Cochlear
Annual Report 2022

Plain-text annual report

Cochlear Limited Annual Report 2022 Cochlear has been the global leader in implantable hearing solutions for over 40 years, providing a range of implants and sound processor upgrades that deliver a lifetime of hearing outcomes. Our goal is to deliver value by helping more people to hear, which contributes to building a healthier and more productive society. Contents Overview Our company How we create value FY22 highlights Letter to shareholders Strategy Our strategy Value creation Growth opportunity Strategic priorities Retain market leadership Grow the hearing implant market Deliver consistent revenue and earnings growth A stronger organisation Business risks 2 6 8 10 26 28 30 34 34 36 44 48 52 Performance Operational review Financial review Governance Overview Board of directors Executive team Directors’ report Remuneration report Directors’ report Financial report 54 56 60 62 66 70 90 95 Shareholder information 144 2022 shareholder reports Available at the Investor section of the website www.cochlear.com Front cover Lou Ferrigno, Cochlear™ Nucleus® System recipient. Find out more about Lou’s Cochlear journey on page 41. Cochlear Limited Corporate Governance Statement 2022 Cochlear Limited Tax Contribution Report 2022 Cochlear Limited Sustainability Report 2022 Cochlear Limited Annual Report 2022 Our story For over 40 years Cochlear has been bringing people all over the globe into the world of sound. Professor Graeme Clark, an Australian ear surgeon, saw first-hand the isolation and frustration that comes from living in a world of silence as his father struggled with hearing difficulties. On holiday in 1977, fiddling with a shell and a blade of grass, Graeme realised there was a safe way to insert electrodes into the inner ear. It was Graeme’s determination to help others that realised our first implantable solution, reconnecting Rod Saunders to hearing and bringing music into his life. Professor Clark partnered with Australian entrepreneur Paul Trainor – and his Nucleus Group – and the University of Melbourne to commercialise the cochlear implant. With funding from the Australian government, they developed the Cochlear™ Nucleus® 22 Implant, the first multi-channel cochlear implant, and Cochlear, the company, was formed. Today, Cochlear is the leader in implantable hearing solutions, connecting hundreds of thousands of people globally to a life full of hearing. The pioneering spirit that started Cochlear all those years ago continues to drive us forward and our commitment is stronger than ever. We’re transforming the way people understand and treat hearing loss, and we’re committed to reaching more people to provide support for a lifetime of hearing. About this report The annual report has been prepared in accordance with the IFRS Foundation’s Integrated Reporting Framework, which we use to clearly articulate how we aim to deliver long-term sustainable value for all our key stakeholders. 1 Cochlear Limited Annual Report 2022 Our company About Cochlear For over 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, it is a Top 50 listed Australian company with a market capitalisation of over $13 billion. We aim to improve awareness of and access to implantable hearing solutions for people indicated for our products. We have provided more than 700,000 implant devices to people who benefit from one – or two – of our implantable solutions. Whether these hearing solutions were implanted today or many years ago, we continue to bring innovative new products to market as well as sound processor upgrades for prior generations of recipients. We invest around 12% of sales revenue each year in R&D, with over $2 billion invested since listing, and participate in over 100 collaborative research programs worldwide. Our global headquarters are on the campus of Macquarie University in Sydney, with regional offices in Asia Pacific, Europe and the Americas. We have a deep geographical reach, selling in over 180 countries, with a direct presence in over 30 countries and a global workforce of close to 4,500 employees. Our mission We help people hear and be heard. We empower people to connect with others and live a full life. We transform the way people understand and treat hearing loss. We innovate and bring to market a range of implantable hearing solutions that deliver a lifetime of hearing outcomes. For over 40 years, Cochlear has been the global leader in implantable hearing solutions We have a deep geographical reach, selling in over 180 countries 2 Cochlear Limited Annual Report 2022 Cochlear at a glance Business segments Cochlear implant systems 57% Cochlear implants* 31% Services* Sound processor upgrades, accessories & other 12% Acoustics* Bone conduction systems and sound processor upgrades Cochlear™ Nucleus® Profile™ Plus with Slim Modiolar Electrode (CI632) Cochlear™ Nucleus® 7 Sound Processor Cochlear™ Nucleus® Kanso® 2 Sound Processor Cochlear™ Osia® 2 System Cochlear™ Baha® 6 Max Sound Processor Global sales >$1.6b in sales revenue ~80% Developed markets* ~20% Emerging markets* 48% Americas* 35% 17% EMEA* Asia Pacific* Market leader Growing scale $200m+ in annual R&D 700,000+ implants sold*** >60% global market share** ~4,500 employees 30+ countries with direct operations 100+ collaborative research programs 6 key manufacturing sites 3 * Based on sales revenue. ** Based