administering dispatches on a
In addition, where
prepayment basis.
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 & Risk
Committee.
suspending
including
and
location
Cochlear’s exposure to credit risk is influenced by the
characteristics of
geographical
individual customers. Cochlear does not have a
significant concentration of credit risk with a single
customer. Most significant debtors are governments,
government‐supported universities and clinics or
major hospital chains.
Credit
31
Strategies used by Cochlear to mitigate the
risk
Standards for the management of operational
risk are in place in the following key areas:
Requirements for appropriate segregation
independent
including
of duties,
authorisation of transactions;
the
Requirements for the reconciliation and
monitoring of transactions;
Appropriate insurance programs;
Documentation
procedures;
of
controls
and
Requirements for the periodic assessment
of operational
the
risks
adequacy of controls and procedures to
address the risks identified;
faced, and
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
threats and
technological
expanding privacy laws. These assessments
are used to determine any appropriate
corrective actions and
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.
improvements.
Talent management programs are in place,
both within Australia and
in our key
international markets.
regular
Cochlear has a system of controls in place to
mitigate such corporate governance risks,
regional and country
including
reporting on any potential issues. A Global
Code of Conduct and other regional policies
are
to ensure all staff are
appropriately trained and aware of the need
to comply with all corporate requirements.
in place
Risk
Description and potential consequences
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
infrastructure and
transitions), technology and
generally accepted standards of corporate behaviour.
Operational risks arise from 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
information
privacy and cyber security as an increasing risk.
recognises
Talent management
operates
Cochlear
competitive
environment, particularly in relation to attracting
scientific talent into the group.
very
in
a
Corporate governance Cochlear operates either directly or indirectly in most
countries in the world. As such, it is exposed to risks
related to general corporate governance compliance
issues (e.g. tax, customs, local regulations). These
risks could result in regulatory fines or reputational
damage.
32 Cochlear Limited Annual Report 2020
Board of directors
Rick Holliday‐Smith
Chairman Age 70
Appointed to the Board 1 March 2005: Chairman of the Nomination Committee. Member of
the Audit & Risk 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. 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,
Servcorp Limited, 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 53
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. Dig is a
member of the Male Champions of Change STEM 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 56
Appointed to the Board 2 August 2010: Chairman of the Audit & Risk 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: Chair of Australian Federal Government Steering Group for Digital Technology
Pilot. Director, Santos Limited, ASX Limited and National Portrait Gallery. Member of the George
Institute for Global Health Board. Chairman, Advance (Global Australian Network), Acting
President, Australian Government Takeovers Panel, Chairman, Faethm.org and Chair,
Australian Federal Government Steering Group for Digital Technology Pilot.
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
33
Andrew Denver
Non‐executive Director Age 71
Appointed to the Board 1 February 2007: Member of the Audit & Risk, Medical Science,
Technology & Innovation and Nomination Committees.
Background: Extensive experience in the life sciences industry. Former Managing Director of
Memtec Limited and President Asia for Pall Corporation.
Other boards: Chairman, SpeeDx and Director, Vaxxas and QBiotics.
Former directorships: Executive Chairman, Universal Biosensors.
Qualifications: BSc (Hons), MBA, FAICD
Donal O’Dwyer
Non‐executive Director Age 67
Appointed to the Board 1 August 2005: Member of the Audit & Risk, 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, Europe.
Other boards: Director, Mesoblast Limited, Fisher & Paykel Healthcare and NIB Holdings Ltd.
Chairman of Endoluminal Sciences and Director Cordis Asset Management Pty Ltd.
Former directorships: Chairman, CardieX (formerly Atcor Medical).
Qualifications: BE Civil, MBA
Glen Boreham, AM
Non‐executive Director Age 56
Appointed to the Board 1 January 2015: Chairman of the People & Culture Committee.
Member of the Audit & Risk, 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
Alison Deans
Non‐executive Director Age 52
Appointed to the Board 1 January 2015: Chairman of the Technology & Innovation Committee.
Member of the Audit & Risk, Nomination and People & Culture Committees.
Background: Extensive experience leading technology‐enabled businesses across e‐commerce,
media and financial services. Former Chief Executive Officer of netus, Hoyts Cinemas, ecorp and
eBay Australia and New Zealand.
Other boards: Director, Westpac Banking Corporation, Ramsay Health Care Limited and Deputy
Group Pty Ltd. Senior Advisor to McKinsey & Company. Member of Investment Committee,
CSIRO Innovation fund (Main Sequence Ventures) and Director of SCEGGS Darlinghurst Limited
and The Observership Program.
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
34 Cochlear Limited Annual Report 2020
Prof Bruce Robinson, AC
Non‐executive Director Age 63
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 acros s
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. Director,
MaynePharma and QBiotics. Director, Woolcock Institute of Medical Research and Senior
Advisor to McKinsey & Company and MinterEllison.
Former directorships: Director of Firefly and Digital Health Agency CRC.
Qualifications: MD, MSc, FRACP, FAAHMS, FAICD
Abbas Hussain
Non‐executive Director Age 55
Appointed to the Board 1 December 2018: Member of the Nomination, Medical Science and
Technology & Innovation Committees.
Background: Over 30 years’ global experience in the pharmaceutical industry with significant
experience in building relationships with professionals within the healthcare industry. Former
Global President, Pharmaceuticals at GlaxoSmithKline.
Other boards: Director, CSL Limited and Immunocore Limited. Senior Advisor, CellResearch
Corp and C‐Bridge Group, Hikma PLC, Director TARGTEX, Advisor to Indegene Inc.
Qualifications: BSc (Hons)
Michael Daniell
Non‐executive Director Age 63
Appointed to the Board 1 January 2020: Member of the Nomination, Medical Science and
Technology & Innovation Committees.
Background: Over 40 years’ experience in the medical device industry with extensive executive
leadership experience. Former Managing Director and CEO of Fisher & Paykel Healthcare
Corporation Limited responsible for the global business and operations including the design,
manufacture and marketing of innovative products and systems for use in respiratory care,
acute care and treatment of obstructive sleep apnea.
Other boards: Director, Fisher & Paykel Healthcare Corporation Ltd, Council member, The
University of Auckland, Director, Tait International Limited, Chair, New Zealand Medical
Technology Centre of Research Excellence, Director, Medical Research Commercialisation Fund.
Qualifications: BE (Hons), Electrical, CMInstD (NZ)
35
Executive team
Dig Howitt
CEO & President
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 is a member of the Male Champions of Change STEM group.
He 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 is responsible for accounting, corporate finance, treasury, audit, and investor
relations. He joined Cochlear in February 2017 and has over 30 years’ experience
working in senior finance roles across a broad range of global industries and
companies, including health, media (PBL Media) and property (Westfield, Bankers
Trust and Sheraton). Brent qualified as a Chartered Accountant at Deloitte, which
included a transfer to the US. Brent has also been a director for various charities and
is an Alumni Leader for UNSW Business School.
Qualifications: BComm, CA
Jan Janssen
Chief Technology Officer
Jan leads a team of over 350 highly qualified engineers and scientists who implement
the R&D strategy. This includes responsibility for identifying and developing cutting‐
edge technologies and bringing these innovations through to commercial products.
Since 2017, he is also responsible for the business development strategy of Cochlear.
Jan started his career at Philips Electronics in 1990 and joined Cochlear in 2000 as
Head of the Cochlear Technology Centre based in Belgium. After relocation to Sydney
in 2003, Jan was promoted to SVP, Design and Development in 2005. In 2017, he was
appointed Chief Technology Officer. Since 2019, Jan also has executive level
accountability for quality and regulatory affairs.
Qualifications: MScEE
36 Cochlear Limited Annual Report 2020
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, USA and President, Cochlear Bone Anchored Solutions, Sweden.
Qualifications: BS EET
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 30 years’ experience in the medical device
industry.
Qualifications: BSc Management, MBA
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 management
around the world including being Managing Director, Johnson & Johnson Medical,
Australia/New Zealand prior to joining Cochlear.
Qualifications: BBus (Hons), MManagement, GAICD
Rom Mendel
President, Acoustics
Rom is responsible for the development and execution of the strategic direction for
our Acoustics business 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
37
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. Prior to
that, he worked for 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
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 years of executive experience across the communications,
logistics and finance sectors.
Qualifications: DipFN, MIT, MBA
38 Cochlear Limited Annual Report 2020
Greg Bodkin
Senior Vice President, Supply Chain & Operational Excellence
Greg has functional responsibility for new product industrialisation, procurement,
manufacturing, logistics and warranty & repair. These functions enable the
technologies developed in design and development to be supplied as commercial
products in Cochlear’s global markets. In addition, he leads 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 SVP Manufacturing and Logistics. In January 2018, he was promoted to
the position of SVP, Supply Chain & Operational Excellence.
Qualifications: BE (Hons), MComm (UNSW)
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 and her focus is to ensure the
right strategic capabilities, organisation and culture are in place to support
Cochlear’s performance and growth aspirations.
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, GAICD
Brian Kaplan
Senior Vice President, Clinical Strategy and Innovation
Brian joined Cochlear in 2016 and manages clinical strategy and innovation for
Cochlear. He is responsible for the clinical data to support present and future
products and services. Brian dedicates two‐thirds of his time to his role at Cochlear,
while continuing to direct a cochlear implant surgical practice at the Greater
Baltimore Medical Center.
Brian's past research interests have included hearing loss, balance disorders, and
hair cell regeneration. His current practice focuses on adult and paediatric otology,
with an emphasis on hearing restoration. Brian is board‐certified in otolaryngology
and is a Fellow of the American College of Surgeons.
Brian has completed an Otolaryngology residency at the University of Virginia, is
the Chairman, Department of Otolaryngology at the Greater Baltimore Medical
Center and Director, Presbyterian Board of Governors Cochlear Implant Center at
the Greater Baltimore Medical Center.
Qualifications: BNeuroSci, BA, MD, FACS
39
Remuneration report
Letter from the Chair of the People & Culture
Committee (P&CC)
Dear Shareholders
On behalf of the Cochlear Board, I present to you the FY20 Remuneration report where we outline Cochlear’s remuneration
strategy, summarise the performance outcomes for FY20 and detail the associated remuneration outcomes for Cochlear’s key
management personnel.
Cochlear had a strong start to FY20. From mid‐March, however, the impact on profitability from an adverse litigation judgment
and COVID‐19 was significant. During this period of uncertainty, the Board and management made every effort to retain its
highly skilled workforce and investment in research and development programs. The Board undertook several measures to
help share the burden with shareholders and protect the long‐term future of the Company including:
Reductions in Board and executive pay for a period of three months commencing mid‐April 2020:
− Non‐executive directors took a 30% reduction in Board and committee fees;
−
The CEO & President (CEO&P) took a 30% reduction in base salary; and
− Other executives took a 20% reduction in base salary;
No short‐term incentive (STI) for FY20 was paid; and
No fixed pay increases for the Board or executive team were made for FY21.
FY20 performance and reward outcomes
The Board is satisfied that the reward outcomes under the STI and long‐term incentive (LTI) plans for FY20 reflect the
Company’s performance in this challenging period.
The Board made changes to the STI plan in FY20 by introducing a minimum net profit after tax (NPAT) gateway, in addition to
revenue growth targets and achievement of Company strategic objectives. Due to the significant impact that COVID‐19 had on
the business, NPAT guidance was withdrawn in March 2020 and the NPAT gateway on the STI plan was not achieved. The Board
considered a range of additional factors, including the disruption of COVID‐19 and the impact of the patent litigation decision,
and determined that no discretion would be applied to the FY20 STI plan, resulting in no STI payments made to any employee,
including executives.
For LTI, Cochlear’s performance hurdles of relative total shareholder return against the ASX 100 was at the 72nd percentile and
basic earnings per share (EPS) represented a (12.9%) compound annual growth rate over the last three years. Based on these
results, 46.4% of the FY18‐20 LTI vested to the CEO&P and executives. There was no vesting for the EPS portion of the FY18‐20
LTI plan. Further detail on this year’s remuneration outcomes are provided in this report.
Our executive remuneration framework
The Board is committed to ensure our executive remuneration framework and the associated reward outcomes align with our
business objectives, performance and shareholder expectations.
After extensive consultation, the Board introduced changes to the LTI plan for FY20, including extending the performance
period from three to four years and recalibrating target and maximum EPS measures to align to the Company’s growth targets
and current market conditions.
40 Cochlear Limited Annual Report 2020
As mentioned in the Letter to shareholders, due to the uncertain timing of a global recovery from the pandemic, we cannot
accurately forecast the future impact this will have on our operations and financial results over the next 12 months. For this
reason, the Board anticipates that discretion will need to be considered and applied (upwards or downwards) using the
parameters of our existing remuneration framework at the end of the FY21 performance period. This will ensure fair and
equitable remuneration outcomes for executives that enable Cochlear to continue to engage and retain our highly skilled
workforce, and consider a range of stakeholders including shareholders, customers and the community.
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 ensure Cochlear is successful over the long term.
Glen Boreham, AM
Chair, People & Culture Committee
41
Contents
This report covers:
1. Key management personnel;
2. Executive KMP remuneration received in FY20 (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.
The information provided in this Remuneration report (except for section 2 and section 8.3) has been audited as required by
section 308(3C) of the Corporations Act 2001.
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 non‐executive directors (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
Michael Daniell
Alison Deans
Andrew Denver
Abbas Hussain
Donal O'Dwyer
Non‐executive director
Non‐executive director
Non‐executive director
Non‐executive director
Non‐executive director
Bruce Robinson, AC
Non‐executive director
Executive KMP
Dig Howitt
Anthony Bishop
Richard Brook
Brent Cubis
Jan Janssen
Tony Manna
CEO & President (CEO&P)
President, Asia Pacific Region
President, EMEA & Latin American Region
Chief Financial Officer
Chief Technology Officer
President, Americas Region
Term as KMP
Full year
Full year
Full year
Part year ‐ appointed 1 January 2020
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
As announced to the market on 13 July 2020, Brent Cubis, Chief Financial Officer, will be leaving Cochlear at the end of calendar
year 2020.
42 Cochlear Limited Annual Report 2020
2. Executive KMP remuneration received in FY20
(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 relate to amounts earned 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 FY20.
Amounts $
Executive KMP
Dig Howitt
Anthony Bishop
Richard Brook
Brent Cubis
Jan Janssen
Tony Manna
Year
Fixed
remuneration1
Cash STI2
Vested
deferred STI3
Vested LTI4
Total
FY20
FY19
FY20
FY19
FY20
FY19
FY20
FY19
FY20
FY19
FY20
FY19
1,744,153
1,725,969
561,171
524,528
1,045,039
1,009,004
633,651
633,522
851,002
783,783
923,513
850,835
‐
1,105,225
‐
244,481
‐
360,020
‐
284,927
‐
422,605
‐
353,068
206,683
155,430
129,803
148,896
205,594
164,934
52,923
‐
188,824
153,450
216,701
147,114
864,687
2,075,203
272,124
‐
682,358
1,858,388
‐
‐
706,925
1,436,076
686,174
1,293,946
2,815,523
5,061,827
963,097
917,905
1,932,991
3,392,347
686,574
918,449
1,746,751
2,795,914
1,826,388
2,644,963
1.
Fixed remuneration earned in the year (base salary, superannuation and non‐monetary benefits which may include insurances and car
allowances). Richard Brook’s fixed remuneration for FY20 and FY19 excludes employer contributions for social security, accident and
sickness and reflects actual ‘take‐home pay’. These amounts are presented in the statutory table in section 5. Tony Manna’s non‐
monetary benefits for the FY19 comparative year have been adjusted from $75,508 to $87,762, with the total for FY19 adjusted
accordingly.
2. Cash STI earned and relating to performance during the financial year. For example, FY20 is reported as STI payments which are accrued
at year end, and received in August 2020, 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, FY20 is reported as the FY17 deferred
STI grant which vested in August 2019.
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, FY20 is reported as the FY17 LTI grant
which vested in August 2019 (79.3% of awards vested due to performance).
43
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 team remuneration
components to Cochlear’s mission and strategy.
Cochlear’s mission and strategy
To help people hear and be heard
We deliver this through our corporate strategy…
Retain market
leadership
Grow the hearing
implant market
Deliver consistent
revenue and earnings
growth
and four strategic platforms…
Grow the core
Build a Service
business
Shape the
organisation
Value creation
which are reflected in performance measures across Cochlear’s incentive plans…
Net profit after tax (NPAT)
Sales revenue
Achievement of business priorities
and growth initiatives
Relative total shareholder return (TSR)
Compound annual growth rate in earnings
per share (EPS)
with actual outcomes directly driving executive remuneration.
Fixed
remuneration
Short‐term
incentive
Long‐term
incentive
Total remuneration
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 (44% for the CEO&P
and 33% for other executive KMP) to align our executives with shareholder interests.
CEO&P
Other Executive KMP1
33%
34%
11%
22%
22%
11%
22%
45%
1 Excludes the transitional arrangement for FY20 where executives (excluding the CEO&P) had an LTI opportunity of 62.5% of base salary. Refer to
section 3.4 for more detail.
44 Cochlear Limited Annual Report 2020
3.2 Fixed remuneration
Fixed remuneration comprises base salary, superannuation and non‐monetary benefits which may include insurances and car
allowances. 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 executive’s expertise and performance in the role. Market benchmarks
are typically set with reference to market capitalisation and include 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 align and reward executives for the achievement of Cochlear group and regional (for regional executives) performance
targets set by the Board at the beginning of the performance period.
Performance
measures
Description
STI is dependent on meeting financial and strategic performance measures:
Performance
measure and
weighting
Performance
Gateway
Sales revenue
(60%)
Group Performance Gateway (minimum NPAT threshold) to drive global alignment.
Sales revenue growth is critical to short and longer‐term shareholder returns.
Financial targets are set by the Board, having regard to prior year performance, global market
conditions, competitive environment, future prospects and Board approved budgets. The targets
incorporate a significant amount of stretch to ensure executives are engaged and incentivised to
appropriately deliver results. The specific targets are not disclosed to the market due to their
commercial sensitivity.
The weighting between Cochlear group and regional financial targets depends on the
responsibilities and scope of influence of the executive.
Strategic measures recognise that in addition to short‐term financial results, a number of strategic
initiatives are required to enable sustained growth over time.
Each executive’s contribution against performance objectives is assessed at an individual level at
the end of the performance period. This assessment determines the level at which awards are
made.
Strategic
measures (40%)
Individual
contribution
Validation of performance against the measures set for:
the CEO&P involves a review by the Board based on financial inputs from the Chief Financial Officer, and approved by
the P&CC and Board each year; and
other executive KMP involves a review by the CEO&P based on inputs from the Chief Financial Officer and approved
by the P&CC.
Any anomalies or discretionary elements are validated and approved by the Board.
Refer to section 4 for further detail on measures for FY20.
Opportunity CEO&P: target opportunity is 100% of base salary, and maximum is up to 180% of base salary.
Delivery
Cessation of
employment
Other executive KMP: target opportunity is 75% of base salary, and maximum is up to 135% of base salary.
Two‐thirds of the award is paid in cash annually, with one‐third deferred into service rights for a period of two years (subject
to a service condition) to reinforce alignment to longer‐term shareholder interests and for retention purposes. No dividends
are attached to service rights.
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 share price following the
announcement of full year results in August each year.
Prior to STI payment date: if an executive ceases employment with Cochlear prior to any cash being paid, or service rights
being granted, the executive will forfeit any awards to be paid for the performance period, unless the Board determines
otherwise.
Post STI payment date: if an executive is dismissed for serious misconduct or resigns from their position after service rights
have been granted, but prior to the relevant vesting date, any unvested rights will generally be forfeited, unless the Board
determines otherwise.
45
3.4 Long‐term incentive
Purpose
Award vehicle
To align the remuneration opportunity for the executive team with shareholder value and provide a stimulus for the
retention of executives within the Company.
LTI is delivered as 50% options and 50% performance rights.
Opportunity
CEO&P: maximum opportunity is 100% of base salary.
Other executive KMP: maximum opportunity is 50% of base salary.
For FY20, a transitional arrangement was implemented to recognise that increasing the performance period from
three to four years will result in a gap year of LTI vesting in FY22 for executives. In FY20, executives (excluding the
CEO&P) had an opportunity of 62.5% of base salary.
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.
Gross contract value discounts for dividends not paid, 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 share price following the announcement of full year results in August each year.
Performance
period
Performance is measured over a four‐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.
Performance
measures and
hurdles
grant 1: 50% of the annual LTI grant opportunity with a three‐year performance period; and
grant 2: 75% of the annual LTI grant opportunity with a four‐year performance period.
For FY20, a transitional arrangement was implemented to recognise that increasing the performance period from three
to four years will result in a gap year of LTI vesting in FY22 for executives. For FY20 only, two grants were provided to
the executive team (excluding the CEO&P):
No transitional arrangement was provided to the CEO&P. The CEO&P’s FY20 LTI grant opportunity continued to be 100%
of base salary with a four‐year performance period.
Awards are subject to:
50% weighting on relative TSR against the constituents of the ASX 100 index as at the start of the performance
period; and
50% weighting on compound annual growth rate (CAGR) in EPS.
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
Performance (CAGR)
EPS
0%
40%
Less than 7.5%
7.5%
% of instruments that
vest
0%
50%
40% to 100% (pro‐rata)
7.5% to 12.5%
50% to 100% (pro‐rata)
100%
Above 12.5%
100%
Dividends
Cessation of
employment
These measures have been selected to incentivise the executive team towards long‐term sustainable growth of the
business and are generally accepted proxies for the creation of shareholder value.
No dividends are attached to options or performance rights.
If an executive ceases employment with Cochlear before the end of the performance period, unvested LTI awards will
generally be forfeited. In exceptional circumstances (including, but not limited to, 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.
46 Cochlear Limited Annual Report 2020
4. Executive KMP remuneration and link to
performance
4.1 FY20 STI outcomes
STI is based on meeting a Group Performance Gateway of NPAT, and performance against financial measures (60%) and
strategic measures (40%).
In FY20, Cochlear experienced a significant and rapid decline in revenue from mid‐March to early May, as a result of
COVID‐19 with elective surgeries deferred across the world. As a result, the Group Performance Gateway was not met, and no
STI pool was created for FY20.
Under the terms of the plan, the Board is able to exercise discretion to create or modify (upwards or downwards) the award
pool to allow payments to be made. After a holistic assessment of business performance, and consideration of shareholder
experience during this period, the Board decided to not exercise discretion and no STI awards (including deferred STI grants)
were made to any employee (including executives) under the plan.
The table below provides a summary, and achievement against each, of the financial and strategic measures of the STI plan.
Measures were agreed with the P&CC at the commencement of the financial year and aligned to the delivery of initiatives that
support Cochlear’s strategic priorities.
Strategic priority
Business priority
Commentary on performance
Achievement
s
e
r
u
s
a
e
m
c
i
g
e
t
a
r
t
S
)
%
0
4
(
Retain
market
leadership
Launch new products and
services
Drive upgrade penetration
Ensure technology leadership
Develop organisational talent
Strengthened product portfolio for Cochlear
Implants and Acoustics with launch of new
acoustic and cochlear implants
Extended leadership in connected services with
Remote Check launch
and capability
Increased organisational capability through
Implement the digital strategy
Develop partnerships and
alliances
Drive One Cochlear and
operational excellence
investment in leadership development and sales
presence
Implemented initiatives to improve customer
experience, including expanding Cochlear Family
membership
Increase recipient engagement
Create world‐class customer
Continued efficiency gains in supply chain,
customer service and procurement
experiences
Grow the
hearing
implant
market
Increase access and funding
Expand and enhance direct‐to‐
consumer capability
Build referrals from the Hearing
Aid and ENT channel
Strengthened direct‐to‐consumer capability in
existing markets, and launched in more
countries
Implemented market access initiatives
Expanded growth programs to build the referral
channel
s
e
r
u
s
a
e
m
l
a
i
c
n
a
n
F
i
)
%
0
6
(
Deliver
consistent
revenue and
earnings
growth
Achieve the FY20 financial
Financial targets were not met due to the
targets
impact of COVID‐19 on sales revenue, combined
with the cost of an adverse litigation judgment
Raised capital and increased debt facilities to
strengthen balance sheet and liquidity position
Implemented a significant reduction in non‐
essential spending and capital expenditure
= Below expectations
= Met expectations
= Exceeded expectations
47
As a result of performance, no FY20 STI payments were made as outlined in the table below.
Executive KMP
Dig Howitt
Anthony Bishop
Richard Brook
Brent Cubis
Jan Janssen
Tony Manna
STI target as a
% of base salary
STI maximum as a
% of base salary
Actual STI as a
% of target
Actual STI as a
% of maximum
STI forfeited as a
% of maximum
Actual STI ($)
100%
75%
75%
75%
75%
75%
180%
135%
135%
135%
135%
135%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
100%
100%
100%
100%
100%
100%
0
0
0
0
0
0
4.2 FY18‐20 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 relative TSR and EPS performance over the past five years.
For FY20, Cochlear’s TSR performance was 30.6%, which was
ranked at the 72nd percentile of the ASX 100 comparator group.
This resulted in performance between target and stretch, and as
a result, 92.8% of the TSR portion of the LTI vested.
Cochlear’s underlying EPS1 in FY20 was 257.9 cents, which is a
(12.9%) CAGR over the three‐year performance period. This
resulted in performance below target and as a result, 0% of the
EPS portion of the LTI vested.
Cochlear TSR performance against targets
Cochlear EPS performance against targets
174.0%
157.0%
127.2%
R
S
T
r
a
e
y
‐
3
200%
180%
160%
140%
120%
100%
80%
60%
40%
20%
0%
76.3%
30.6%
R
G
A
C
S
P
E
r
a
e
y
‐
3
40%
30%
20%
10%
‐
(10%)
(20%)
33.3%
12.4%
18.6%
11.7%
FY16
FY17
FY18
FY19
FY20
(12.9%)
FY16
FY17
FY18
FY19
FY20
Cochlear TSR performance
Median TSR (target)
75th percentile TSR (stretch)
Cochlear EPS performance
Target
Stretch
For the FY18‐20 LTI, 46.4% vests based on performance over the three‐year period
from 1 July 2017 to 30 June 2020.
1. Underlying EPS excludes innovation fund gains and patent litigation expense.
48 Cochlear Limited Annual Report 2020
4.3 Financial performance history (FY16 to FY20)
Sales revenue ($million)1
Earnings/(loss) before interest and tax (EBIT) ($million)
EBIT (excluding innovation fund gains and patent litigation
expense) ($million)
Net profit/(loss) after tax (NPAT) ($million)
NPAT (excluding innovation fund gains and patent litigation
expense) ($million)
Basic earnings/(loss) per share (EPS) (cents) – reported
Basic EPS (excluding innovation fund gains and patent
litigation expense) (cents)
EPS growth (3‐year CAGR)
EPS growth (excluding innovation fund gains and patent
litigation expense) (3‐year CAGR)
Total dividend per share ($)2
Share price as at 30 June ($)
FY16
FY17
FY18
FY19
1,158.1
1,239.7
1,351.4
1,446.1
262.6
n/a
188.9
n/a
330.6
n/a
315.6
n/a
223.6
n/a
389.7
n/a
348.4
350.6
245.8
248.0
427.3
431.1
370.1
359.3
276.7
265.9
479.6
460.9
FY20
1,352.3
(262.2)
206.9
(238.3)
153.8
(399.6)
257.9
12.4%
33.3%
18.6%
13.2%
(200.8%)
n/a
2.30
n/a
2.70
n/a
3.00
121.25
155.45
200.17
11.7%
(12.9%)
3.30
206.84
1.60
188.93
Relative total shareholder return (TSR) (3 years)
TSR percentile ranking3
1. Excludes foreign exchange gain/(loss) on hedged sales.
2. No final FY20 dividend; $1.60 is the interim dividend for FY20.
3. TSR percentile ranking is shown over three financial years to 30 June. For LTI, performance is compared to the TSR of the constituents
157.0%
97th
127.2%
94th
174.0%
96th
76.3%
81st
30.6%
72nd
of the ASX 100 as at the start of the relevant performance period.
For further explanation of details on Cochlear performance, see the Operating and financial review section on pages 15 to 32
of this Annual Report.
49
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
Post‐
employment
Salary
Cash STI
Non‐
monetary
benefits1
Super‐
annuation
contributions
Other long‐
term
benefits
Long service
leave
Share based payments
Total
Deferred
STI2
LTI
performance
rights3
LTI
options3
% of
performance
related
remuneration
Executive KMP
Dig Howitt
FY20
1,721,612
‐
FY19
1,704,308
1,105,225
Anthony
Bishop
FY20
FY19
539,245
‐
503,356
244,481
1,538
1,130
923
640
21,003
41,051
298,081
151,890
463,205
2,698,380
20,531
(19,078)
344,269
124,402
413,778
3,694,565
21,003
20,531
6,549
70,316
38,756
36,625
2,583
99,369
45,172
24,710
713,417
940,842
Richard Brook FY20
767,993
‐
235,341
152,924
FY19
753,728
360,020
275,439
152,836
‐
‐
104,762
150,706
53,498
79,027
1,393,545
89,567
75,067
1,857,363
Brent Cubis
FY20
611,725
‐
FY19
612,350
284,927
Jan Janssen
FY20
828,461
‐
FY19
762,121
422,605
923
640
1,538
1,130
Tony Manna FY20
816,517
‐
85,755
FY19
743,718
353,068
87,762
21,003
20,531
21,003
4,397
84,302
52,062
59,666
834,078
2,472
96,139
34,503
35,415
1,086,977
4,869
115,315
60,412
88,868
1,120,466
20,531
22,880
157,525
69,669
88,896
1,545,357
21,241
19,355
‐
‐
102,227
150,682
36,386
111,795
1,173,921
30,346
120,337
1,505,268
Total
FY20
5,285,553
‐
326,018
258,177
56,866
775,003
393,004
839,186
7,933,807
FY19
5,079,581
2,770,326
366,741
254,315
8,857
998,690
393,659
758,203
10,630,372
33.84%
53.80%
20.42%
43.97%
17.03%
36.36%
23.50%
41.49%
23.61%
47.80%
21.33%
43.48%
25.30%
46.29%
1. Non‐monetary benefits include insurances for all KMP and car and housing allowances for overseas based KMP which are market‐based
payments. For Richard Brook, the amount also includes compulsory social security contributions of approximately $111,000. Tony
Manna’s non‐monetary benefits for the FY19 comparative year have been adjusted from $75,508 to $87,762, with the totals for FY19
adjusted accordingly.
3.
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
FY20 amount represents the portion of the FY18 and FY19 deferred STI expensed in FY20. The FY19 amount represents the portion of
the FY17, FY18 and FY19 deferred STI expensed in FY19.
LTI 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.
50 Cochlear Limited Annual Report 2020
6. Executive service agreements
Cochlear does not enter into (limited) service contracts for executive KMP. The terms of employment 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 to 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.
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.
Management
People & Culture Committee
Board
• Reviews, applies judgment
and, as appropriate,
approves recommendations
from the P&CC
• Makes recommendations to the
P&CC with respect to individual
remuneration arrangements for
executive KMP
• Implement policies and
practices relating to talent
management, remuneration,
organisational culture, diversity
and inclusion, work, health and
safety and leadership
development
• 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
− Organisational culture, diversity and
inclusion, talent management and
leadership development strategies and
practices
− Work, health and safety metrics and
initiatives
− Design features of employee and executive
short‐term and long‐term incentive plan
awards
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 FY20, the P&CC engaged Godfrey Remuneration Group (GRG) and received market practice advice and information in
relation to the remuneration of NEDs, executives and senior leaders. GRG was paid $57,100 (excluding GST) for these services.
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 as GRG confirmed in writing that the remuneration recommendations were made free from undue
influence by management, in accordance with the Corporations Act 2001.
51
7.3 Share ownership requirements
Executive KMP are required 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 and discretion
All participants of the deferred STI and LTI plans are subject to the Clawback Policy, available in the ‘Investor Centre’ section of
the Company’s 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.
The Board retains discretion to adjust remuneration outcomes upwards or downwards to ensure incentives are not provided
where it would be inappropriate or would provide unintended outcomes. The exercise of appropriate discretion may be used
where a formulaic outcome does not align with the overall shareholder experience, or reflect overall business performance
and intended outcomes, or leads to retention risk for key talent. The Board balances judgment on remuneration outcomes
with consideration to all stakeholders.
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 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.
Executive KMP
Plan
Grant date
Options
Dig Howitt
FY17 LTI
FY17 deferred STI
FY18 LTI
FY18 deferred STI
FY19 LTI
FY19 deferred STI
FY20 LTI
Total
Anthony Bishop FY17 LTI
FY17 deferred STI
FY18 LTI
FY18 deferred STI
FY19 LTI
FY19 deferred STI
FY20 LTI
FY20 LTI
Total
Number
10,375
‐
46,842
‐
35,907
‐
24,041
117,165
2,171
‐
1,778
‐
1,598
‐
2,014
2,745
10,306
Maximum
value to be
expensed ($)1
‐
‐
‐
‐
194,795
‐
322,228
517,023
‐
‐
‐
‐
8,669
‐
21,121
36,792
66,582
19‐Oct‐16
24‐Aug‐17
18‐Oct‐17
24‐Aug‐18
17‐Oct‐18
17‐Sep‐19
23‐Oct‐19
19‐Oct‐16
24‐Aug‐17
18‐Oct‐17
24‐Aug‐18
17‐Oct‐18
17‐Sep‐19
23‐Oct‐19
23‐Oct‐19
Performance rights
Number Maximum value
to be expensed
($)1
‐
‐
‐
‐
32,719
184,161
221,054
437,934
‐
‐
‐
‐
13,592
40,692
14,439
25,238
93,961
1,537
949
3,372
1,692
1,685
2,634
4,432
16,301
751
596
697
440
700
582
332
506
4,604
Vesting
date
Vested Forfeited
79.3%
100.0%
20.7%
0.0%
79.3%
100.0%
20.7%
0.0%
19‐Aug‐19
19‐Aug‐19
19‐Aug‐20
19‐Aug‐20
18‐Aug‐21
18‐Aug‐21
16‐Aug‐23
19‐Aug‐19
19‐Aug‐19
19‐Aug‐20
19‐Aug‐20
18‐Aug‐21
18‐Aug‐21
17‐Aug‐22
16‐Aug‐23
52 Cochlear Limited Annual Report 2020
Executive KMP
Plan
Grant date
Options
Richard Brook
Brent Cubis
Jan Janssen
Tony Manna
FY17 LTI
FY17 deferred STI
FY18 LTI
FY18 deferred STI
FY19 LTI
FY19 deferred STI
FY20 LTI
FY20 LTI
Total
FY17 deferred STI
FY18 LTI
FY18 deferred STI
FY19 LTI
FY19 deferred STI
FY20 LTI
FY20 LTI
Total
FY17 LTI
FY17 deferred STI
FY18 LTI
FY18 deferred STI
FY19 LTI
FY19 deferred STI
FY20 LTI
FY20 LTI
Total
FY17 LTI
FY17 deferred STI
FY18 LTI
FY18 deferred STI
FY19 LTI
FY19 deferred STI
FY20 LTI
FY20 LTI
Total
Number
5,622
‐
6,965
‐
4,565
‐
2,679
3,652
23,483
‐
3,622
‐
4,050
‐
2,287
3,117
13,076
7,900
‐
7,060
‐
5,223
‐
3,237
4,413
27,833
9,414
‐
10,385
‐
7,530
‐
3,055
4,165
34,549
Maximum
value to be
expensed ($)1
‐
‐
‐
‐
24,765
‐
28,096
48,949
101,810
‐
‐
‐
21,971
‐
23,985
41,778
87,734
‐
‐
‐
‐
28,335
‐
33,947
59,149
121,431
‐
‐
‐
‐
40,850
‐
32,039
55,825
128,714
19‐Oct‐16
24‐Aug‐17
18‐Oct‐17
24‐Aug‐18
17‐Oct‐18
17‐Sep‐19
23‐Oct‐19
23‐Oct‐19
24‐Aug‐17
18‐Oct‐17
24‐Aug‐18
17‐Oct‐18
17‐Sep‐19
23‐Oct‐19
23‐Oct‐19
19‐Oct‐16
24‐Aug‐17
18‐Oct‐17
24‐Aug‐18
17‐Oct‐18
17‐Sep‐19
23‐Oct‐19
23‐Oct‐19
19‐Oct‐16
24‐Aug‐17
18‐Oct‐17
24‐Aug‐18
17‐Oct‐18
17‐Sep‐19
23‐Oct‐19
23‐Oct‐19
Performance rights
Number Maximum value
to be expensed
($)1
‐
‐
‐
‐
16,641
59,989
19,223
33,567
129,420
‐
‐
‐
14,757
47,473
16,396
28,629
107,255
‐
‐
‐
‐
19,049
70,406
23,225
40,550
153,230
‐
‐
‐
‐
6,854
58,800
21,920
38,256
125,830
1,944
944
1,170
665
857
858
442
673
7,553
243
1,420
547
760
679
377
574
4,600
1,171
867
1,186
667
981
1,007
534
813
7,226
598
995
436
645
353
841
504
767
5,139
Vesting
date
Vested Forfeited
79.3%
100.0%
20.7%
0.0%
100.0%
0.0%
79.3%
100.0%
20.7%
0.0%
79.3%
100.0%
20.7%
0.0%
19‐Aug‐19
19‐Aug‐19
19‐Aug‐20
19‐Aug‐20
18‐Aug‐21
18‐Aug‐21
17‐Aug‐22
16‐Aug‐23
19‐Aug‐19
19‐Aug‐20
19‐Aug‐20
18‐Aug‐21
18‐Aug‐21
17‐Aug‐22
16‐Aug‐23
19‐Aug‐19
19‐Aug‐19
19‐Aug‐20
19‐Aug‐20
18‐Aug‐21
18‐Aug‐21
17‐Aug‐22
16‐Aug‐23
19‐Aug‐19
19‐Aug‐19
19‐Aug‐20
19‐Aug‐20
18‐Aug‐21
18‐Aug‐21
17‐Aug‐22
16‐Aug‐23
1. The options granted in FY20 have an exercise price of $217.28, and an expiry date of 17 March 2023 (awards vesting after 3 years) and
16 March 2024 (awards vesting after 4 years). Fair values (IFRS‐2) of FY20 options and performance rights under the LTI plan as at the
date of grant are as follows:
options: 3 year (EPS growth: $34.13; relative TSR: $31.46) and 4 year (EPS growth: $37.56; relative TSR: $35.74); and
performance rights: 3 year (EPS growth: $206.70; relative TSR: $130.48) and 4 year (EPS growth: $203.72; relative TSR: $133.01).