on Cochlear estimates for cochlear implants. *** Includes cochlear and acoustic implants.Cochlear Limited Annual Report 2022 Our company 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 over 40 years with over 60% global market share and more than 700,000 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 and services to market as well as sound processor upgrades compatible with prior generation implants Growing income stream from servicing our 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 ~$150,000 as at 30 June 2022 4 $40,000$80,000$120,000$160,000$200,000959697989900010203040506070809101112131415161718192021Cochlear total shareholder return since listingCochlear Limited Annual Report 2022 Financial history Cochlear has a long track record of delivering growing sales revenue, profits* and dividends. 5% in FY22 9% in FY22 in CC** 18% in FY22 18% in FY22 Cochlear implants units Sales revenue $million Net profit $million - underlying* Dividends per share 5 $3.00969798990001020304050607080910111213141516171819202122* Excluding one-off and non-recurring items. ** Constant currency.1,64196979899000102030405060708091011121314151617181920212227796979899000102030405060708091011121314151617181920212238,182969798990001020304050607080910111213141516171819202122Cochlear Limited Annual Report 2022 Our mission The passion that drives the organisation and focuses the strategy Our strategy Where we focus our time and resources to create value We help people hear and be heard The factors driving industry growth How we focus our resources Our growth opportunity is compelling and has remained unchanged for many years. Our strategic priorities are focused on improving awareness of and access to implantable hearing solutions for people indicated for our products. Growth opportunity Strategic priorities We empower people to connect with others and live a full life We transform the way people understand and treat hearing loss We innovate and bring to market a range of implantable hearing solutions that deliver a lifetime of hearing outcomes • Hearing loss is prevalent and under-treated • Cochlear implants are a cost- eff ective solution for all age groups • Product indications are broadening and funding is expanding • Cochlear implants can deliver superior outcomes to hearing aids for indicated patients • Good hearing is essential for healthy ageing How we create value Our goal is to deliver value by helping more people to hear, which contributes to building a healthier and more productive society. We have a responsibility to be here to support a lifetime of hearing for the children, and adults, being implanted with our devices, which means we need to deliver sustainable financial growth, benefiting all our stakeholders. We achieve this through market-leading innovation capabilities in conjunction with a global network of experts and collaborators; the strong and trusted relationships we build with our candidates, recipients, professional customers and payers; and our employees who are central to how we deliver our strategy and create value. Retain market leadership Grow the hearing implant market Deliver consistent revenue and earnings growth 6 Cochlear Limited Annual Report 2022 Value creation How the outcomes of our activities impact all key stakeholders - our customers, our people, our shareholders and society more broadly The pillars that set the foundation for success To be successful over the long term, our organisation needs to be strong, agile and sustainable to enable us to execute our strategy, support our customers and deliver on our growth ambitions. A stronger organisation The key inputs to creating value Customers & communities Our capacity to create value depends on the strong and trusted relationships we build with our candidates, recipients, professional customers and payers. The value we create, driving success now and into the future A healthier & more productive society Delivering societal benefi t through improved health outcomes, educational cost savings and productivity gains. Empowered customers Improving the wellbeing of recipients and providing convenience and confi dence to our professional customers. Shaping our culture Creating value sustainably Innovation A lifetime of hearing solutions We are pioneers and global leaders in the development, manufacture and commercialisation of implantable hearing solutions, collaborating with a global network of research partners. Innovating to build a market-leading portfolio of products and services that improve hearing outcomes and provide a lifetime of hearing solutions for recipients. People Thriving people Being agile and effi cient Our people’s knowledge and expertise are central to how we deliver our strategy. An engaged, capable, high-performing and diverse workforce that delivers on our strategy and supports the creation of sustained value. Financial & environmental Sustained value Prudent management of fi nancial capital and responsible production and consumption underpin the delivery of sustainable growth over time. Maximising spending to grow the market while maintaining our competitive position. Agile, effi cient and environmentally responsible business processes to support our growth ambitions. 