This valuation is for accounting purposes only and forms the basis of the expense in future years. Further detail on the allocation
methodology is provided in section 3.4.
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 FY17 deferred STI plan and FY17 LTI plan vested in August 2019, and executives’ options/rights converted
into shares under these plans.
Executive KMP
Dig Howitt
Anthony Bishop
Richard Brook
Brent Cubis
Jan Janssen
Tony Manna
Balance
1 July 2019
Received on exercise of
options/rights1
Purchases and sales
Balance
30 June 2020
40,094
752
6,816
‐
6,786
2,182
10,394
2,912
6,943
243
8,059
8,934
(8,013)
(1,165)
(8,759)
100
(8,059)
(6,988)
42,475
2,499
5,000
343
6,786
4,128
1.
For options exercised, the amount paid per option was the exercise price of $135.84.
53
Rights held during the year
Rights are acquired by executive KMP under the deferred STI and LTI plan. During the year:
granted: FY19 STI deferred awards were granted in September 2019 (based on the FY19 performance year) and FY20 LTI
awards were granted in October 2019; and
vested: 100% of the FY17 deferred STI award and 79.3% of the FY17 LTI award vested in August 2019.
Executive KMP
Dig Howitt
Anthony Bishop
Richard Brook
Brent Cubis
Jan Janssen
Tony Manna
Balance
1 July 2019
9,235
3,184
5,580
2,970
4,872
3,027
Options held during the year
Deferred STI service rights
Granted
Vested
Forfeited
LTI performance rights
Vested
Granted
Forfeited
2,634
582
858
679
1,007
841
(949)
(596)
(944)
(243)
(867)
(995)
‐
‐
‐
‐
‐
‐
4,432
(1,218)
838
(595)
1,115
(1,541)
951
1,347
1,271
‐
(928)
(474)
(319)
(156)
(403)
‐
(243)
(124)
Balance
30 June 2020
13,815
3,257
4,665
4,357
5,188
3,546
Options over ordinary shares are acquired by executive KMP under the LTI plan. During the year, FY20 LTI awards were granted
in October 2019 and 79.3% of the FY17 LTI award vested in August 2019.
All options held at the end of the year are unvested.
Executive KMP
Dig Howitt
Anthony Bishop
Richard Brook
Brent Cubis
Jan Janssen
Balance
1 July 2019
LTI options
Granted
Vested and exercised1
Forfeited
Balance
30 June 2020
93,124
5,547
17,152
7,672
20,183
24,041
4,759
6,331
5,404
7,650
(8,227)
(1,721)
(4,458)
‐
(2,148)
(450)
(1,164)
‐
(6,264)
(1,636)
106,790
8,135
17,861
13,076
19,933
Tony Manna
1. The value of exercised options at the date of vesting is $81.95 (closing share price at the vesting date 19 August 2019 of $217.79 less
(1,949)
(7,465)
27,329
25,135
7,220
the exercise price of $135.84).
Executive minimum shareholding
As at 30 June 2020, the Board is satisfied that the executive KMP are compliant with the Share Ownership Policy. The table
below presents a summary of executive KMP holdings and compliance with minimum shareholding requirements.
Executive KMP
Dig Howitt
Anthony Bishop
Richard Brook
Brent Cubis
Jan Janssen
Tony Manna
Ordinary shares held
Policy value of Cochlear shares at year
end ($)1
% of base salary2
42,475
2,499
5,000
343
6,786
4,128
8,923,148
524,990
1,050,400
72,057
1,425,603
867,210
518%
97%
137%
12%
172%
106%
1.
In line with the Share Ownership Policy, the value has been calculated as the average daily share price over the previous 12 months
($210.08), as at closing on the ASX up to 30 June 2020, times the number of shares.
2. The % of base salary is calculated as the value of shares divided by the actual base salary for the preceding 12 months to 30 June 2020.
54 Cochlear Limited Annual Report 2020
8.3 Potential dilution if options vest and ordinary shares issued
(unaudited)
The Board encourages employee ownership of Cochlear shares. To restrict dilution of shareholders’ interests, the total
employee interests in unvested equity cannot exceed 5% of share capital.
At the date of this report, the number of ordinary shares that would be issued if all options were vested, having met the service
and performance conditions, and exercised and assuming ordinary shares were issued, is as follows.
Grant date
Issued
Number of options
Forfeited/
lapsed1
At report
date
Exercise
price per
share ($)
Exercise period
Current net value of
outstanding options as at
30 June 2020 ($)2
FY18 LTI
FY19 LTI
FY20 LTI
FY20 LTI
Total
18‐Oct‐17
17‐Oct‐18
23‐Oct‐19
23‐Oct‐19
106,713
80,231
24,231
57,074
2,337
4,486
‐
‐
75,745
24,231
57,074
202.84 Aug‐21 to Mar‐22
217.28 Aug‐22 to Mar‐23
217.28 Aug‐23 to Mar‐24
104,376
154.73 Aug‐20 to Mar‐21
3,569,659
‐
‐
‐
3,569,659
268,249
6,823
261,426
Forfeited/lapsed options from unvested grants relate to plan participants who have departed Cochlear.
1.
2. Closing share price as at 30 June 2020 was $188.93.
Total unvested equity currently accounts for approximately 0.55% 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 issued shares
Number of issued shares
Number of equivalent shares at 30 June 2020
261,426
35,625
59,372
3,896
360,319
0.55%
65,687,402
1. Refer to Note 4.3 to the financial statements for further information on the APAC Employee Equity 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.
55
9. Non‐executive director fees
NEDs are paid from an aggregate annual fee pool for FY20 of $3,000,000 (approved at the 2017 Annual General Meeting). Total
remuneration paid during the year was $2,325,215 which is within the fee pool limit (represented 77.5% 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 2.5%, effective
1 July 2019. Committee fees remain unchanged. This decision was made with reference to external remuneration
benchmarking of companies of a similar market capitalisation to that of Cochlear.
In response to the significant impact of COVID‐19 on financial performance, the Board implemented a 30% reduction in Board
and committee fees for a period of three months from mid‐April 2020. There will be no fee increases for the Board for FY21.
The table below outlines the policy base and committee fees for FY19 and FY20.
Amounts $1
Cochlear Board
Committees2
Audit & Risk
People & Culture
Technology & Innovation
Medical Science
Nomination
FY19
Chair
505,900
50,000
40,000
40,000
30,000
No fee
Member
165,779
25,000
20,000
20,000
15,000
No fee
FY20
Chair
518,547
50,000
40,000
40,000
30,000
No fee
Member
169,923
25,000
20,000
20,000
15,000
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 $
Year
Short‐term benefits
Post‐employment benefits
Total
Rick Holliday‐Smith
Yasmin Allen
Glen Boreham
Michael Daniell2
Alison Deans3
Andrew Denver
Abbas Hussain4
Donal O'Dwyer
FY20
FY19
FY20
FY19
FY20
FY19
FY20
FY19
FY20
FY19
FY20
FY19
FY20
FY19
FY20
Fees
488,387
505,617
244,848
255,686
240,136
250,686
85,122
‐
249,022
230,686
218,194
245,686
193,021
111,973
216,578
Superannuation1
21,003
20,531
21,003
20,531
21,003
20,531
9,210
‐
10,501
20,384
20,492
20,531
19,280
10,635
20,492
509,390
526,148
265,851
276,217
261,139
271,217
94,332
‐
259,523
251,070
238,686
266,217
212,301
122,608
237,070
56 Cochlear Limited Annual Report 2020
Amounts $
Year
Short‐term benefits
Post‐employment benefits
Total
Bruce Robinson
Total
FY19
FY20
FY19
FY20
FY19
Fees
225,686
226,002
235,686
2,161,310
2,061,706
Superannuation1
20,165
20,921
20,531
163,905
153,839
245,851
246,923
256,217
2,325,215
2,215,545
The total fees for FY19 of $2,215,545 in this table is less than the total for FY19 in the 2019 Remuneration report of $2,745,148 as it does not
include $529,603 for the former NED, Edward Byrne who retired as a NED on 16 October 2018.
1. During the temporary fee reduction period from mid‐April 2020, superannuation was maintained on full fees, and continued to be
capped at the maximum superannuation contribution limit.
2. Michael Daniell was appointed to the Board on 1 January 2020.
3. Effective 1 January 2020, Alison Deans has opted out of receiving superannuation guarantee payments in accordance with the
Superannuation Guarantee (Administration) Act 1992. An equivalent amount of $10,501 was made over the period from 1 January 2020
to 30 June 2020 as fees.
4. Abbas Hussain was appointed to the Board on 1 December 2018.
9.3 Minimum shareholding requirement for NEDs
NEDs are requested to hold shares equivalent to the fees (including both Board and committee fees) received in the previous
12 months. The share ownership requirement must be satisfied within three years of appointment to the Board.
As at 30 June 2020, all NEDs are compliant with the Share Ownership Policy which allows three years to build their
shareholdings. The table below presents Cochlear Limited shareholdings for each NED. All NEDs increased their shareholding
through the Share Purchase Plan in April 2020.
Balance
1 July 2019
Purchases
Sales
10,000
3,500
2,800
‐
3,000
4,000
‐
6,000
1,652
214
214
214
1,214
214
214
226
214
214
‐
‐
‐
‐
‐
‐
‐
‐
(933)
Balance
30 June 2020
Policy value of
shares as at
30 June 2020 ($)1
10,214
2,145,757
3,714
3,014
1,214
3,214
4,214
226
6,214
933
780,237
633,181
255,037
675,197
885,277
47,478
1,305,437
196,005
% of fees
439%
319%
264%
300%
271%
406%
25%
603%
87%
Rick Holliday‐Smith
Yasmin Allen
Glen Boreham
Michael Daniell2
Alison Deans
Andrew Denver
Abbas Hussain3
Donal O’Dwyer
Bruce Robinson4
1.
In line with the Share Ownership Policy, available in the ‘Investor Centre’ section of the Company’s website, the value of Cochlear
Limited ordinary shares is calculated using the average daily share price over the previous 12 months ($210.08), as at closing on the ASX
up to 30 June 2020, times the number of shares.
2. Michael Daniell was appointed to the Board on 1 January 2020. The % of fees has been calculated based on his actual total fees for the
six‐month period post appointment from 1 January 2020 to 30 June 2020.
3. Abbas Hussain was appointed to the Board on 1 December 2018, and in accordance with the policy has until 1 December 2021 to build
his shareholding.
4. Bruce Robinson did an off‐market transfer required by a Court Order in a family law settlement.
57
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 2020, 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, Mr M Daniell, Ms A Deans, Mr A Denver, Mr D Howitt, Mr A Hussain, Mr DP O’Dwyer and
Prof B Robinson, AC.
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 R 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 35 years’ experience in corporate and commercial law, litigation and
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 & Risk
Committee
People &
Culture
Committee
Medical Science
Committee
Nomination
Committee
Technology &
Innovation
Committee
Held Attended Held Attended Held Attended Held Attended Held Attended Held Attended
Mr R Holliday‐Smith
Mrs YA Allen
Mr G Boreham, AM
Mr M Daniell1
Ms A Deans2
Mr A Denver3
Mr D Howitt
Mr A Hussain
Mr DP O’Dwyer
21
21
21
15
21
21
21
21
21
21
20
21
14
21
21
21
19
21
5
5
5
‐
5
5
‐
‐
5
5
5
5
‐
5
5
‐
‐
5
4
4
4
‐
4
‐
‐
‐
‐
4
4
4
‐
4
‐
‐
‐
‐
‐
‐
‐
‐
‐
2
2
2
2
Prof B Robinson, AC
20
1. Mr Daniell was appointed on 1 January 2020.
2. Ms Deans was appointed as Chair of the Technology & Innovation Committee effective 23 July 2019.
3. Mr Denver ceased as Chair of the Technology & Innovation Committee from 23 July 2019.
21
4
4
2
‐
‐
‐
‐
‐
‐
‐
2
2
‐
2
2
4
4
4
1
4
4
‐
4
4
4
4
3
4
1
4
4
‐
2
4
4
‐
3
3
1
3
3
3
3
3
3
‐
2
3
1
3
3
3
2
3
3
58 Cochlear Limited Annual Report 2020
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 15 to 32 of this Annual Report.
Dividends
Dividends declared and paid by the Company to members since the end of the previous financial year are:
Interim 2020 ordinary
Final 2019 ordinary
Total amount
Dollars per share
Total amount
$m
Franked/
unfranked
Date of payment
1.60
1.75
3.35
92.5
101.2
193.7
100% Franked
17 April 2020
100% Franked
14 October 2019
No final dividend has been declared after 30 June 2020. Franked dividends declared and paid during the financial year were
franked at the tax rate of 30% (2019: 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 & Risk 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 & Risk 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.
59
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
Total audit services
Non‐audit services
Other assurance services
Taxation compliance and advisory services
IT advisory
Other
Total non‐audit services
State of affairs
Consolidated
2020
$
2019
$
2,170,767
2,170,767
1,809,019
1,809,019
35,666
133,481
1,547,505
1,764,533
‐
9,185
643,260
357,650
1,592,356
2,898,924
There were no significant changes to the state of affairs of Cochlear during the financial year other than that referred to in the
financial statements or notes thereto.
Remuneration report
Information on Cochlear’s remuneration framework and the outcomes for the financial year ended 30 June 2020 for the
Cochlear Limited Board, the CEO & President and other key management personnel, and changes for the financial year ending
30 June 2021, is included in the Remuneration report on pages 40 to 57 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.
60 Cochlear Limited Annual Report 2020
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:
Patent litigation expense
Subsequent to year‐end, Cochlear agreed to a settlement with Alfred E. Mann Foundation for Scientific Research and Advanced
Bionics LLC (collectively referred to as AMF and AB) for pre‐judgment interest and attorneys’ fees totalling USD 75 million in
the long‐running patent dispute. At 30 June 2020, Cochlear has provided USD 75 million in relation to these claims which are
also included in the patent litigation expense within the Income Statement. The settlement is conditional upon the outcome
of an appeal by Cochlear to the US Supreme Court against the Judgment of USD 280 million in patent infringement damages
and post judgment interest against the Defendants.
Cochlear has agreed to file its appeal by no later than 15 September 2020. Cochlear has also agreed to deposit USD 75 million
into escrow account pending the outcome of the appeal. If Cochlear’s Supreme Court appeal is unsuccessful, the monies in the
escrow account will be paid to AMF and AB and the settlement will become final.
If Cochlear’s Supreme Court appeal is successful, the monies in the escrow account will be returned to Cochlear and there may
be a new trial to redetermine the quantum of damages.
Lead auditor’s independence declaration
The lead auditor’s independence declaration is set out on page 62 and forms part of the Directors’ report for the financial year
ended 30 June 2020.
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 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
stated.
Dated at Sydney this 18th day of August 2020.
Signed in accordance with a resolution of the directors:
Director
Director
61
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 2020 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
Julian McPherson, Partner
Sydney, 18 August 2020
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.
62
Income statement
Revenue
Cost of sales
Gross profit
Selling, marketing and general expenses
Research and development expenses
Administration expenses
Other income
Other expenses
Patent litigation expense
Share of losses on equity accounted investments
Results from operating activities
Finance income ‐ interest
Finance expense ‐ interest
Net finance expense
(Loss)/profit before income tax
Income tax benefit/(expense)
Net (loss)/profit
Basic (loss)/earnings per share (cents)
Diluted (loss)/earnings per share (cents)
Note
2.2
2.3
2.4
2.3
2.3
5.5
3.1
2.5
2.5
2020
$m
1,320.6
(344.4)
976.2
(470.0)
(185.1)
(93.8)
78.1
(62.7)
(503.7)
(1.2)
(262.2)
1.6
(10.5)
(8.9)
(271.1)
32.8
(238.3)
(399.6)
(399.6)
2019
$m
1,426.7
(351.1)
1,075.6
(450.9)
(184.4)
(94.8)
29.0
(4.4)
‐
‐
370.1
0.7
(5.2)
(4.5)
365.6
(88.9)
276.7
479.6
479.5
The Consolidated Entity has initially applied AASB 16 Leases at 1 July 2019. Under the transition methods chosen, comparative
information is not restated. See Note 5.8.