7 Cochlear Limited Annual Report 2022 FY22 highlights In FY22, we helped over 40,000 people hear with one – or two – of our cochlear or acoustic implants, providing an estimated net societal benefit of more than $6 billion over the lifetime of the recipients from improved health outcomes, educational cost savings and productivity gains.1 FY22 value creation A healthier & more productive society Empowered customers Helping more people hear • We helped over 40,000 more people hear with one – or two – of our cochlear or acoustic implants Developing a treatment pathway for adults • The World Health Organization provided guidance for establishing evidence-based programs for hearing screening2 aimed at improving the identification and treatment of hearing loss • The ‘Living guidelines’ initiative was established to deliver clinical guidelines to enable early identification and referral for cochlear implant candidates Providing convenience and confidence to customers • We became the first company to offer app-based Remote Care solutions to both acoustic and cochlear implant recipients • Cochlear™ Remote Assist achieved FDA approval, enabling live video appointments for both cochlear implant and Baha® Implant recipients Growing connectivity and engagement with recipients • Cochlear Family membership grew 20% to 260,000, with a 60% join rate for new Cochlear™ Nucleus® implant recipients Broadening indications and reimbursement • Achieved FDA approval for the treatment of unilateral hearing loss and single-sided deafness with a Cochlear™ Nucleus® implant in the US • Achieved reimbursement for the Cochlear™ Osia® 2 System across a number of countries including the US, Germany and UK • Achieved reimbursement for remote programming in Australia Improving access to education • Formed a partnership3 with Malala Fund aimed at removing hearing loss as a barrier to education in emerging markets 8 Cochlear Limited Annual Report 2022 A lifetime of hearing solutions Thriving people Sustained value Market-leading technology underpins over 60% global market share • Invested over $200m in R&D, 13% of sales revenue, with many new products and services achieving regulatory approval over the past few years across all parts of the portfolio Providing the latest technology to our existing customers • The Cochlear™ Nucleus® 8 Sound Processor achieved CE Mark approval in August 2022 • Strong demand experienced for the new Cochlear™ Baha® 6 Max Sound Processor • Launched the Cochlear™ Nucleus® 7 S and Nucleus® 7 SE Sound Processors across the emerging markets Australian cochlear implant pioneer honoured as 2021 NSW Scientist of the Year • Professor Jim Patrick, Cochlear’s Chief Scientist – Emeritus, recognised for his extraordinary contribution to science Shaping our culture • Continued to roll out a range of training and leadership development programs • Employee engagement maintained at 80% Broadening incentives to benefit more employees • Introduced changes to our reward offering to achieve greater alignment and consistency of reward across the business Strong financial position • Delivered record sales revenue of $1,641m, up 9% in CC* • Underlying net profit** of $277m, up 18% on FY21 and within the guidance range • Full year dividends up 18%, with the payout in line with the 70% target Investing to build scale • Agreement to acquire Oticon Medical, Demant’s hearing implant business for ~A$170m Emission reduction targets • Established net-zero emissions targets with net-zero in our operations (Scope 1 and 2) by FY30 and across our value chain (Scope 1, 2 and 3) by FY50 • Manufacturing at 5 of our 6 facilities transitioned to 100% renewable energy Gender equality • Women in senior and executive management roles increased to 41%, exceeding our 40% target • 33% women on the Board of directors, with the transition in August 2021 to our first female Chair Reconciliation Action Plan • Formalised our commitment to recognition and reconciliation through our first Reconciliation Action Plan * Constant currency. ** Excluding one-off and non-recurring items. 9 Cochlear Limited Annual Report 2022 Alison Deans, Chair Dig Howitt, CEO & President Letter to shareholders We are pleased to report strong growth in sales revenue and profitability with all regions and product segments tracking above pre-COVID levels. We continued to invest in research and development (R&D) and awareness and access activities with good progress made across the key value drivers. Our compelling growth opportunity, the progress made on key strategic priorities and strong balance sheet mean we are well placed to create value for our stakeholders now, and over the long term. Operational and financial review We experienced improving momentum across the year as surgeries recovered following COVID shutdowns. Cochlear implants, however, continued to experience variability in performance across countries with COVID and hospital staffing shortages impacting operating theatre capacity. Record sales revenue of $1,641 million, up 10% (9% in constant currency*), was driven by strong demand for acoustic implants and sound processor upgrades with all regions and product segments tracking above pre-COVID levels. Underlying net profit** increased 18% (10% in CC) to $277 million, within the guidance range of $265-285 million, and with an underlying net profit margin of 17%. Excluding the impact of cloud computing- related expenses, the underlying net profit margin was 18%, in line with our long-term target. Statutory net profit of $289 million benefited from $12 million in one-off gains. Strong cash flow generation supports the 18% increase in full year dividends. The dividend payout of 71% of underlying net profit is aligned to our 70% target payout. 