The notes on pages 68 to 105 are an integral part of these consolidated financial statements.
63
Statement of comprehensive
income
Net (loss)/profit
Other comprehensive income/(loss)
Items that will not be reclassified subsequently to the income statement:
Defined benefit plan actuarial gain/(losses)
Financial investments measured at fair value through other comprehensive
income, net of tax
Total items that will not be reclassified subsequently to the income statement
Items that are or may be reclassified subsequently to the income statement:
Foreign currency translation differences
Effective portion of changes in fair value of cash flow hedges, net of tax
Net change in fair value of discontinued cash flow hedges transferred to income
statement, net of tax
Net change in fair value of cash flow hedges transferred to the income statement, net
of tax
Total items that are or may be reclassified subsequently to the income statement
Total other comprehensive income, net of tax
Total comprehensive (loss)/income
2020
$m
(238.3)
1.6
(1.8)
(0.2)
3.9
(22.6)
18.3
22.2
21.8
21.6
(216.7)
2019
$m
276.7
(0.2)
(1.3)
(1.5)
12.6
(17.8)
‐
13.6
8.4
6.9
283.6
The Consolidated Entity has initially applied AASB 16 Leases at 1 July 2019. Under the transition methods chosen, comparative
information is not restated. See Note 5.8.
The notes on pages 68 to 105 are an integral part of these consolidated financial statements.
64 Cochlear Limited Annual Report 2020
Balance sheet
Assets
Cash and cash equivalents
Term deposits
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
Equity accounted investments
Deferred tax assets
Right of use asset
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
Lease liability
Total current liabilities
Trade and other payables
Forward exchange contracts
Loans and borrowings
Employee benefit liabilities
Provisions
Deferred tax liabilities
Deferred revenue
Lease liability
Total non‐current liabilities
Total liabilities
Net assets
Equity
Share capital
Reserves
Retained earnings
Total equity
Note
6.3(b)
6.4(b)
5.1
3.2
5.2
5.3
5.4
5.5
3.2
5.8
6.3(a)
3.2
4.2
5.6
5.8
6.3(a)
4.2
5.6
3.2
5.8
2020
$m
565.0
365.0
235.5
1.2
223.8
69.4
17.6
1,477.5
5.0
2.1
230.5
410.3
25.9
69.0
147.1
208.3
1,098.2
2,575.7
159.3
0.3
393.1
7.2
54.4
130.2
47.0
26.0
817.5
13.6
1.7
79.9
12.4
27.2
14.1
2.3
205.5
356.7
1,174.2
1,401.5
1,272.4
12.7
116.4
1,401.5
2019
$m
78.6
‐
319.7
2.2
195.4
12.2
26.9
635.0
3.3
2.1
166.5
424.4
47.8
‐
100.1
‐
744.2
1,379.2
160.8
20.9
3.3
34.8
69.5
27.3
42.9
‐
359.5
42.4
7.6
178.3
13.1
44.2
5.5
2.7
‐
293.8
653.3
725.9
182.3
(15.3)
558.9
725.9
The Consolidated Entity has initially applied AASB 16 Leases at 1 July 2019. Under the transition methods chosen, comparative
information is not restated. See Note 5.8.
The notes on pages 68 to 105 are an integral part of these consolidated financial statements.
65
Statement of changes in equity
$m
2019
Balance at 1 July 2018
Total comprehensive income/(loss)
Net profit
Other comprehensive (loss)/income
Defined benefit plan actuarial losses
Financial investments measured at fair value through
other comprehensive income, net of tax
Foreign currency translation differences
Effective portion of changes in fair value of cash flow
hedges, net of tax
Net change in fair value of cash flow hedges transferred
to the income statement, net of tax
Total other comprehensive income/(loss)
Total comprehensive income/(loss)
Transactions with owners, recorded directly in equity
Share options exercised
Performance rights vested
Share based payment transactions
Deferred tax recognised in equity
Dividends to shareholders
Balance at 30 June 2019
2020
Balance at 1 July 2019 (as reported)
Change on initial application of AASB 16, net of tax
Balance at 1 July 2019 (restated)
Total comprehensive (loss)/income
Net loss
Other comprehensive income/(loss)
Defined benefit plan actuarial gains
Financial investments measured at fair value through
other comprehensive income, net of tax
Foreign currency translation differences
Effective portion of changes in fair value of cash flow
hedges, net of tax
Net change in fair value of discontinued cash flow hedges
transferred to the income statement, net of tax
Net change in fair value of cash flow hedges transferred
to the income statement, net of tax
Total other comprehensive income/(loss)
Total comprehensive income/(loss)
Transactions with owners, recorded directly in equity
Share options exercised
Performance rights vested
Shares issued through institutional placement, net of
related costs
Shares issued through share purchase plan, net of related
costs
Share based payment transactions
Deferred tax recognised in equity
Dividends to shareholders
Balance at 30 June 2020
Issued
capital
Translation
reserve
Hedging
reserve
Fair
value
reserve
Share
based
payment
reserve
Retained
earnings
Total
equity
173.0
(59.8)
(12.8)
0.2
39.0
464.2
603.8
‐
‐
‐
‐
‐
‐
‐
‐
9.3
‐
‐
‐
‐
182.3
182.3
‐
182.3
‐
‐
‐
‐
‐
‐
‐
‐
‐
7.4
‐
856.2
219.4
‐
7.1
‐
1,272.4
‐
‐
‐
12.6
‐
‐
‐
‐
‐
‐
(1.3)
‐
‐
(17.8)
‐
‐
12.6
12.6
‐
‐
‐
‐
‐
(47.2)
(47.2)
‐
(47.2)
‐
‐
‐
3.9
‐
‐
‐
3.9
3.9
‐
‐
‐
‐
‐
‐
‐
(43.3)
13.6
(4.2)
(4.2)
‐
‐
‐
‐
‐
(17.0)
(17.0)
‐
(17.0)
‐
‐
‐
‐
(22.6)
18.3
22.2
17.9
17.9
‐
‐
‐
‐
‐
‐
‐
0.9
‐
(1.3)
(1.3)
‐
‐
‐
‐
‐
(1.1)
(1.1)
‐
(1.1)
‐
‐
(1.8)
‐
‐
‐
‐
(1.8)
(1.8)
‐
‐
‐
‐
‐
‐
‐
(2.9)
‐
‐
‐
‐
‐
‐
‐
‐
(1.8)
(0.1)
8.5
4.4
‐
50.0
50.0
‐
50.0
‐
‐
‐
‐
‐
‐
‐
‐
‐
(0.5)
(0.6)
‐
‐
7.0
2.1
‐
58.0
276.7
276.7
(0.2)
(0.2)
‐
‐
‐
‐
(0.2)
276.5
‐
‐
‐
‐
(181.8)
558.9
(1.3)
12.6
(17.8)
13.6
6.9
283.6
7.5
(0.1)
8.5
4.4
(181.8)
725.9
558.9
(12.1)
546.8
725.9
(12.1)
713.8
(238.3)
(238.3)
1.6
1.6
‐
‐
‐
‐
(1.8)
3.9
(22.6)
18.3
‐
1.6
(236.7)
22.2
21.6
(216.7)
‐
‐
‐
6.9
(0.6)
856.2
‐
‐
‐
(193.7)
116.4
219.4
7.0
9.2
(193.7)
1,401.5
The Consolidated Entity has initially applied AASB 16 Leases at 1 July 2019. Under the transition methods chosen, comparative
information is not restated. See Note 5.8. The notes on pages 68 to 105 are an integral part of these consolidated financial
statements.
66 Cochlear Limited Annual Report 2020
Statement of cash flows
Cash flows from operating activities
Cash receipts from customers
Cash paid to suppliers and employees
Grant and other income received
Government assistance in respect of COVID‐19 received
Interest received
Interest paid
Income taxes paid
Net cash (used in)/provided by operating activities
Cash flows from investing activities
Acquisition of leasehold improvements and plant and equipment
Acquisition of IT system costs
Acquisition of other intangible assets
Acquisition of investments
Acquisition of term deposits
Net cash used in investing activities
Cash flows from financing activities
Repayments of borrowings
Proceeds from borrowings
Payments of lease liability
Net proceeds from exercise of share options and performance rights
Net proceeds from shares issued through institutional placement
Net proceeds from share purchase plan
Dividends paid
Net cash provided by/(used in) in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents, net of overdrafts at 1 July
Effect of exchange rate fluctuations on cash held
Cash and cash equivalents, net of overdrafts at 30 June
Note
2020
$m
2019
$m
1,403.7
1,448.5
(1,501.6)
(1,064.7)
2.4
2.4
3.1
2.7(b)
5.2
5.3
5.3
2.6
5.5
23.6
1.6
(10.5)
(80.1)
(157.8)
(92.9)
(18.5)
(19.1)
(14.2)
(365.0)
(509.7)
(130.0)
420.9
(24.6)
6.3
856.2
219.4
(193.7)
1,154.5
487.0
78.6
(0.6)
565.0
7.4
‐
0.7
(5.2)
(90.7)
296.0
(59.9)
(26.7)
(28.0)
(23.2)
‐
(137.8)
(405.6)
439.1
‐
7.4
‐
‐
(181.8)
(140.9)
17.3
61.5
(0.2)
78.6
The notes on pages 68 to 105 are an integral part of these consolidated financial statements.
67
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 2020 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 18 August 2020.
(b) Coronavirus (COVID‐19) impacts
Cochlear continues to satisfy solvency and going concern assumptions despite the financial impacts of COVID‐19. During the
year, Cochlear raised additional capital which netted proceeds of $1,075.6 million and strengthened Cochlear’s capital position
together with additional debt facilities. After payment of the interim dividend, Cochlear suspended dividend payments until
trading conditions improve.
Cochlear has undertaken a number of actions to manage costs. During COVID‐19, the business implemented a short‐term
reduction in pay for its Board, CEO & President (CEO&P) and Senior Executives and also implemented a hiring freeze and
suspension of short‐term Incentives. The business has reduced non‐essential spending, including reducing marketing, travel
and consultant expenditure and has reviewed and reduced capital expenditure, where possible.
However, an adverse decision in the patent litigation dispute, resulted in Cochlear achieving a net loss for the full year.
At 30 June 2020, Cochlear has $457.0 million in net cash (net of outstanding loan liabilities) and has access to a further $529.9
million in unutilised bank loan facilities. Cochlear has obtained debt covenant waivers for the leverage and interest cover ratio
covenants for the June 2020 and December 2020 testing periods. These financial resources provide Cochlear with ability to
continue to meet its financial obligations despite the negative economic effects of COVID‐19.
(c) Basis of measurement
The consolidated financial statements have been prepared on the historical cost basis except for derivative financial
instruments and financial investments measured at fair value. The fair value measurement method of derivative instruments
and financial investments measured at fair value through other comprehensive income is discussed further in Note 6.4(d).
(d) Functional and presentation currency
These consolidated financial statements are presented in Australian dollars (AUD), which is the Company’s functional currency.
68 Cochlear Limited Annual Report 2020
The Company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191
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.
(e) 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 within other income and other
expenses.
Financial statements of foreign operations
The assets and liabilities of foreign operations are translated to the Company’s functional currency at foreign exchange rates
ruling at the reporting date. The revenues and expenses of foreign operations are translated to the Company’s functional
currency at rates approximating the foreign exchange rates ruling at the dates of transactions.
Foreign currency differences arising from translation of controlled entities are recognised in the foreign currency translation
reserve (translation reserve) in equity. When a foreign operation is disposed of, in part or in full, the relevant amount of its
translation reserve is transferred to the income statement and reported as part of the gain or loss on disposal.
Foreign exchange gains and losses arising from a monetary item receivable from or payable to a foreign operation, the
settlement of which is neither planned nor likely in the foreseeable future, are considered to form part of a net investment in
a foreign operation and are recognised in other comprehensive income, and presented in the translation reserve.
(f) Use of judgements and estimates
The preparation of financial statements in conformity with AASB 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 & Risk 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 5.6 – Provisions
Note 5.7 – Contingent liabilities
Note 5.8 – Leases
Note 6.4 – Financial risk management.
(g) 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
69
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.
(h) Goods and services tax (GST)
Revenues, expenses and assets are recognised net of the amount of GST. Where the amount of GST incurred is not recoverable
from the taxation authority, the GST is recognised as part of the cost of acquisition of the asset or as part of the expense.
Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to,
the relevant taxation authority is included as a current asset or liability in the balance sheet.
Cash flows are included in the statement of cash flows on a gross basis. The GST components of cash flows arising from investing
and financing activities which are recoverable from, or payable to, the relevant taxation authority are classified as operating
cash flows.
(i) Comparability
Comparative information is reclassified where appropriate to enhance comparability.
2. Performance for the year
2.1 Operating segments
Cochlear’s three reportable segments, determined on a geographical basis, are the strategic business units of Cochlear.
Segment results, assets and liabilities include items directly attributable to a segment, as well as those that can be allocated
on a reasonable basis. Unallocated items comprise corporate and other net expenses and corporate and manufacturing assets
and liabilities.
Performance is measured based on segment earnings before interest and income tax (EBIT) as included in the internal
management reports that are reviewed by Cochlear’s CEO&P, who is also the chief operating decision‐maker.
Information about reportable segments
Americas
EMEA1
Asia Pacific
Total
2020
$m
650.3
335.0
353.7
148.7
10.8
2.0
29.7
2019
$m
688.6
374.6
257.7
93.7
2.2
0.6
5.4
2020
$m
479.6
191.7
247.6
67.6
5.6
1.5
1.9
2019
$m
519.2
238.9
261.4
57.8
1.7
0.7
2.4
2020
$m
2019
$m
2020
$m
2019
$m
222.4
238.3
1,352.3
1,446.1
59.0
79.2
148.2
143.5
37.6
43.1
585.7
749.5
253.9
692.7
662.6
194.6
5.6
0.8
1.4
1.4
0.3
3.2
22.0
4.3
33.0
5.3
1.6
11.0
Reportable segment revenue
Reportable segment EBIT
Reportable segment assets
Reportable segment liabilities
Other material items
Depreciation and amortisation
Write‐down in value of inventories
Acquisition of non‐current assets
Europe, Middle East and Africa.
1.
70 Cochlear Limited Annual Report 2020
Reconciliations of reportable segment revenues, profit or loss, assets and liabilities and other material items
Revenues
Cochlear
implants
$m
817.9
845.1
2020
2019
Profit or loss
Services
(sound
processor
upgrades
and other)
$m
395.5
427.2
2020
2019
Total
Cochlear
implants
$m
1,213.4
1,272.3
Acoustics
(bone
conduction
and acoustic
implants)
$m
138.9
173.8
Reportable
segment
revenue
Foreign
exchange loss
on hedged
sales
Consolidated
revenue
$m
1,352.3
1,446.1
$m
(31.7)
(19.4)
$m
1,320.6
1,426.7
Reportable
segment EBIT
Corporate
and other
net expenses
Foreign
exchange loss
on hedged
sales
Net finance
expense
Consolidated
(loss)/profit
before
income tax
$m
585.7
692.7
$m
(816.2)
(303.2)
$m
(31.7)
(19.4)
$m
(8.9)
(4.5)
$m
(271.1)
365.6
Assets and liabilities
Reportable
segment assets
2020
2019
$m
749.5
662.6
Corporate and
manufacturing
assets
$m
1,826.2
716.6
Consolidated
total assets
$m
2,575.7
1,379.2
Reportable
segment
liabilities
$m
253.9
194.6
Corporate and
manufacturing
liabilities
$m
920.3
458.7
Consolidated
total
liabilities
$m
1,174.2
653.3
Other material items
Reportable segment total
Corporate and
manufacturing total
Consolidated total
2020
$m
22.0
4.3
33.0
‐
‐
‐
2019
$m
5.3
1.6
11.0
‐
‐
‐
2020
$m
55.5
15.4
97.0
16.7
503.7
1.2
2019
$m
33.2
5.0
162.5
‐
‐
‐
2020
$m
77.5
19.7
130.0
16.7
503.7
1.2
2019
$m
38.5
6.6
173.5
‐
‐
‐
Depreciation and
amortisation
Write‐down in value of
inventories
Acquisition of non‐current
assets
Impairment of intangible
assets
Patent litigation expense
Equity accounted losses
2.2 Revenue
Revenue from the sale of cochlear and acoustic implants and associated sound processors and accessories to customers is
based on the contracted sales price. Revenue is recognised at the point in time when control passes to the customer with the
exact timing dependent on the agreed sales terms for each contract. Revenue from product sales is also deferred based on the
historical rates of product returns.
Revenue from the rendering of services, including ongoing customer support and software licensing are provided to customers
over time. Where payments are received in advance, the agreed transaction price is initially deferred and progressively
recognised over the life of the agreement as the service is provided. The value of unfulfilled performance obligations under
these contracts is reflected in the Consolidated Entity’s deferred revenue balance.
71
Customers include implant recipients, medical practitioners and governments. Contracts are short‐term with the exemption of
software licences which are recognised over multiple years. 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 loss on hedged sales
Revenue from sale of goods
Rendering of services
Total revenue
2.3 Expenses
2020
$m
1,320.3
(31.7)
1,288.6
32.0
1,320.6
2019
$m
1,415.3
(19.4)
1,395.9
30.8
1,426.7
2020
$m
2019
$m
(a) Cost of sales
Carrying amount of inventories recognised as an expense
Write‐down in value of inventories1
Other
Total cost of sales
1.
337.8
6.6
6.7
351.1
Total inventory write‐down of $19.7 million comprises $8.2 million write‐down of inventories in cost of sales and $11.5 million write‐
down of inventories in other expenses.
329.7
8.2
6.5
344.4
(b) (Loss)/profit before income tax has been arrived at after charging the following items:
Operating lease rental expense
Patent litigation expense
‐
503.7
29.4
‐
Due to the adoption of AASB 16 Leases, operating lease rental expenses are replaced by amortisation of the right of use assets
and interest expense, refer to Note 5.8.
Patent litigation expense
In March 2020, the US Court of Appeals affirmed the US District Court’s decision against Cochlear Limited and its US subsidiary
Cochlear Americas (the Defendants) in the long‐running patent dispute with Alfred E. Mann Foundation for Scientific Research
and Advanced Bionics LLC (collectively referred to as AMF and AB). The affirmation resulted in the Defendants paying USD 268
million in relation to patent infringement damages and a further USD 12 million in post judgment interest. At 30 June 2020,
the Defendants have paid the damages and interest awarded against it which have been expensed in the Income Statement.