10 * Constant currency (CC) removes the impact of foreign exchange (FX) rate movements to facilitate comparability of operational performance.** Excluding one-off and non-recurring items (refer page 59). Cochlear Limited Annual Report 2022 Creating long-term value Our goal is to deliver value by helping more people to hear, which contributes to building a healthier and more productive society. Our value creation model demonstrates how our business creates value over the long term. For us, this means describing the outcomes of our activities in broader terms than just the progress against our strategic priorities and the financial returns we generate. Genuine value creation describes the impact we have on all our key stakeholders – our customers, our people, our shareholders as well as society more broadly. The following pages describe how the key inputs into our business – our customers and communities, our innovation capability, our people and financial capital – create value. We believe success will be defined by building a healthier and more productive society, having empowered customers, providing a lifetime of hearing solutions for our recipients and having thriving employees. Doing these things well should enable us to achieve sustainable financial returns over time. Sales revenue $m in CC* Underlying net profit $m** Dividends per share $1,641m $277m $3.00 9% in FY22 in CC** 18% in FY22 18% in FY22 11 -$0.50$1.00$1.50$2.00$2.50$3.00$3.5013141516171819202122-4509001,3501,80013141516171819202122-5010015020025030013141516171819202122Cochlear Limited Annual Report 2022 Letter to shareholders A healthier & more productive society We are focused on building a healthier and more productive society, delivering societal benefit through improved health outcomes, educational cost savings and productivity gains. We do this by transforming the way people understand and treat hearing loss through awareness and access activities. Helping more people hear In FY22, we helped over 40,000 people hear with one – or two – of our cochlear or acoustic implants, providing an estimated net societal benefit of more than $6 billion over the lifetime of the recipients from improved health outcomes, educational cost savings and productivity gains.1 Over the past few years, we have been expanding our programs for driving growth of the adults and seniors segment through direct-to-consumer (DTC) marketing activities and building referrals from hearing aid and ENT (ear, nose and throat) clinics. We have expanded our DTC activities to over 20 countries and increased the sophistication of targeting and nurturing candidates from awareness through to surgery. As a result, we are attracting more high-quality candidates and seeing improvements in the time to surgery. The Cochlear Provider Network and Sycle business in the US help educate hearing aid audiologists of the indications and benefits of cochlear implants and continues to provide a growing number of referrals. We are taking the learnings from the US and developing referral networks in other countries, with a focus on helping our partners in the hearing aid channel identify and refer potential patients. Developing a treatment pathway for adults An important long-term goal for us is to support the development of a consistent process by which all healthcare professionals diagnose, refer and treat adults eligible for cochlear implants. This goal is supported by the growing recognition that hearing is an essential part of healthy ageing and treating age- related hearing loss is cost-effective. In 2021, the World Health Organization (WHO) provided guidance for establishing evidence- based programs for hearing screening2 aimed at improving the identification and treatment of hearing loss in target age-groups, including adults. And in 2022, the ‘Living Guidelines’ initiative was established, an international taskforce of over 50 leading cochlear implant professionals, academics and cochlear implant users tasked with delivering clinical guidelines to enable early identification and referral for cochlear implant candidates. The initiative aims to create guidelines that can be adapted and adopted in country to optimise the care for adults eligible for cochlear implants. 12 Cochlear Limited Annual Report 2022 Cochlear and acoustic implants contribute to building a healthier and more productive society. Mahrukh is a bilateral cochlear implant recipient and works as an obstetrics and gynaecology doctor in Delhi. When Mahrukh was young, she didn’t believe she could be a doctor because she hadn’t seen, read or heard of a doctor with disabilities. With encouragement from her teachers, Mahrukh studied medicine in India even though Hindi is not her first language. She is now thriving and has become a passionate advocate, hoping to inspire others with hearing loss to see medicine as a possible career path. Broadening indications and reimbursement Market access activities have been focused on expanding indications and reimbursement for our products. In January, Cochlear obtained FDA approval for the treatment of unilateral hearing loss and single-sided deafness (SSD) with a Cochlear™ Nucleus® implant in the US. This approval expands the addressable market with around 60,000 people in the US acquiring SSD every year.3 We also achieved reimbursement for the Cochlear™ Osia® 2 System in a number of countries, including the US, Germany and UK. In Australia, following advocacy from a coalition of cochlear implant recipients, surgeons, audiologists and service providers, the Australian Government introduced reimbursement for remote programming of auditory implants including cochlear and bone conduction implants under the Medical Benefits Schedule. This change will empower both implant recipients and clinicians by improving the availability of programming options that are not face to face and creating flexibility in how care can be accessed and provided. Improving access to education The emerging markets is an important segment, with a primary focus on children. While this segment has been growing rapidly, penetration rates remain very low. We know that if children with hearing loss do not receive support early in life, they often experience lower performance at school and ultimately this can impact economic outcomes over their lifetime. We are focused on building awareness in these markets of the importance of addressing hearing health through public education campaigns, and on improving the rates of hearing screening for children. In September, we announced a partnership4 between Cochlear Foundation and Malala Fund with the joint aim of removing hearing loss as a barrier to education. We hope this partnership will raise awareness of the need for governments and societies to prioritise hearing health in children. In doing so, children with hearing loss will be empowered to connect with life’s opportunities on a more even playing field. 13 Cochlear Limited Annual Report 2022 Letter to shareholders Empowered customers We aim to improve the wellbeing of our recipients by providing them with the latest sound processor technology as well as easy-to-use after-care to support a lifetime of hearing outcomes. And we invest in education and clinical support tools to ensure our professional customers have convenience and confidence in caring for implant candidates and recipients. Providing convenience and confidence to customers Continuing our history of meaningful innovations that make a difference in people’s lives, we are the first company to offer app-based Remote Care solutions to both acoustic and cochlear implant recipients. This means that recipients can conveniently access care from their clinician without a clinic visit – from home, at work, or when travelling. Remote Care is available through two solutions, Cochlear™ Remote Check and Cochlear™ Remote Assist, which achieved FDA approval in October. With Cochlear™ Remote Check, cochlear implant recipients can complete a hearing health check through the Nucleus® Smart App without visiting the clinic. Their clinician can then review the results at a convenient time to determine if they are performing as expected or need follow-up. Cochlear™ Remote Assist enables live video appointments for both cochlear implant and Baha® Implant recipients. The clinician can assess how the recipient is progressing and discuss any issues they are experiencing. The clinician can also connect remotely to the recipient’s sound processor to make adjustments or enable features in real-time. COVID has accelerated use of smartphone technology by adults and seniors, including video calling. It has also changed the way recipients think about care delivery with most adults with hearing loss, when surveyed, saying they would use remote care if it was offered by their clinician.6 By offering app-based Remote Care solutions, we are meeting a recipient need and making care more convenient. We are also assisting our professional partners to increase clinic efficiency, providing greater flexibility and allowing clinicians to see more patients, including new candidates. Cochlear™ Remote Check Cochlear™ Remote Assist 14 Cochlear Limited Annual Report 2022 Remote Care solutions empower our customers. Katie is a cochlear implant recipient with a Cochlear™ Nucleus® 7 Sound Processor. She has a busy life as a physiotherapist with two young children and she enjoys swimming, running and cycling. With the new Cochlear™ Remote Check, Katie is now able to do a hearing health check from home. It saves her two hours of time travelling to her audiologist’s clinic, enabling her to better balance maintaining her hearing care with her busy lifestyle. Katie can complete the check when it’s convenient for her and she doesn’t have to complete all the activities at the same time. “Having Remote Check is really convenient. You can do it in the comfort of your home environment, when you want to do it. It takes away the stress of having to go all the way to the clinic.” Growing connectivity and engagement with recipients We invest to provide our recipients with a world- class customer experience with increased connectivity and engagement. Cochlear Family, the recipient membership program, provides us with the opportunity to connect directly with recipients to provide service and support. Membership continues to grow rapidly, increasing by 20% over the last 12 months, to 260,000 members with a 60% join rate for new Cochlear™ Nucleus® implant recipients. An acceleration in recruitment in recent years has been driven by a combination of direct