The Defendants intend to lodge an appeal with the US Supreme Court against the Judgment.
Subsequent to year‐end, the Defendants agreed to a settlement with AMF and AB of pre‐judgment interest and attorneys’ fees
totalling USD 75 million. At 30 June 2020, Cochlear has provided USD 75 million in relation to this settlement which is included
in the patent litigation expense within the Income Statement. The settlement is conditional upon the outcome of an appeal by
the Defendants to the US Supreme Court against the Judgment of USD 280 million for patent infringement damages and post
judgment interest.
The Defendants have agreed to file their appeal by no later than 15 September 2020. The Defendants have also agreed to
deposit USD 75 million into an escrow account pending the outcome of the appeal. If the Defendants’ Supreme Court appeal
is unsuccessful, the monies in the escrow account will be paid to AMF and AB and the settlement will become final.
If the Defendants’ Supreme Court appeal is successful, the monies in the escrow account will be returned to the Defendants
and there may be a new trial to redetermine the quantum of damages.
72 Cochlear Limited Annual Report 2020
Other expenses
Foreign exchange loss
Ineffective forward exchange contracts
Impairment expense1
Total other expenses
1.
Impairment expense includes $11.5 million of inventory write‐downs.
2.4 Other income
Note
6.4(a)
2020
$m
6.8
26.1
29.8
62.7
2019
$m
4.4
‐
‐
4.4
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(e).
Due to the impact of COVID‐19, Cochlear has received AUD 23.6 million in government assistance through the United States’
Coronavirus Aid, Relief, and Economic Security Act (‘CARES Act’), Australia’s JobKeeper Program and other government
assistance programs offered in Europe and Asia.
Changes to the contingent consideration value recognised for the Sycle, LLC business acquisition were considered at 30 June
2020. Based on FY20 revenue growth relative to the performance hurdle, $13.2 million (2019: $10.8 million) has been released
to the income statement and $6.2 million remains as contingent consideration (2019: $19.4 million).
Grant received or due and receivable
Release of contingent consideration
Government assistance in respect of COVID‐19
Fair value change in investments measured at fair value through profit or loss
Other income
Total other income
2020
$m
1.4
13.2
23.6
35.8
4.1
78.1
2019
$m
1.9
10.8
‐
10.8
5.5
29.0
73
2.5 Earnings per share
Cochlear presents basic and diluted earnings per share (EPS) for its ordinary shares.
Basic earnings per share
The calculation of basic EPS has been based on the following net profit attributable to equity holders of the parent entity and
weighted average number of ordinary shares of the Company:
Net (loss)/profit attributable to equity holders of the parent entity
($238,285,000)
$276,697,000
2020
2019
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)
Effect of shares issued under institutional placement (number) 1
Effect of shares issued under share purchase plan (number) 2
Weighted average number of ordinary shares (basic) at 30 June
57,715,821
57,547,820
88,382
5,629
1,562,842
261,928
134,937
5,448
‐
‐
59,634,602
57,688,205
(399.6)
479.6
Basic (loss)/earnings per share (cents)
1.
2.
Institutional placement of 6,285,715 shares 31 March 2020, weighted as per days held for the purpose of the EPS calculation.
Share purchase plan of 1,571,567 shares 30 April 2020, weighted as per days held for the purpose of the EPS calculation.
Diluted earnings per share
The calculation of diluted EPS has been based on the following net (loss)/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 (loss)/profit attributable to equity holders of the parent entity
($238,285,000)
$276,697,000
Weighted average number of ordinary shares (diluted):
Weighted average number of shares (basic) (number)
59,634,602
57,688,205
Effect of options, performance shares and performance rights unvested (number)
‐
21,948
Weighted average number of ordinary shares (diluted) at 30 June
Diluted (loss)/earnings per share (cents)
59,634,602
57,710,153
(399.6)
479.5
2020
2019
2.6 Dividends
A liability for dividends payable is recognised in the financial year in which the dividends are declared.
Dollars per share
Total amount $m
Franked/unfranked
Date of payment
Dividends recognised in the current financial year by the Company are:
2020
Interim 2020 ordinary
Final 2019 ordinary
Total amount
2019
Interim 2019 ordinary
Final 2018 ordinary
Total amount
1.60
1.75
3.35
1.55
1.60
3.15
92.5
101.2
193.7
89.5
92.3
181.8
No final dividend has been declared after 30 June 2020.
74 Cochlear Limited Annual Report 2020
100% Franked
100% Franked
17 April 2020
14 October 2019
100% Franked
100% Franked
16 April 2019
10 October 2018
Dividend franking account
Franked dividends paid during the financial year were franked at the tax rate of 30% (2019: 30%). There are no further tax
consequences as a result of paying dividends other than a reduction in the franking account.
The dividend franking account at year end is normally 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.
At 30 June 2020, no franking credits will arise for the payment of a current tax liability and no final dividend has been declared
after 30 June 2020.
As a result of no franking credits arising at year end, there are $0 million of franking credits (2019: $39.2 million) available to
shareholders of Cochlear Limited for subsequent financial years.
The ability to utilise the franking account credits is dependent upon the ability to declare dividends. As no final 2020 dividend
has been declared, there is no impact on the dividend franking account after the balance sheet date (2019: $43.3 million).
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 1.09% (2019: 0.79%) per annum.
(b) Reconciliation of net (loss)/profit to net cash (used in)/provided by operating activities
Net (loss)/profit
Add item classified as investing activities:
Loss on disposal of property, plant and equipment
Add/(less) non‐cash items:
Depreciation and amortisation
Impairment of intangible assets
Release of contingent consideration
Change in fair value measurement of investments through profit or loss
Equity settled share based payment transactions
Share of losses on equity accounted investments
Net cash (used in)/provided by operating activities before changes in assets and
liabilities
Changes in assets and liabilities:
Change in trade and other receivables
Change in inventories
Change in prepayments
Change in deferred tax assets/liabilities
Change in trade and other payables
Change in current tax assets/liabilities
Change in employee benefit liabilities
Change in provisions
Change in deferred revenue
Effect of movements in foreign exchange
Net cash (used in)/provided by operating activities
75
2020
$m
(238.3)
0.4
77.5
16.7
(13.2)
(35.8)
7.0
1.2
(184.5)
82.5
(28.4)
9.3
(38.4)
(30.3)
(84.8)
(15.8)
85.9
3.7
43.0
(157.8)
2019
$m
276.7
0.5
38.5
‐
(10.8)
(10.8)
8.5
‐
302.6
(4.2)
(28.0)
(1.6)
(22.0)
34.6
10.1
13.3
(7.4)
16.5
(17.9)
296.0
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 (benefit)/expense
Income tax (benefit)/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 (benefit)/expense recognised in the income statement
Current year
Adjustment
for prior years
Total current
tax expense
2020
2019
$m
6.0
105.0
$m
(2.7)
(1.4)
$m
3.3
103.6
Origination
and reversal
of temporary
differences
$m
(36.1)
(14.7)
Total
deferred tax
benefit
Total income
tax (benefit)/
expense
$m
(36.1)
(14.7)
$m
(32.8)
88.9
Consolidated Entity ‐ Numerical reconciliation between income tax (benefit)/expense and (loss)/profit before
income tax
(Loss)/profit before income tax
Tax at the Australian tax rate of 30% (2019: 30%)
Add/(less) adjustments for:
Patent litigation
Other net non‐assessable items
Research and development allowances
Effect of tax rates in foreign jurisdictions
Adjustment for prior years
Income tax (benefit)/expense on (loss)/profit before income tax
2020
$m
(271.1)
(81.3)
63.7
(3.3)
(9.4)
0.2
(30.1)
(2.7)
(32.8)
2019
$m
365.6
109.7
‐
(3.4)
(9.7)
(6.3)
90.3
(1.4)
88.9
76 Cochlear Limited Annual Report 2020
Tax expense/(benefit) for items relating to other comprehensive income/(loss) or equity
Total deferred tax recognised in other comprehensive income/(loss) relating to
derivative financial instruments
Total deferred tax recognised directly in equity relating to share based payments
Total deferred tax recognised directly in equity relating to capital raising
Note
3.2
3.2
3.2
2020
$m
7.7
(2.1)
(7.1)
2019
$m
(1.8)
(4.4)
‐
Consolidated Entity ‐ Numerical reconciliation between income tax (benefit)/expense and cash taxes paid
Income tax (benefit)/expense on (loss)/profit before income tax
Timing differences recognised in deferred tax
Effect of tax rates in foreign jurisdictions
Current year tax instalments refundable/(payable) next year
Prior year tax instalments paid this year
Cash taxes paid per statement of cash flows
2020
$m
(32.8)
33.2
0.6
53.1
26.0
80.1
2019
$m
88.9
12.5
0.3
(26.0)
15.0
90.7
Cochlear Limited’s Australian tax consolidated group ‐ Numerical reconciliation between income tax (benefit)/
expense and (loss)/profit before income tax
(Loss)/profit before income tax (excluding dividends from wholly owned foreign subsidiaries)
Add: Dividends from wholly owned foreign subsidiaries
(Loss)/profit before income tax
Tax at the Australian tax rate of 30% (2019: 30%)
Add/(less) adjustments for:
Patent litigation
Other net (non‐assessable)/non‐deductible items
Controlled foreign company income
Research and development allowances
Exempt foreign sourced dividends from wholly owned subsidiaries
Adjustment for prior years
Income tax (benefit)/expense on (loss)/profit before income tax
2020
$m
(306.4)
116.0
(190.4)
(57.1)
63.7
(1.7)
1.6
(8.5)
(34.8)
(36.8)
(0.3)
(37.1)
2019
$m
300.5
6.9
307.4
92.2
‐
0.6
0.7
(8.5)
(2.1)
82.9
(1.6)
81.3
77
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 from
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
2020
$m
5.1
1.6
46.9
59.7
4.0
‐
26.8
10.4
154.5
(7.4)
147.1
2019
$m
0.4
0.8
40.8
33.0
5.3
7.4
‐
20.4
108.1
(8.0)
100.1
2020
$m
(6.3)
(3.0)
‐
‐
‐
(0.4)
‐
(11.8)
(21.5)
7.4
(14.1)
2019
$m
(2.2)
(6.5)
‐
‐
(2.5)
‐
‐
(2.3)
(13.5)
8.0
(5.5)
2020
$m
(1.2)
(1.4)
46.9
59.7
4.0
(0.4)
26.8
(1.4)
133.0
‐
133.0
2019
$m
(1.8)
(5.7)
40.8
33.0
2.8
7.4
‐
18.1
94.6
‐
94.6
Property, plant and equipment
Intangible assets
Inventories
Provisions
Deferred revenue
Forward exchange contracts
Tax losses and offsets carried forward
Other
Deferred tax assets/(liabilities)
Set off tax
Deferred tax assets/(liabilities)
Unrecognised deferred tax liabilities
At 30 June 2020, a deferred tax liability of $22.8 million (2019: $12.0 million) relating to investments in subsidiaries has not
been recognised because the Company controls whether the asset will be recovered or the liability will be incurred and it is
satisfied that it will not be incurred in the foreseeable future.
Movement in temporary differences during the year
Carrying amount at beginning of financial year
Recognised in the income statement
Recognised in other comprehensive income/(loss)
Recognised directly in equity
Effect of movements in foreign exchange
Carrying amount at end of financial year
Current tax assets and liabilities
Note
3.1
3.1
3.1
2020
$m
94.6
36.1
(7.7)
9.2
0.8
133.0
2019
$m
72.6
14.7
1.8
4.4
1.1
94.6
The current tax assets for the Consolidated Entity of $69.4 million (2019: $12.2 million) represent the amount of income taxes
recoverable in respect of current and prior years and arise from the payment of tax in excess of the amounts due to the relevant
taxation authority. The current tax liabilities for the Consolidated Entity of $7.2 million (2019: $34.8 million) represent the
amount of income taxes payable in respect of current and prior financial years.
78 Cochlear Limited Annual Report 2020
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
2020
$m
415.6
31.3
6.4
7.0
460.3
2019
$m
378.1
31.6
6.9
8.5
425.1
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 Consolidated Entity has defined benefit plans that cover, in aggregate, 84 employees in two countries (2019: 87
employees). Cochlear contributed cash of $1.5 million (2019: $1.3 million) to defined benefit plans in the year ended 30 June
2020 and expects to contribute $1.5 million in the year ending 30 June 2021.
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.
79
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. There are no executive directors entitled to this benefit.
Current
Provision for long service leave
Provision for annual leave
Provision for short‐term incentives and sales commissions
Total current employee benefit liabilities
Non‐current
Provision for long service leave
Defined benefit plan
Total non‐current employee benefit liabilities
Total employee benefit liabilities
4.3 Share based payments
2020
$m
13.4
36.3
4.7
54.4
6.9
5.5
12.4
66.8
2019
$m
12.9
31.0
25.6
69.5
6.4
6.7
13.1
82.6
From 1 July 2013, the Company grants options and performance rights to certain employees under the Cochlear Executive
Incentive Plan (CEIP).
The fair value of options 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 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 or performance rights are
granted, taking into account market based criteria and the terms and conditions attached to the instruments. The options 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. At 30 June 2020, 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
Exercise price of
options
Number of
options
Number of
performance rights
Contractual life
‐
n/a
11,835
104,376
$154.73
$202.84
October 20171
August 20182
October 20181
September 20192
October 20191,3
October 20191,3
Total
1. Options and performance rights offered under long‐term incentives (LTI).
Performance rights offered under deferred short‐term incentives (STI).
2.
FY20, LTI Award is subject to a four‐year performance period and as a transition for FY20 LTI plan, 2 grants were offered including three‐
3.
year and four‐year performance period. No transitional arrangements were provided to the CEO&P. The CEO&P’s FY20 LTI grant had a
four‐ year performance period only.
261,426
$217.28
$217.28
4 years
4 years
2 years
4 years
2 years
5 years
94,997
10,516
32,684
26,688
24,231
75,745
57,074
9,280
3,994
n/a
‐
80 Cochlear Limited Annual Report 2020
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 index. The conditions for minimum vesting are four years of service and:
50% weighting on compound annual growth rate (CAGR) in EPS with a minimum CAGR in EPS of 7.5% assigned to 50% of
grant; or
50% weighting on relative TSR with the Consolidated Entity’s TSR at the 50th percentile against the ASX 100 over four years
assigned to 40% of grant.
For FY20, a transitional arrangement was implemented to recognise that increasing the performance period from three to four
years, will result in a gap year of LTI vesting in FY22 for executives. For FY20 only, two grants were provided to the executive
team (excluding the CEO&P):
Grant 1: 50% of the annual LTI grant opportunity with a three‐year performance period; and
Grant 2: 75% of the annual LTI grant opportunity with a four‐year performance period.
No transitional arrangement was provided to the CEO&P. The CEO&P’s FY20 LTI grant opportunity continued to be 100% of
base salary with a four‐year performance period.
The grant date fair value of options and performance rights was measured based on the Black‐Scholes‐Merton pricing model.
Gross contract value discounts for dividends not paid, 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. The inputs used in the measurement of the fair values at
the grant date are the following:
23 October 2019 (3yr) 23 October 2019 (4yr)
17 September
2019
17 October 2018
24 August
2018
TSR based
conditions
TSR based
conditions
EPS
performance
based
conditions
EPS
performance
based
conditions
Deferred
STI service
based
conditions
TSR based
conditions
EPS
performance
based
conditions
Deferred
STI service
based
conditions
$31.46
$34.13
$35.74
$37.56
n/a
$32.55
$37.43
n/a
$130.48
$206.70
$133.01
$203.72
$209.75
$116.51
$199.29
$201.99
$215.89
$215.89
$215.89
$215.89
$215.89
$207.50
$207.50
$207.50
Fair value of options
at grant date
Fair value of
performance rights at
grant date
Share price at
valuation date
Option exercise price
$217.28
$217.28
$217.28
$217.28
n/a
$202.84
$202.84
n/a
Expected volatility1
Option life (years)
24.1%
3 ‐ 4
24.1%
23.96%
23.96%
24.42%
22.59%
22.59%
22.59%
3 ‐ 4
4 ‐5
4 ‐ 5
2
3 ‐ 4
3 ‐ 4
2
1.46%
Expected dividend
yield
Risk free interest
rate2
1. Measure captures the characteristics of fluctuations in the share price.
2. Based on government bonds.
1.46%
0.71%
0.71%
0.71%
1.46%
1.46%
1.46%
1.35%
1.35%
1.35%
0.71%
0.71%
2.04%
2.04%
2.04%
81
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
2020
$163.71
$150.26
$135.84
$217.28
$188.12
$154.73
Number of
options
2020
263,613
(20,846)
(62,646)
81,305
261,426
104,376
Weighted
average exercise
price
2019
$119.60
$82.89
$82.89
$202.84
$163.71
$135.84
Number of
options
2019
318,227
(4,724)
(130,121)
80,231
263,613
79,006
62,646 options were exercised in 2020 (2019: 130,121 options were exercised). The weighted average market share price on
the Australian Securities Exchange (ASX) at date of exercise was $215.30 (2019: $196.26). The weighted average remaining
contractual life of options outstanding at the end of the year is two years (2019: two 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 approximately $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 2020, the Company issued 7,955 shares (2019: 7,590 shares) under the Plan, see Note 6.2.
APAC Employee Equity Plan
The APAC Employee Equity Plan, established in 2016, aligns with the Cochlear Employee Share Plan and provides up to
approximately $1,000 of service rights annually per eligible employee in selected Asian countries. Upon vesting, each service
right converts to one share. For the year ended 30 June 2020, the Company issued 826 shares under the plan (2019: 1,092
shares).
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, Mr M Daniell1, Ms A Deans, Mr A Denver, Mr A Hussain,
Mr DP O’Dwyer and Prof B Robinson, AC
Executive KMP
Mr D Howitt, Mr A Bishop, Mr R Brook, Mr B Cubis, Mr J Janssen and Mr T Manna.
1. Appointed on 1 January 2020.
Key management personnel disclosures
The KMP compensation is included in employee expenses as follows:
Short‐term
employee
benefits
$
7,772,881
Post‐
employment
benefits
$
422,082
2020
2019
1.