outreach programs and improvements in customer onboarding. Elena, Cochlear Nucleus System recipient 15 Cochlear Limited Annual Report 2022 Letter to shareholders A lifetime of hearing solutions We innovate to build a market-leading portfolio of products and services that supports a lifetime of hearing outcomes for recipients. We have achieved this through a multi-decade philosophy of investing to grow and an unwavering commitment to innovation. Our market-leading technology underpins our global market share of over 60%, and in FY22 we invested over $200 million in R&D, representing 13% of sales revenue. Providing the latest technology to our existing customers The Cochlear™ Nucleus® 8 Sound Processor achieved CE Mark approval in August 2022. Commercial availability commences in European countries over the coming months and is expected to be launched across other markets by the end of 2022, subject to the timing of regulatory approvals. The Cochlear™ Baha® 6 Max Sound Processor was launched in the second half of FY21 with strong demand experienced for the new sound processor. The Baha 6 Max Sound Processor provides a fitting range of up to 55 dB sensorineural hearing loss in the same small size as current 45 dB devices, with longer battery life and direct streaming from both Android™ and Apple devices. In late 2021 we launched the Cochlear™ Nucleus® 7 S and Nucleus® 7 SE Sound Processors across the emerging markets, providing many of the benefits of our latest technology platform to more people around the world. Michelle, Baha 6 Max recipient 16 Cochlear Limited Annual Report 2022 Our products and services provide a lifetime of hearing outcomes for recipients. Jack lost his hearing at age 11 as the result of a bacterial infection. He received his Cochlear™ Nucleus® 22 implant a year later, in 1988. For the past 34 years Jack has upgraded his external sound processor to the latest technology at every opportunity, most recently in October 2020 when he got his Cochlear™ Nucleus® 7 Sound Processor. Jack is grateful that Cochlear makes modern technologies compatible with legacy implants like his. Each sound processor upgrade ensures that Jack keeps pace with lifestyle changes and his working needs. “Each advancement in the technology puts in my hands access to tools or methods by which I can hear more clearly and with less effort. Without a doubt, my quality of life improves.” Australian cochlear implant pioneer honoured as 2021 NSW Scientist of the Year Professor Jim Patrick, Cochlear’s Chief Scientist – Emeritus, and one of the original engineers to pioneer the development of the multi-channel cochlear implant, was named the 2021 NSW Scientist of the Year. The award recognises and celebrates the extraordinary contribution that NSW scientists and engineers make to our everyday lives. In 1981, Jim was a member of the Cochlear ‘Tiger Team’ tasked with developing a clinically applicable cochlear implant. As a long-time member of Cochlear’s senior team, Jim held a number of technology management roles, including responsibility for R&D, Quality and Manufacturing. NSW Chief Scientist & Engineer Professor Durrant- Whyte said Jim is “not only a giant in health technology, but an exemplar of how a great idea can be translated into a highly successful commercial outcome, while delivering ongoing benefits to society.” Professor Jim Patrick, Cochlear’s Chief Scientist – Emeritus We are proud and humbled by the work of Professor Jim Patrick and the early innovators who commercialised the first multi-channel cochlear implant, founding a business that employs close to 4,500 people today. 17 Cochlear Limited Annual Report 2022 Letter to shareholders Thriving people Our people are our most valuable asset and are an engaged, capable and high- performing team that delivers on our strategy and supports the creation of sustained value. We have a diverse workforce with close to 4,500 people across the globe. Their knowledge, expertise, passion and focus on delivering excellence is key to achieving future success. Shaping our culture We have an inclusive organisation and a healthy corporate culture that is strongly connected to our mission and puts the customer at the centre of everything we do. As our workforce continues to expand, we work hard to intentionally shape the culture that will enable us to grow and deliver for our customers in the future. Over the past few years, we have introduced a range of training and leadership development programs to evolve our organisational culture to ensure it continues to support our business strategy and long- term growth goals. 80% We are pleased to report that overall employee engagement continues to remain strong at 80%, with 91% of employees reporting that they feel proud to tell people they work at Cochlear and 94% understanding how they contribute to the satisfaction of our customers. Employee engagement Broadening incentives to benefit more employees Our total reward framework is an important part of building a strong and cohesive culture. In FY22, we introduced changes to our reward offering to achieve greater alignment and consistency of how we reward employees across the business. The key highlights include aligning employees to the global short term incentive plan, ensuring more of our employees have some form of performance- based reward, and introducing a new global employee share plan. These changes support our cultural priorities, improve our market competitiveness to ensure we are able to attract and retain talent across all the markets in which we operate, and provide an opportunity for our employees to own shares in the company and be part of our future success. 