10,340,814
Prof E Byrne retired from the Board on 16 October 2018.
414,161
82 Cochlear Limited Annual Report 2020
Other long‐term
benefits
$
56,866
8,857
Directors’
retirement
benefits1
$
‐
Share based
payments
Total
$
2,007,193
$
10,259,022
461,136
2,150,552
13,375,520
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 57.
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
82.6
70.3
Work in
progress
$m
32.5
26.2
Finished
goods
$m
108.7
98.9
Total inventories
$m
223.8
195.4
2020
2019
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.
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 between three to 14 years and buildings
between 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.
83
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.
Leasehold
improvements
Plant and equipment
Land and
buildings
Total
2020
$m
67.6
(28.7)
38.9
2019
$m
42.0
2020
$m
333.4
2019
$m
277.5
2020
$m
30.0
(28.2)
13.8
(171.2)
162.2
(154.4)
123.1
(0.6)
29.4
2019
$m
30.1
(0.5)
29.6
2020
$m
431.0
2019
$m
349.6
(200.5)
230.5
(183.1)
166.5
At cost
Accumulated
depreciation
Net book value
Reconciliations of the carrying amounts are:
Opening balance
Additions
Disposals
Depreciation
Effect of movements in
foreign exchange
Net book value
13.8
30.0
‐
(4.4)
(0.5)
38.9
13.3
3.3
‐
(3.2)
0.4
13.8
123.1
62.9
(0.4)
(22.0)
(1.4)
162.2
85.3
56.6
(0.5)
29.6
29.8
‐
‐
‐
‐
(19.5)
(0.2)
(0.2)
1.2
‐
‐
123.1
29.4
29.6
166.5
92.9
(0.4)
(26.6)
(1.9)
230.5
128.4
59.9
(0.5)
(22.9)
1.6
166.5
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.
IT system costs
IT 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 IT systems including direct labour.
Other intangible assets
Other intangible assets, comprising acquired technology, patents and licences, customer relationships, capitalised
development expenditure and intellectual property, are acquired individually or through business combinations and are stated
at cost less accumulated amortisation and impairment losses (see below).
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: IT system
costs between two to seven years, acquired technology, patents and licences between four to 15 years, customer relationships
up to 31 years 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.
84 Cochlear Limited Annual Report 2020
Goodwill and intangible assets with an indefinite useful life are systematically tested for impairment annually.
Intangible assets with
indefinite useful
life
Intangible assets with finite useful life
Goodwill IT system costs
Acquired
technology,
patents and
licences
$m
$m
127.4
127.4
(69.3)
58.1
50.4
18.5
(10.8)
‐
‐
58.1
109.2
(58.8)
50.4
32.9
26.7
(9.2)
‐
50.4
(73.8)
53.6
72.5
4.4
(6.6)
(16.7)
‐
53.6
122.9
(50.4)
72.5
29.0
48.4
(4.9)
‐
72.5
Other intangible
assets
$m
55.4
(27.7)
27.7
32.7
‐
(5.1)
‐
0.1
27.7
56.3
(23.6)
32.7
18.0
15.3
(1.5)
0.9
32.7
Intangible
assets
Total
$m
581.1
(170.8)
410.3
424.4
22.9
(22.5)
(16.7)
2.2
410.3
557.2
(132.8)
424.4
345.3
90.4
(15.6)
4.3
424.4
2020
At cost
Accumulated amortisation and
impairment losses
Net book value
Reconciliations of the carrying amounts are:
Opening balance
Additions
Amortisation
Impairment
Effect of movements in foreign
exchange
Net book value
2019
At cost
Accumulated amortisation
Net book value
Reconciliations of the carrying amounts are:
Opening balance
Additions
Amortisation
Effect of movements in foreign
exchange
Net book value
Impairment
$m
270.9
‐
270.9
268.8
‐
‐
‐
2.1
270.9
268.8
‐
268.8
265.4
‐
‐
3.4
268.8
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.
85
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:
2020
2019
Americas
EMEA
Asia Pacific
$m
185.2
184.2
$m
75.5
74.6
$m
10.2
10.0
Total
$m
270.9
268.8
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 and recent experience and learnings in relation to the economic impacts of
COVID‐19 on Cochlear’s business. The calculation contains increased estimation uncertainty from potential COVID‐19 impacts
which may include government restrictions on elective surgeries and demand impacts due to the broader economic
environment.
The calculation assumes that the future economic impact of COVID‐19 will primarily impact FY21 with gradually improving
trading conditions. While uncertainty resulting from COVID‐19 remains, Cochlear will continue to manage costs by limiting non‐
essential spending in each CGU. Future year forecasts include an EBIT growth rate, considered modest compared to historical
growth rates in the CGUs.
Cash flows for year 6 onwards are extrapolated using a terminal growth rate of 3.0% (2019: 3.0%) per annum which is consistent
with long‐term growth rates. The pre‐tax discount rate for each CGU is as follows: Americas 9.6% (2019: 10.6%), EMEA 9.8%
(2019: 10.3%) and Asia Pacific 10.3% (2019: 11.2%).
The key assumptions and the approach to determining their value in the current year are:
Assumption
Discount rate
EBIT growth 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.
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 growth rates.
The recoverable amount of each CGU including unallocated corporate assets is in excess of the carrying amount and therefore
no impairment expense was recognised. The above represents the best estimate of the directors. Sensitivity analysis has been
undertaken to stress test cash flow forecasts, discount rates and terminal value growth rate assumptions to reflect a prolonged
recovery and growth rate. Based on the range and depth of sensitivities applied no reasonable change in assumptions would
result in an impairment.
86 Cochlear Limited Annual Report 2020
5.4 Investments
Cochlear’s investments are valued individually using quoted prices or unobservable market inputs. 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. Refer to Note 6.4(d) for further details on the valuation of financial assets.
Equity investments at fair value through other comprehensive income are ordinary shares. Investments measured at fair value
through profit or loss are interests in entities that do not meet the definition of equity, such as instruments convertible into
ordinary shares.
Opening balance
Additions
Fair value gain through profit or loss
Fair value loss through other comprehensive income
Transferred to equity accounted investments
Effect of movements in foreign exchange
Total investments
2020
$m
47.8
14.2
35.8
(1.8)
(70.2)
0.1
25.9
2019
$m
15.8
22.1
10.8
(1.3)
‐
0.4
47.8
At 30 June 2020, $22.7 million of investments is measured at fair valued through profit or loss with the remaining $3.2 million
measured at fair valued through other comprehensive income.
5.5 Equity accounted investments
In February 2020, Cochlear executed an agreement to invest an additional EUR 8.0 million in Nyxoah S.A. The additional
investment resulted in Cochlear’s ownership interest exceeding 20% and the investee has been reclassified as an associate
from February 2020.
Associates are accounted for using the equity method with Cochlear recognising its share of the associate’s profit or loss and
other comprehensive income. Transactions with associates are eliminated to the extent of Cochlear’s interest in the associate
until such time as they are realised by the investee on consumption or sale. Investments in associates are assessed for
impairment when indicators of impairment are present and if required, written down to the recoverable amount.
If Cochlear’s share of losses exceeds its interest in the associate, the carrying amount is reduced to nil and recognition of further
losses is discontinued except to the extent that Cochlear has incurred legal or constructive obligations or made payments on
behalf of the associate.
In the current year, Cochlear has recognised $1.2 million in losses representing its proportionate share of Nyxoah S.A.’s net
loss since it became an equity accounted investment. At 30 June 2020, the value of this investment is $69.0 million.
87
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.
2020
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
37.8
4.6
(11.4)
0.6
31.6
13.6
18.0
31.6
$m
22.0
97.5
(4.3)
‐
115.2
115.2
‐
115.2
$m
10.5
‐
(1.5)
‐
9.0
1.4
7.6
9.0
$m
1.2
0.4
‐
‐
1.6
‐
1.6
1.6
Total
$m
71.5
102.5
(17.2)
0.6
157.4
130.2
27.2
157.4
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
Cochlear is involved in litigation in the ordinary course of business, including claims made by Cochlear and against Cochlear for
patent infringement. Where Cochlear is able to make a reliable estimate of the estimated future costs related to these
proceeding, including legal fees, a provision is recognised.
The legal and insurance provision also includes amounts provided in relation to the long‐running patent dispute with Alfred E.
Mann Foundation for Scientific Research and Advanced Bionics LLC (collectively referred to as AMF and AB). The increased
provision relates primarily to the additional USD 75 million provided in relation to the claims by AMF and AB for pre‐judgment
interest and attorneys’ fees. Refer to Note 2.3 for further details.
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 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 additional provisions have been made or released to the income statement for the year ended 30 June 2020.
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.
88 Cochlear Limited Annual Report 2020
5.7 Contingent liabilities
The details of contingent liabilities are set out below. The directors are of the opinion that provisions are either adequate or
are not required in respect of these matters, as it is either not probable that a future sacrifice of economic benefits will be
required, or the amount is not capable of reliable measurement.
Product liability claims
Cochlear is currently, and/or is likely from time to time to be, involved in claims and lawsuits incidental to the ordinary course
of business, including claims for damages relating to its products and services.
In addition, Cochlear has received legal claims and lawsuits in various countries including the United States by recipients who
have had Cochlear implant CI500 series devices stop functioning for the reason that led to the September 2011 voluntary recall
of unimplanted CI500 series devices.
Cochlear carries product liability insurance and has made claims under the policies. The insurers have agreed to indemnify
Cochlear in accordance with the terms and conditions of the policies including deductibles and exclusions. In the opinion of
the directors, the details of the product liability insurance policies are commercially sensitive and any disclosure of these details
may be prejudicial to the interests of Cochlear.
Regulatory actions
Cochlear operates in multiple overseas jurisdictions and is currently, and/or is likely from time to time to be, subject to tax,
customs and regulatory reviews, audits and investigations. Known reviews, audits and investigations are not expected to result
in a significant adverse outcome for Cochlear. Outcomes are uncertain because investigations are ongoing.
5.8 Leases
Cochlear leases a number of assets including land and buildings, office equipment and motor vehicles. Cochlear’s lease
agreements often include a standard lease term with an extension option at the end. Lease agreements may include annual
rent increases based on either a fixed percentage or benchmarked against an inflation index. Land and building leases may also
include periodic market rent reviews which resets the rent to the market rent at the time of the review.
At inception of a contract, Cochlear assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease, if
the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
Where the contract contains a lease, a lease liability is recognised at lease commencement date. The liability is initially
measured at the present value of future lease payments, discounted using Cochlear’s incremental borrowing rate.
The lease liability is subsequently remeasured when there is a modification in future lease payments arising from a change in
an index or rate, a change in the estimate of the amount expected to be payable under a residual value guarantee, or changes
in the assessment of whether a purchase or extension option is reasonably certain to be exercised or a termination option is
reasonably certain not to be exercised. The right of use asset is initially measured at cost and subsequently adjusted for certain
remeasurements of the lease liability.
Over the life of the lease, the lease liability will be increased by interest costs and will be reduced as lease payments are made.
The right of use asset is amortised on a straight‐line basis over its useful life. As compared to AASB 117 Leases, the pattern of
expense recognition changes with a higher expense at lease commencement due to a higher lease liability at that time.
Under AASB 117, operating lease payments are expensed on a straight‐line basis over the term of the lease, except where an
alternatives basis is more representative of the pattern of benefits to be derived from the leased property. Minimum lease
payments include fixed rate increases.
Cochlear has applied judgement to determine the lease term for some lease contracts in which it is a lessee that include
renewal options. The assessment of whether Cochlear is reasonably certain to exercise such options impacts the lease term,
which significantly affects the amount of lease liabilities and right of use assets recognised.
Cochlear has elected not to recognise a right of use asset and a corresponding lease liability for leases with a term of less than
12 months or for leases of low‐value assets. Cochlear recognises the lease payments associated with these leases as an expense
on a straight‐line basis over the lease term.
89
The following table shows movements in the right of use asset during the year:
Balance at 1 July 2019
Depreciation expense
Additions to right of use asset
Total right of use asset
Land and
buildings
$m
171.4
(24.0)
54.6
202.0
Other
assets
$m
6.8
(4.4)
3.9
6.3
Total
$m
178.2
(28.4)
58.5
208.3
Cochlear recognised $28.4 million in depreciation expense and $6.1 million in interest expense instead of the operating lease
expense recognised under the previous standard.
The operating lease expense under AASB 117 and the right of use asset depreciation under AASB 16 are both recognised in
cost of sales, selling, marketing and general expenses, research and development expenses and administration expenses in the
income statement depending on the function of associated activities. Interest expense incurred on the lease liability under
AASB 16 is recognised in finance expense – interest in the income statement.
For the purpose of presentation of the statement of cash flows, the lease payments under AASB 16 are separated into principal
payments (financing activities) of $24.6 million and interest payments (operating activities) of $6.1 million. Under AASB 117,
lease payments are included in cash paid to suppliers and employees in the statement of cash flows.
Transition to AASB 16
Cochlear has initially adopted AASB 16 Leases from 1 July 2019, this has replaced AASB 117. Cochlear adopted AASB 16 using
the modified retrospective approach. Under this approach, the cumulative impact of adoption was recognised as an adjustment
to opening retained earnings with no restatement of comparative periods.
Under AASB 117, Cochlear classified leases as either operating leases or finance leases based on its assessment of whether the
lease transferred substantially all the risks and rewards of ownership. Under AASB 16, Cochlear recognises a right of use asset
and a corresponding lease liability for most leases i.e. these leases are on balance sheet.
Lease liabilities were measured at the present value of the remaining lease payments at 1 July 2019, discounted at Cochlear’s
incremental borrowing rate as at 1 July 2019. Right of use assets were measured at their carrying amount as if AASB 16 had
been applied since the commencement date, discounted using Cochlear’s incremental borrowing rate at the date of initial
application.
Cochlear has elected to apply practical expedients allowed under the modified retrospective approach not to recognise right
of use assets or lease liabilities for leases with less than 12 months of lease term remaining at the transition date or leases of
low‐value assets.
The adoption of AASB 16, as outlined above, resulted in the following change in the balance sheet on 1 July 2019:
Total
$m
178.2
5.6
(197.8)
1.9
12.1
Increase in right of use assets
Increase in deferred tax assets
Increase in lease liabilities (current and non‐current)
Decrease in other liabilities
Decrease in retained earnings
90 Cochlear Limited Annual Report 2020
The following table reconciles the differences between the non‐cancellable lease commitments as disclosed in the FY19
Annual Financial Statements under AASB 117 and the lease liability recognised on transition to AASB 16:
Operating lease commitments disclosed at 30 June 2019
Add: Adjustments as a result of different treatment of extension options
Less: Lease executed but not yet effective on transition date
Less: Other
Discounted using incremental borrowing rate at the date of initial application
Lease liability recognised as at 1 July 2019
$m
220.8
112.5
(84.5)
(7.8)
(43.2)
197.8
Lease terms range from one to 25 years. The weighted average incremental borrowing rate applied is 3.0% per annum.
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.
In the year ended 30 June 2020 and in response to the combined effects of COVID‐19 and the patent litigation, Cochlear
increased its liquidity by taking the following steps:
a capital raising of AUD 1,075.6 million (net of related costs). The capital raising was to ensure Cochlear remained strongly
capitalised during the market uncertainties of COVID‐19 and to position Cochlear for the future;
increase total available debt from AUD 414.5 million in 2019 to AUD 1,003.8 million. Additional facilities were obtained
from existing lenders of AUD 225.0 million for working capital and USD 268 million for the patent litigation;
obtaining covenant waivers from all Cochlear’s lenders for the leverage and interest cover ratio covenants testing periods
June 2020 and December 2020; and
determined that no final 2020 dividend will be paid.
Cochlear’s priorities for the use of cash from the capital raising and the availability of the new debt facilities is to strengthen
the balance sheet to support the business during the impacts of COVID‐19 while continuing to invest in core strategic
business priorities and research and development, to respond to the patent litigation expense and to reduce existing net
debt levels. At the appropriate time, Cochlear will resume the dividend to shareholders.
91
As a result of the capital raising, Cochlear is now in a net cash rather than a net debt position for the year ended 30 June 2020.
Cochlear’s net gearing ratio was as follows:
Net (cash)/debt
Total equity ‐ reported
Net gearing ratio at 30 June
1. Net gearing ratio is negative due to net cash in 2020.
6.2 Capital and reserves
Share capital
Note
6.3(a)
2020
$m
(457.0)
1,401.5
(48%)1
2019
$m
103.0
725.9
12%
The Company does not have authorised capital or par value in respect of its issued shares.
On issue 1 July – fully paid
Issued for nil consideration under Employee Share Plan
Issued from exercise of APAC Equity Plan
Issued from the exercise of options
Issued from the exercise of performance rights
Issued from capital raising – institutional placement
Issued from capital raising – share purchase plan
On issue 30 June – fully paid
Total number of issued shares
2020
57,715,821
7,955
826
54,419
51,099
6,285,715
1,571,567
65,687,402
2019
57,547,820
7,590
1,092
112,093
47,226
‐
‐
57,715,821
During the 2020 financial year, Cochlear purchased 10,394 shares (2019: 18,813 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.
In response to the combined effects of COVID‐19 and the patent litigation, Cochlear adjusted its capital structure by a capital
raising of AUD 1,075.6 million, net of related costs. The capital raising was to ensure Cochlear remained strongly capitalised
during the market uncertainties of COVID‐19, enhance Cochlear’s balance sheet and to strengthen liquidity in order to position
Cochlear for the future.
From the capital raise, 6,285,715 shares were issued from the institutional placement on 31 March 2020 and 1,571,567 shares
were issued from the share purchase plan on 30 April 2020.
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(e) 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.
92 Cochlear Limited Annual Report 2020
Fair value reserve
The fair value reserve comprises the cumulative net change in the fair value of investments revalued through other
comprehensive income 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 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 $0.9 million (2019:
$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
Less: Term deposits
Net (cash)/debt
(b) Term deposits
2020
$m
393.1
79.9
473.0
(565.0)
(365.0)
(457.0)
2019
$m
3.3
178.3
181.6
(78.6)
‐
103.0
Term deposits are bank deposits with a fixed term maturity of longer than three months from inception. Bank deposits with a
fixed term of less than 3 months are classified as cash and cash equivalents. All term deposits held at 30 June 2020 will mature
by January 2021. Term deposits of AUD 365.0 million (2019: AUD nil) were held as at 30 June 2020.