18 Cochlear Limited Annual Report 2022 A focus on career development and internal promotion helps build thriving people. Melinda joined Cochlear 13 years ago as an Engineering Intern with a desire to grow in a dynamic and collaborative environment and contribute to the health and well-being of society. She believes that rotating through different departments is a fantastic way to get a glimpse of the career possibilities ahead. Melinda is currently a Professional Marketing Manager for our Australia & New Zealand team. She credits her growth and success to understanding her strengths, building supportive networks across the organisation and having a realistic action plan to develop her skills. Reflecting on her experience, she says, “I have developed from a quiet achiever to a people leader because of the career opportunities at Cochlear.” Gender equality Support and flexibility Achieving gender equality is one important element of our Diversity and Inclusion strategy. We strive for a gender balance of 40:40:20, which means that 40- 60% of either gender is represented (40% women, 40% men, 20% open). We are committed to ensuring the safety and wellbeing of our people. We also support our employees in better integrating their work and personal commitments so they can thrive at both work and home. By year end we achieved 41% female representation amongst our senior leaders, exceeding our 40% target 18 months ahead of expectations. And at Board level, the target of at least 30% female representation on the Board was achieved in FY21, with 33% female directors by year end. Achievement of this target is supported by focused activities in the areas of talent and succession planning 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. Flexible work is a foundational piece of our global Diversity and Inclusion framework and is key to supporting employee wellbeing by providing our people with different ways of working, no matter their life stage or responsibilities. As employees return to the workplace following the easing of COVID restrictions, we are seeing a greater uptake of flexible working arrangements, which is working well, supported by the rapid evolution of our IT infrastructure to enable efficient and inclusive remote working capabilities. We continue to educate and support our employees working in a hybrid work environment and have provided additional resources to support both physical and mental health, with a focus on staying connected to colleagues. 19 Cochlear Limited Annual Report 2022 Letter to shareholders Board renewal Reconciliation Action Plan Over recent years we have continued our process of Board renewal, adding new directors with diverse perspectives and relevant experience, while maintaining continuity and corporate knowledge. We are pleased with our recent appointments, with Christine McLoughlin, Michael Daniell and Michael del Prado adding valuable new perspectives to our Board discussions. We look forward to working with Karen Penrose who joined the Board in July. Karen is a highly respected company director and Audit and Risk Committee Chair, having served on the boards of a number of ASX100 companies and experienced across health care, financial services, property and infrastructure industries. Prior to this, Karen had a distinguished executive career in senior leadership and Chief Financial Officer roles in financial services. Her skills and executive, board and governance experience will be invaluable to Cochlear and serve to further enhance the financial expertise of the Board. We believe that our Board has an appropriate mix of skills and experience and as we consider ongoing renewal, we will continue to review the skills needed to best serve Cochlear now and into the future. In December we proudly launched our first Reconciliation Action Plan (RAP). In recent years we have made some small but significant steps in advancing reconciliation and celebrating the unique and central role of First Nations peoples in Australia’s past, present and future. As a leading Australian company – and one with a mission to help people hear and be heard – we can and must do more. Our Reflect RAP formalises this commitment and sets out a pathway for us to explore opportunities to have real influence and impact. This includes helping to tackle the ear and hearing health gap between First Nations and non- First Nations Australians. The Reconciliation Australia framework sets out four domains for action – relationships, respect, opportunities and governance. We have developed commitments and actions across these domains that reflect the unique opportunities and issues for Cochlear and our sector including supporting improvement of First Nations hearing and ear health, and healthcare support systems, and promoting Science, Technology, Engineering and Math (STEM) development and career pathways for First Nations students. Other priority actions include improving employment opportunities and outcomes for First Nations peoples within Cochlear, increasing support for First Nations suppliers and working towards creating a culturally safe and welcoming workplace for First Nations peoples. 