(c) Financing arrangements
Multi‐option bank facilities
Unsecured
bank loan
Bank
guarantees2
Other credit facilities
Unsecured
bank loan
Bank
guarantees2
Unsecured
bank
overdrafts
$m
470.5
527.2
997.7
179.1
229.4
408.5
$m
8.0
7.0
15.0
5.3
9.7
15.0
$m
‐
2.9
2.9
‐
2.9
2.9
$m
3.4
2.7
6.1
3.3
2.7
6.0
$m
5.4
4.2
9.6
4.6
5.1
9.7
2020
Utilised at reporting date1
Not utilised at reporting date
Total facilities
2019
Utilised at reporting date1
Not utilised at reporting date
Total facilities
Excludes the amount of $0.9 million (2019: $0.8 million) in relation to unamortised loan establishment fees.
1.
2. Bank guarantees include standby letters of credit.
93
Multi‐option bank facilities ‐ Unsecured bank loan
During the year ended 30 June 2020, Cochlear restructured its bank loan facilities as follows:
Facility type
<1 year term
$m
1 ‐ 2 year term
$m
2 ‐ 3 year term
$m
3 ‐ 4 year term
$m
Total facilities
$m
Committed debt including
guarantees
389.8
325.0
146.7
151.2
1,012.7
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 USD 268.0 million loan facility, a Japanese yen (JPY) 450.0 million loan facility, a Swedish kroner (SEK) 300.0
million loan facility and a Chinese yuan (CNY) 176.0 million loan facility. The facilities are unsecured bank loans. Interest on
unsecured bank loans is variable and is charged at prevailing market rates.
Bank guarantees/Standby letters of credit
As at 30 June 2020, Cochlear had additional contingent liability facilities denominated in USD, Euros (EUR), Sterling (GBP),
Indian rupees and New Zealand dollars totalling AUD 9.6 million (2019: AUD 9.7 million).
(d) 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 & Risk Committee on a regular basis.
The Audit & Risk Committee oversees how management monitors compliance with Cochlear’s Risk Management Framework,
policies and procedures and is assisted by Group Risk and Assurance which undertakes reviews of key management controls
and procedures.
(a) Market risk
Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices, will affect
Cochlear’s net profit or the value of its holdings of financial instruments.
The objective of market risk management is to manage and control market risk exposures by buying and selling forward
exchange contracts and incurring financial liabilities, within acceptable parameters, while 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,
Swiss francs (CHF), CNY, EUR, GBP, JPY, SEK and USD.
94 Cochlear Limited Annual Report 2020
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 2020 was as follows,
based upon notional amounts:
Amounts local currency/millions
CHF
CNY
EUR
GBP
JPY
SEK
USD
2020
Trade receivables
Unsecured bank loan
Trade payables
0.6
6.0
36.5
(0.9)
771.8
1.7
66.4
‐
(165.4)
‐
‐
(250.0)
(300.0)
(268.0)
Balance sheet exposure
0.5
(185.7)
25.9
(0.1)
(26.3)
(10.6)
(3.0)
(3.9)
(74.4)
(39.9)
(23.8)
447.4
(338.2)
(225.4)
2019
Trade receivables
Unsecured bank loan
Trade payables
Balance sheet exposure
Derivative assets and liabilities
0.5
‐
(0.9)
(0.4)
12.2
(14.1)
(20.8)
(22.7)
59.4
‐
(8.4)
51.0
5.7
1,139.7
7.5
‐
(250.0)
(300.0)
78.0
‐
(4.8)
(122.1)
(44.2)
(17.4)
0.9
767.6
(336.7)
60.6
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 2020, 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.
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.
In the year ended 30 June 2020, Cochlear assessed that its forward exchange contracts to hedge sales revenues in EUR, GBP
and USD for periods less than one year were no longer highly effective due to the combined effects of COVID‐19 and the patent
litigation on the probable foreign currency cash flows anticipated to be received during that period. As a result, those cash
flow hedges no longer met the criteria for hedge accounting and hedge accounting on those cash flow hedges was
discontinued. The associated cumulative gain/(loss) was removed from equity and recognised in the income statement in the
same period that hedge accounting was discontinued. In addition, the ineffective forward exchange contracts were terminated
with a total loss of AUD 26.1 million (2019: AUD nil).
95
All other cash flow hedges with terms greater than 1 year were effective at the reporting date and continue to meet the criteria
for hedge accounting.
The following table sets out the gross value to be received or paid under remaining 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
2020
Buy CHF
Sell EUR
Sell GBP
Sell JPY
Buy SEK
Sell USD
Total
2019
Buy CHF
Sell EUR
Sell GBP
Sell JPY
Buy SEK
Sell USD
Total
0.659
0.595
0.522
72.979
6.492
0.691
0.697
0.606
0.541
76.902
6.391
0.746
(12.0)
‐
‐
19.8
(27.7)
‐
(19.9)
(19.9)
141.2
20.2
17.7
(43.0)
266.0
382.2
‐
63.1
9.6
11.1
‐
122.8
206.6
‐
84.7
14.9
9.5
‐
135.0
244.1
‐
‐
‐
‐
‐
26.3
26.3
‐
7.6
1.9
1.6
‐
21.0
32.1
Currency risk ‐ Sensitivity analysis
An analysis based on a 10% strengthening of foreign currencies would have increased Cochlear’s loss for the year ended 30
June 2020 after tax by approximately AUD 1.7 million (2019: decrease profit by AUD 2.5 million) and increased Cochlear’s
equity by AUD 13.6 million (2019: increase by AUD 25.8 million). A 10% weakening of the foreign currencies would have
decreased Cochlear’s loss after tax by AUD 2.4 million (2019: increased profit by AUD 3.5 million) and decreased equity by AUD
13.0 million (2019: decrease by AUD 67.2 million).
This analysis assumes that all other variables remain constant and ignores any impact from the translation of foreign
operations.
The following significant exchange rates applied to Cochlear during the year:
AUD 1 =
CHF
CNY
EUR
GBP
JPY
SEK
USD
Interest rate risk
Average rate
Reporting date spot rate
2020
0.656
4.725
0.606
0.533
72.549
6.457
0.672
2019
0.712
4.877
0.627
0.553
79.582
6.557
0.716
2020
0.654
4.869
0.611
0.558
73.985
6.413
0.688
2019
0.683
4.814
0.616
0.552
75.355
6.494
0.700
Cochlear is exposed to interest rate risks in Australia, China, Japan and Sweden. See Note 6.4(c) for effective interest rates,
repayment and repricing analysis of outstanding debt.
96 Cochlear Limited Annual Report 2020
In order to reduce the impact of fluctuations in market interest rates, Cochlear had previously entered into interest rate swaps
to manage the interest rate risk by using a floating versus fixed rate debt framework. The notional principal amount of these
interest rate swaps was $50.0 million. These interest rate swaps were closed out in May 2020.
At the reporting date, the interest rate profile of Cochlear’s interest‐bearing financial instruments is financial assets of $930.0
million (2019: $78.6 million) and financial liabilities of $473.0 million (2019: $181.6 million).
Interest rate risk ‐ Sensitivity analysis
For the year ended 30 June 2020, it is estimated that a general increase of one percent in interest rates would have increased
Cochlear’s loss after income tax and equity by approximately $3.3 million (2019: decrease profit by $0.7 million). A one percent
general decrease in interest rates would have had the equal but opposite effect on Cochlear’s loss 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:
2020
2019
Americas
EMEA
Asia Pacific
$m
74.7
96.0
$m
92.1
140.1
$m
44.6
63.4
Total
$m
211.4
299.5
Depending on the region, Cochlear’s credit terms are generally 30 days; however, there are certain jurisdictions where it is
customary practice for customers to make payment beyond 270 days. Although Cochlear discloses the balance as overdue, it
is not indicative of a higher than normal credit risk as payments are typically received by Cochlear within the extended
timeframes.
Cochlear has established an allowance for impairment that represents its estimate of the expected credit losses in respect of
trade receivables. The expected credit losses are assessed by reference to historical collection trends and timing of recoveries
of each customer type within a region.
In response to COVID‐19, Cochlear undertook a review of its outstanding trade debtors at 30 June 2020. The review considered
the macroeconomic conditions and outlook in the country that the customer is located as well as any specific collection risk
identified by either Cochlear or the customer. As a result of this review, the trade debtors provision has been increased to
reflect these higher levels of risks caused by COVID‐19. While these model inputs including forward looking information was
revised, the expected credit loss model remains consistent with the prior year.
97
Trade and other receivables are stated at amortised cost less impairment losses. The ageing of Cochlear’s trade receivables at
the reporting date was:
Trade receivables
Not past due
Past due 1 ‐ 60 days
Past due 61 ‐ 180 days
Past due 181 ‐ 360 days
Past due 361 days and over
Allowance for impairment losses
Trade receivables net of allowance for impairment losses
Other receivables ‐ current
Trade and other receivables
2020
$m
163.5
31.6
19.8
11.6
8.8
235.3
(23.9)
211.4
24.1
235.5
2019
$m
239.3
42.4
16.7
6.6
8.4
313.4
(13.9)
299.5
20.2
319.7
Credit risk management ‐ Cash deposits, term deposits and forward exchange contracts
The majority of Cochlear’s cash deposits, term 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. The capital raising
of AUD 1,075.6 million net of related costs and extra debt facilities, increased Cochlear’s liquidity such that Cochlear is now in
a net cash position for the year ended 30 June 2020 (refer Note 6.1). This has ensured that Cochlear has a strengthened balance
sheet and is well positioned to meet all liabilities when due.
Non‐derivative liabilities
Contractual maturities of non‐derivative financial liabilities, including estimated interest payments and excluding the impact
of netting agreements, are as follows:
Effective
interest rate
Carrying
amount
Contractual
cash flows
< 1
year
1 ‐ 2
years
2 ‐ 5
years
Per annum
$m
$m
$m
$m
$m
1.17%
2.60%
0.55%
0.91%
‐
‐
2.42%
4.11%
0.53%
0.57%
‐
389.8
34.0
3.3
45.9
172.9
231.5
877.4
129.2
2.9
3.3
46.2
203.2
384.8
394.3
37.6
3.4
47.8
172.9
282.6
938.6
138.0
3.5
3.3
46.5
203.2
394.5
394.3
0.9
3.4
0.2
159.3
26.0
584.1
3.1
0.1
3.3
0.3
160.8
167.6
‐
0.9
‐
0.4
12.4
28.2
41.9
63.1
0.1
‐
46.2
30.3
139.7
‐
35.8
‐
47.2
1.2
77.7
161.9
71.8
3.3
‐
‐
12.1
87.2
More
than 5
years
$m
‐
‐
‐
‐
‐
150.7
150.7
‐
‐
‐
‐
‐
‐
2020
USD floating rate loan
CNY floating rate loan
JPY floating rate loan
SEK floating rate loan
Trade and other payables
Lease liability
Total
2019
AUD floating rate loan
CNY floating rate loan
JPY floating rate loan
SEK floating rate loan
Trade and other payables
Total
98 Cochlear Limited Annual Report 2020
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
The following table indicates the periods in which the cash flows associated with Cochlear’s derivatives are expected to occur:
2020
Assets
Liabilities
Total
2019
Assets
Liabilities
Total
Carrying
amount
$m
Contractual
cash flows
$m
3.3
(2.0)
1.3
4.3
(28.5)
(24.2)
3.3
(2.0)
1.3
4.4
(27.7)
(23.3)
< 1 year
$m
1.2
(0.3)
0.9
2.2
(22.6)
(20.4)
1 ‐ 2
years
$m
2.0
(1.6)
0.4
2.1
(5.0)
(2.9)
2 ‐ 5
years
$m
0.1
(0.1)
‐
0.1
(0.1)
‐
The expected impact on the income statement is not considered to be significantly different to the cash flow impact noted
above.
(d) Fair value
The carrying amounts and estimated fair values of Cochlear’s financial assets and liabilities are materially the same.
The fair value of forward exchange contracts is based upon the listed market price, if available. If a listed market price is not
available, the fair value is estimated by discounting the difference between the contractual forward price and the current
forward price for the residual maturity of the contract using benchmark bill futures and swap rates. These fair values are
provided by independent third parties.
Valuation of financial assets and liabilities
For financial asset and liabilities measured and carried at fair value, Cochlear uses the following levels to categorise the
valuation methods used:
Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly
(i.e. as prices) or indirectly (i.e. derived from prices); and
Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
All of Cochlear’s forward exchange contracts were valued using observable market inputs (Level 2) and there were no transfers
between levels during the year.
99
7. Other notes
7.1 Auditors’ remuneration
Audit services
Auditors of the Company ‐ KPMG:
‐ audit and review of financial reports
Total audit services
Non‐audit services
Auditors of the Company ‐ KPMG:
‐ other assurance services
‐ taxation compliance and advisory services
‐ IT advisory
‐ other
Total non‐audit services
7.2 Commitments
Capital expenditure commitments
2020
$
2019
$
2,170,767
2,170,767
1,809,019
1,809,019
35,666
1,547,505
‐
9,185
133,481
1,764,533
643,260
357,650
1,592,356
2,898,924
As at 30 June 2020, Cochlear entered into contracts to purchase property, plant and equipment for $24.0 million (2019: $44.0
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
Country of
incorporation/formation
2020
%
2019
%
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
Switzerland
USA
Austria
Belgium
Sweden
USA
Canada
USA
Colombia
Germany
Australia
Germany
UK
Australia
Company
Cochlear Limited
Controlled entities
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 Colombia SAS
Cochlear Deutschland GmbH & Co KG
Cochlear Employee Share Trust
Cochlear Europe Finance GmbH
Cochlear Europe Limited
Cochlear Finance Pty Limited
100 Cochlear Limited Annual Report 2020
Cochlear France SAS
Cochlear German Holdings Pty Limited
Cochlear Incentive Plan Pty Ltd
Cochlear Investments Pty Ltd
Cochlear Investments (No. 2) Pty Ltd
Cochlear Italia SRL
Cochlear Korea Limited
Cochlear Labs Pty Limited
Cochlear Latinoamerica S.A.
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 Mexico SA de CV
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 Taiwan Limited
Cochlear Thailand 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) Incorporated in November 2019.
(ii) Dormant.
7.4 Parent entity disclosure
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
51
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
51
100
100
(i)
(ii)
France
Australia
Australia
Australia
Australia
Italy
Korea
Australia
Panama
Malaysia
USA
China
China
India
Mexico
UAE
Sweden
Norway
New Zealand
UK
Panama
Sweden
Taiwan
Thailand
Turkey
Germany
Hong Kong
UK
Singapore
Japan
China
USA
Canada
At, and throughout the financial year ended, 30 June 2020, the parent company of Cochlear was Cochlear Limited.
Result of the parent entity
Net (loss)/profit
Other comprehensive income/(loss)
Total comprehensive (loss)/income
Financial position of the parent entity at year end
Current assets
Total assets
Current liabilities
Total liabilities
101
2020
$m
(191.4)
17.9
(173.5)
1,441.8
2,154.8
689.0
922.0
2019
$m
225.0
(4.0)
221.0
456.0
1,015.7
211.7
502.4
Total equity of the parent entity comprising:
Share capital
Hedging reserve
Share based payment reserve
(Accumulated losses)/retained earnings
Total equity
2020
$m
1,272.4
0.9
58.0
(98.5)
1,232.8
2019
$m
182.3
(17.0)
50.0
298.0
513.3
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 2020, the parent entity entered into contracts but had not provided for or paid to purchase plant and equipment
for $10.1 million (2019: $17.0 million).
7.5 Deed of Cross Guarantee
Cochlear Limited (the holding entity) together with wholly owned subsidiaries set out below (together referred to as the ‘Closed
Group’) have entered a Deed of Cross Guarantee on 17 April 2019 in accordance with ASIC Corporations (Wholly‐owned
Companies) Instrument 2016/785 and are relieved from the Corporations Act 2001 requirement to prepare and lodge an
audited financial report and directors’ report. The effect of the deed is that Cochlear Limited has guaranteed to pay any
outstanding liabilities upon the winding up of any wholly owned subsidiary that is party to the Deed. Wholly owned subsidiaries
that are party to the Deed have also been given a similar guarantee in the event that Cochlear Limited or another party to the
Deed is wound up.
The subsidiaries party to the deed are:
Cochlear Finance Pty Limited;
Cochlear German Holdings Pty Limited;
Cochlear Investments Pty Ltd;
Cochlear Investments (No. 2) Pty Ltd; and
Cochlear Labs Pty Limited.
102 Cochlear Limited Annual Report 2020
Set out below is the income statement, statement of comprehensive income, a summary of movements in (accumulated
losses)/retained earnings and balance sheet of the entities party to the Deed of Cross Guarantee for the year ended 30 June
2020 and 30 June 2019:
Income statement
Revenue
Cost of sales
Gross profit
Selling, marketing and general expenses
Research and development expenses
Administration expenses
Other income
Other expenses
Patent litigation expense
Share of losses on equity accounted investments
Results from operating activities
Finance income ‐ interest
Finance expense ‐ interest
Net finance expense
(Loss)/profit before income tax
Income tax benefit/(expense)
Net (loss)/profit
Statement of comprehensive income
Financial investments measured at fair value through other comprehensive
income, net of tax
Foreign currency translation differences
Effective portion of changes in fair value of cash flow hedges, net of tax
Net change in fair value of discontinued cash flow hedges transferred to the income
statement, net of tax
Net change in fair value of cash flow hedges transferred to the income statement,
net of tax
Total comprehensive (loss)/income
Retained earnings at beginning of year
Transfers to and from reserves
Dividends recognised
(Accumulated losses)/retained earnings at end of year
2020
$m
851.1
(307.2)
543.9
(63.3)
(141.8)
(88.3)
178.8
(107.7)
(503.7)
(1.2)
(183.3)
3.0
(10.0)
(7.0)
(190.3)
37.1
(153.2)
(1.8)
(2.2)
(22.6)
18.3
22.3
(139.2)
275.0
(166.1)
(193.7)
(84.8)
2019
$m
972.9
(310.4)
662.5
(65.4)
(122.6)
(92.8)
34.3
(102.6)
‐
‐
313.4
10.7
(16.6)
(5.9)
307.5
(81.3)
226.2
(1.3)
18.7
(17.8)
‐
13.6
239.4
232.3
224.5
(181.8)
275.0
103
Balance sheet
Assets
Cash and cash equivalents
Term deposits
Trade and other receivables
Forward exchange contracts
Inventories
Current tax assets
Prepayments
Total current assets
Other receivables
Forward exchange contracts
Loans and borrowings ‐ internal
Investments in subsidiaries
Equity accounted investments
Property, plant and equipment
Intangible assets
Deferred tax assets
Right of use asset
Total non‐current assets
Total assets
Liabilities
Trade and other payables
Forward exchange contracts
Loans and borrowings ‐ external
Loans and borrowings ‐ internal
Current tax liabilities
Employee benefit liabilities
Provisions
Deferred revenue
Lease liability
Total current liabilities
Trade and other payables
Forward exchange contracts
Loans and borrowings ‐ external
Loans and borrowings ‐ internal
Employee benefit liabilities
Provisions
Deferred tax liabilities
Deferred revenue
Lease liability
Total non‐current liabilities
Total liabilities
Net assets
Equity
Share capital
Reserves
(Accumulated losses)/retained earnings
Total equity
104 Cochlear Limited Annual Report 2020
2020
$m
432.9
365.0
443.2
1.0
137.6
53.5
9.4
1,442.6
5.0
2.1
79.8
441.1
69.0
109.4
107.4
90.1
117.6
1,021.5
2,464.1
115.0
0.3
389.8
74.5
1.7
32.6
139.6
2.6
13.4
769.5
51.3
1.7
45.9
208.4
4.7
5.5
12.9
2.0
123.8
456.2
1,225.7
1,238.4
1,272.4
50.8
(84.8)
1,238.4
2019
$m
21.8
‐
306.6
2.0
111.9
5.0
14.4
461.7
3.1
2.1
60.0
462.6
‐
110.6
121.3
42.8
‐
802.5
1,264.2
114.7
20.9
‐
60.5
23.2
38.7
17.0
2.3
‐
277.3
81.8
7.6
175.4
188.2
4.7
40.3
4.6
‐
‐
502.6
779.9
484.3
182.3
27.0
275.0
484.3
7.6 Changes in accounting policies
Cochlear has adopted AASB 16 Leases from 1 July 2019. Due to the transition methods chosen, comparative information
throughout these financial statements has not been restated to reflect the requirements of the new standards.
Refer to Note 5.8 for further details on the accounting for leases under AASB 16 and the transition impacts.
7.7 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 2020 and have not been applied in preparing these consolidated financial statements. These new standards,
amendments and interpretations are not expected to have an effect on the consolidated financial statements of Cochlear.
7.8 Events subsequent to the reporting date
Other than the patent litigation detailed in Note 2.3, 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.
105
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 2020 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; and
c) at the date of this declaration, there are reasonable grounds to believe that the Company and each of the Closed
Group entities identified in Note 7.5 will be able to meet any liabilities to which they are or may become subject to,
because of the Deed of Cross Guarantee between the Company and those group entities pursuant to ASIC
Corporations (Wholly‐owned Companies) Instrument 2016/785.
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 2020.
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 18th day of August 2020.
Director
Director
106 Cochlear Limited Annual Report 2020
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).
The Financial Report comprises:
Balance sheet as at 30 June 2020;
In our opinion, the accompanying Financial Report of the
Company is in accordance with the Corporations Act
2001, including:
Income statement, Statement of comprehensive income,
Statement of changes in equity, and Statement of cash flows
for the year then ended;
giving a true and fair view of the Consolidated Entity’s
financial position as at 30 June 2020 and of its
financial performance for the year ended on that
date; and
complying with Australian Accounting Standards and
the Corporations Regulations 2001.
Notes including a summary of significant accounting policies;
and
Directors’ Declaration.
The Consolidated Entity consists of 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.
Key Audit Matters
The key audit matters we identified are:
Recoverability of trade receivables; and
Warranty provision.
Recoverability of trade receivables $211.4 million
Refer to Note 6.4(b) Financial risk management, credit risk
The key audit matter
Recoverability of trade receivables was considered a key
audit matter due to:
The varying characteristics of customers which include
universities,
government‐supported
governments,
clinics and major hospital chains;
The different geographical locations of customers and
the political and economic environments they are
Key Audit Matters are those matters that, in our professional
judgement, were of most significance in our audit of the
Financial Report of the current period.
These matters were addressed in the context of our audit of
the Financial Report as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these
matters.
How the matter was addressed in our audit
Our procedures included:
With the assistance of our IT specialists, testing key
controls within the credit control process including:
‐ management review and approval of new customer
credit limits within the Consolidated Entity’s credit
limit policies;
‐
the system configuration of credit limits; and
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
Independent auditor’s report to the shareholders of Cochlear Limited
subject to, which may affect the timely recovery of
certain receivables;
‐ management’s evaluation of trade receivables
ageing and trade receivables past due;
Trade receivables past due at the reporting date which
have certain risk characteristics and therefore have a
greater inherent risk of not being recovered;
The potential for COVID‐19 to increase the risk of
receivables being delayed for a prolonged period or not
paid;
The inherent subjectivity involved in the Consolidated
Entity making forward‐looking judgements in relation to
the recovery of credit risk exposures; and
The Consolidated Entity’s adoption of AASB 9 Financial
Instruments requiring the use of an expected credit loss
model.
These conditions gave rise to additional audit effort,
including:
Greater involvement by our senior team members to
gather evidence across the various customer profiles
and their trade receivables; and
To challenge the forward‐looking judgements made by
the Consolidated Entity.
We involved IT specialists to supplement our senior team
members in assessing this key audit matter.
Warranty provision $31.6 million
Refer to Note 5.6 Provisions
The key audit matter
The warranty provision was considered a key audit matter
due to:
The estimation uncertainty
in the key
assumptions applied by the Consolidated Entity to
determine the warranty provision;
inherent
The Consolidated Entity’s evolving product portfolio,
through the introduction of new generations, where
Assessing the Consolidated Entity’s expected credit loss
the
model
requirements of the accounting standards;
geographies
significant
against
in
Challenging the Consolidated Entity’s view of credit risk
and recoverability in certain locations by selecting a
sample of significant overdue customer balances with
indicators of credit deterioration. We:
‐
‐
‐
‐
‐
noted the historical patterns for long outstanding
trade receivables in those locations for those
customer types, to form an understanding of the
normal pattern of recovery and compared this to
the age of the customer balances sampled;
assessed cash received subsequent to year‐end
from the Consolidated Entity’s bank statements for
its effect in reducing amounts outstanding at year‐
end;
evaluated other evidence
correspondence;
including customer
questioned the Consolidated Entity’s assessment of
the impact of Covid‐19 on the risk of default; and
questioned the Consolidated Entity’s knowledge of
future conditions which may
impact expected
customer receipts based on consistency with the
results of the procedures performed above; and
Assessing the Consolidated Entity’s disclosures of the
quantitative and qualitative considerations in relation
to trade receivable credit risk, by comparing these
disclosures to our understanding of the matter and the
requirements of the accounting standards.
How the matter was addressed in our audit
Our procedures included:
Obtaining an understanding of the evolving product
portfolio, each product’s warrantable period and
history of claim rates, and the different attributes
which impact the key assumptions used in the
Consolidated Entity’s warranty provision;
Testing the sensitivity of the warranty provision by
varying key assumptions, within a reasonably possible
range, to focus our further procedures;
KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation.
108 Cochlear Limited Annual Report 2020
Independent audit report to the shareholders of Cochlear Limited
each product’s design and quality attributes can impact
the key assumptions;
The increased use of the Global Repair Centre intended
to reduce forecast repair cost;
The inherent unpredictability of future failures resulting
in claims under warranty; and
The calculation is largely manually developed and
therefore is at greater risk of error.
The key assumptions used in the Consolidated Entity’s
determination of the warranty provision are:
The forecast claim rates of the multiple products in the
portfolio;
The ratio of repairing to replacing failed products;
The forecast repair cost; and
The forecast replacement cost which is based on
standard forecasts of manufacturing costs.
Challenging these key assumptions required greater
involvement by our senior team members.
Challenging the Consolidated Entity’s ability to reliably
estimate the key assumptions by comparing previous
estimates to actual outcomes;
Assessing the integrity of the model for the warranty
provision. This included checking the accuracy of the
formulas within the model;
Comparing the forecast claim rates of a sample of
products to the historical warranty claims for that
product or the historical warranty claims of previous
generations of similar products;
Comparing the forecast proportion of claims that can
be repaired and associated repair costs to historical
performance of the Global Repair Centre;
Comparing the forecast replacement cost to:
‐
‐
the standard manufacturing cost used in board
approved budgets; and
actual manufacturing costs to identify variances
and their impact on the warranty provision;
Enquiring of management responsible for product
design and quality attributes and the Global Repair
Centre to challenge the forward‐looking assumptions
used in the model; and
Assessing the disclosures of the quantitative and
qualitative considerations in relation to the warranty
provision, by comparing these disclosures 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 and our related assurance
opinion.
In connection with our audit of the Financial Report, our responsibility is to read the Other Information. In doing so, we consider
whether the Other Information is materially inconsistent with the Financial Report or our knowledge obtained in the audit, or
otherwise appears to be materially misstated.
We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the
work we have performed on the Other Information that we obtained prior to the date of this Auditor’s Report we have nothing
to report.
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.
109
Independent auditor’s report to the shareholders of Cochlear Limited
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; and
implementing necessary internal controls 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.
Report on the Remuneration Report
Opinion
In our opinion, the Remuneration Report of Cochlear Limited for the year ended 30 June 2020, 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 57 of the Directors’ report for the year ended 30 June 2020.
Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with
Australian Auditing Standards.
Julian McPherson, Partner
KPMG
Sydney, 18 August 2020
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.
110 Cochlear Limited Annual Report 2020
References
Market leadership
1. ClinicalTrials.gov [Internet]. Bethesda (MD): National Library of Medicine (US); 2017 March 22. Identifier NCT03086135.
Clinical Performance of a New Implant System for Bone Conduction Hearing; 2019 January 31 [cited 2019 June 20]; [4
screens]. Available from: https://clinicaltrials.gov/ct2/show/NCT03086135.
2. Cochlear Ltd. D1190805 Sound Processor Size Comparison. 2020; March. Data on file.
3. Mauger SJ, et al. Clinical evaluation of the Nucleus 6 cochlear implant system: performance improvements with
SmartSound iQ. International Journal of Audiology. (2014 Aug); 53(8): 564‐576. [Sponsored by Cochlear].
4. Mauger SJ, et al. Clinical outcomes with the Kanso off‐the‐ear cochlear implant sound processor. Int J Audiol. (2017 Jan);
DOI:10.1080/14992027.2016.1265156.
5. Wolfe J, et al. Benefits of Adaptive Signal Processing in a Commercially Available Cochlear Implant Sound Processor. Otol
Neurotol. (2015 Aug); 36(7):1181‐90.
6. Cochlear Limited. D1660797. CP1150 Sound Processor Interim Clinical Investigation Report. January 2020
7. Cochlear Ltd. D1710313 CP1150 Battery Life Coverage Technical Report. 2020; Mar. Data on file.
8. Cochlear Limited. D1376556. CLTD5709 Acceptance and Performance with the Nucleus 7 Cochlear Implant System with
Adult Recipients. 2018, Jan; Data on file.
9. Cochlear Limited. D1619303 Software History Timeline. Data on file.
10. Dillon H, James A, Ginis J. Client Oriented Scale of Improvement (COSI) and its relationship to several other measures of
benefit and satisfaction provided by hearing aids. J Am Acad Audiol. 1997, Feb (1)8:27‐43. 2.
Operating and financial review
11. 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.
12. 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.
13. Fact 5. Deafness and hearing loss. World Health Organization [Internet]. [cited July 2018]. Available from:
http://www.who.int/features/factfiles/deafness/en/.
14. Cochlear internal data.
15. Market penetration estimate based on Cochlear sourced data.
16. Mohr et al., 2000.
17. CPI Inflation Calculator (http://www.in2013dollars.com).
18. Estimated from Mohr et al., 2000.
19. Mohr et al., 2000.
20. Emmett et al., 2015.
21. Kochkin, 2007.
22. World Alzheimer Report 2015 (https://www.alz.co.uk/research/WorldAlzheimerReport2015.pdf).
23. World Alzheimer Report 2015 (https://www.alz.co.uk/research/WorldAlzheimerReport2015.pdf).
24. Lin et al., 2011.
25. The Ear Foundation (2018). Spend2Save Report (2nd Edition).
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 2020.
Substantial shareholders
Investor
Baillie Gifford & Co
BlackRock Inc
Veritas Asset Mgt
The Vanguard Group, Inc
Total
Distribution of shareholders
Number of shares held
Number of ordinary shares
3,944,356
3,930,851
3,696,542
3,602,454
15,174,203
%
6.0
6.0
5.6
5.5
23.1
Number of ordinary shareholders
% shares
1 ‐ 1,000
1,001 ‐ 5,000
5,001 ‐ 10,000
10,001 ‐ 100,000
100,001 and over
Total
Non‐marketable parcels – 129 shareholders held less than a marketable parcel of ordinary shares.
39,479
2,828
132
78
14
42,531
Twenty largest shareholders
Shareholder
HSBC Custody Nominees (Australia) Limited
J P Morgan Nominees Australia Pty Limited
Citicorp Nominees Pty Limited
National Nominees Limited
BNP Paribas Noms Pty Ltd
BNP Paribas Nominees Pty Ltd
HSBC Custody Nominees (Australia) Limited‐GSCO ECA
Australian Foundation Investment Company Limited
HSBC Custody Nominees (Australia) Limited
Netwealth Investments Limited
Citicorp Nominees Pty Limited
Mr Christopher Graham Roberts
BNP Paribas Nominees Pty Ltd Hub24 Custodial Serv Ltd
PGA (Investments) Pty Ltd
National Nominees Limited
AMP Life Limited
HSBC Custody Nominees (Australia) Limited ‐ A/C 2
UBS Nominees Pty Ltd
Avanteos Investments Limited
Custodial Services Limited
The 20 largest shareholders held 77.43% of the ordinary shares of the Company.
On market buy‐back
There is no current on market buy‐back.
112 Cochlear Limited Annual Report 2020
Number of ordinary shares
28,405,386
11,371,030
4,113,509
1,682,907
1,540,107
1,132,094
738,643
323,715
300,693
231,860
226,944
162,173
103,774
100,118
86,230
79,421
71,519
70,592
68,964
67,214
50,876,893
10.9
8.2
1.3
2.9
76.7
100.0
%
43.24
17.31
6.26
2.56
2.34
1.72
1.12
0.49
0.46
0.35
0.35
0.25
0.16
0.15
0.13
0.12
0.11
0.11
0.10
0.10
77.43
Contact information
Cochlear headquarters
1 University Avenue
Macquarie University NSW 2109
Australia
Telephone: +612 9428 6555
Fax: +612 9428 6353
Website: www.cochlear.com
Shareholder enquiries
Access to shareholding information is available to investors through Computershare.
Computershare Investor Services Pty Limited
GPO Box 2975
Melbourne VIC 3001
Australia
Telephone: 1300 850 505
Email: web.queries@computershare.com.au
Website: www.computershare.com.au
Calendar of events
18 August 2020
FY20 results announced
8 September 2020
Closing date for receipt of director nominations
20 October 2020
Annual general meeting
19 February 2021
HY21 results announced*
20 August 2021
FY21 results announced*
* Indicative dates only.
Annual general meeting
The annual general meeting (AGM) of Cochlear Limited will be held on 20 October 2020 at 10.00am as a virtual meeting.
Shareholders will be advised of further details regarding the 2020 AGM in a separate Notice of Meeting, which will be provided
to shareholders in mid‐September 2020. The Notice of Meeting will also be available on the ASX Company Announcements
Platform and Cochlear’s website at www.cochlear.com.
113
Hear now. And always
As the global leader in implantable hearing solutions, Cochlear is dedicated to helping people with
moderate to profound hearing loss experience a life full of hearing. We have provided more than
600,000 implantable devices, helping people of all ages to hear and connect with life’s opportunities.
We aim to give people the best lifelong hearing experience and access to innovative future
technologies. We have the industry’s best clinical, research and support networks.
That’s why more people choose Cochlear than any other hearing implant company.
Cochlear Ltd (ABN 96 002 618 073) 1 University Avenue, Macquarie University, NSW 2109, Australia T: +61 2 9428 6555 F: +61 2 9428 6352
www.cochlear.com
Please seek advice from your health professional about treatments for hearing loss. Outcomes may vary, and your health professional will advise you about the factors
which could affect your outcome. Always read the instructions for use. Not all products are available in all countries. Please contact your local Cochlear representative
for product information.
Views expressed are those of the individual. Consult your health professional to determine if you are a candidate for Cochlear technology.
The Cochlear Nucleus Smart App is available on App Store and Google Play. The Cochlear Nucleus 7 Sound Processor is compatible with Apple and Android devices,
for compatibility information visit www.cochlear.com/compatibility.
ACE, Advance Off-Stylet, AOS, AutoNRT, Autosensitivity, Beam, Bring Back the Beat, Button, Carina, Cochlear,
Codacs, Contour, Contour Advance, Custom Sound, ESPrit, Freedom, Hear now. And always, Hugfit, Hybrid, Invisible Hearing, Kanso, MET, MicroDrive, MP3000,
myCochlear, mySmartSound, NRT, Nucleus, Outcome Focused Fitting, Off-Stylet, Slimline, SmartSound, Softip, SPrint, True Wireless, the elliptical logo, and Whisper
are either trademarks or registered trademarks of Cochlear Limited. Ardium, Baha, Baha SoftWear, BCDrive, DermaLock, EveryWear, SoundArc, Vistafix, and
WindShield are either trademarks or registered trademarks of Cochlear Bone Anchored Solutions AB.
Android, Google Play and the Google Play logo are trademarks of Google LLC. The Android robot is reproduced or modified from work created and shared by Google
and used according to terms described in the Creative Commons 3.0 Attribution License.
Apple, the Apple logo, FaceTime, Made for iPad logo, Made for iPhone logo, Made for iPod logo, iPhone, iPad Pro, iPad Air, iPad mini, iPad and iPod touch are
trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc., registered in the U.S. and other countries.
© Cochlear Limited 2020. D1714949 V1 2020-06
,
,
코클리어
コクレア
, Cochlear SoftWear,
科利耳