20 Cochlear Limited Annual Report 2022 The Joy of Sound artwork by First Nations design agency, Balarinji, was commissioned by Cochlear to tell the story of our foundation and beginnings. It represents Professor Graeme Clark’s determination to find a new and more effective way to treat hearing. It reflects our mission to help more people hear and be heard, to connect with others and live a full life. 21 Cochlear Limited Annual Report 2022 Letter to shareholders Sustained value To deliver consistent revenue and earnings growth over time, we balance maximising spending to grow the market with investment to maintain our competitive position while ensuring we have agile, efficient and environmentally responsible business processes to support our growth ambitions. Pathway to net-zero carbon emissions We are committed to taking an active role in the global effort to tackle climate change, targeting net- zero emissions in our operations (Scope 1 and 2) by FY30 and across our value chain (Scope 1, 2 and 3) by FY50. Our carbon reduction strategy is aligned with the Science Based Target Initiative (SBTi) and is consistent with efforts to limit warming to 1.5 degrees above pre-industrial levels. We have a relatively low level of carbon emissions as a business, with around 50% of total FY19 reported carbon emissions generated from Scope 3 – or indirect – emissions, with business flights our single biggest source of reported carbon emissions. For these Scope 3 emissions, we have a target of 50% reduction in business flight-related emissions by FY25. We are in the process of developing a complete Scope 3 inventory and will define our broader Scope 3 SBTi-aligned target by FY25. Our targets reflect our strategy of transitioning to renewable energy as well as the broader global transition toward a net-zero economy. By the end of FY22, manufacturing at five of our six facilities had transitioned to 100% renewable energy, with the sixth transitioning in July 2022. Underlying net profit increases 18% to $277 million Underlying net profit** increased 18% (10% in CC) to $277 million, within the guidance range of $265- 285 million, and with an underlying net profit margin of 17%. Excluding the impact of cloud computing- related expenses, the underlying net profit margin was 18%, in line with our long-term target. Statutory net profit of $289 million benefited from $12 million in one-off gains, primarily relating to the revaluation of Epiminder. Record sales revenue of $1,641 million, an increase of 10% (9% in CC), was driven by strong demand for acoustic implants and sound processor upgrades with all regions and product segments tracking above pre-COVID levels. Gross margin increased from 73% to 75%, aligned to the 75% longer-term target. Operating expenses increased by 15% (15% in CC), reflecting growing investment in R&D and market growth activities with a material increase in cloud computing-related investment. Excluding cloud investment, operating expenses increased 13%. 22 * Constant currency. ** Excluding one-off and non-recurring items.Cochlear Limited Annual Report 2022 Sustained value means having environmentally responsible business processes to support our growth ambitions. We are taking practical action to meet our targets of reducing Scope 2 carbon emissions and moving our manufacturing to 100% renewable energy. Our site at Lane Cove, Sydney was our first global headquarters and manufacturing facility. As part of a project to modernise and improve the environmental performance of the site, we are installing a 750-kW roof top solar system, which will generate onsite renewable electricity. Once installed the system will nearly halve the facility’s demand for grid power, reducing its Scope 2 carbon emissions by just over 50% from our FY19 baseline. Strong financial position The balance sheet remains strong, with operating cash flows sufficient to fund investing activities and capital expenditure whilst delivering dividends to shareholders. Net cash increased $22 million to $587 million, driven by strong free cash flow generation, with operating cash flows increasing by $111 million to $377 million and free cash flow increasing $57 million to $238 million. A final dividend of $1.45 per share has been determined, with full year dividends declared of $3.00 per share, an increase of 18% on last year and representing a payout of 71% of underlying net profit. Investing to improve efficiency and agility We are strengthening our business processes and IT platforms to improve efficiency and agility with an investment of $100-150 million in cloud- based technology solutions over four to five years. Successfully executing this transformation program will enable us to scale more effectively and provide even better solutions for our customers. In April 2021, the International Financial Reporting Standards Interpretations Committee handed down an accounting interpretation on the treatment of cloud computing arrangements, which limits the ability to capitalise customisation and configuration costs related to cloud computing products. As a result, investment in cloud computing has been reclassified from capital expenditure to operating expenses, effective from FY21. This change has no impact on cash flow but reduces reported profits. As the change in accounting treatment has coincided with the commencement of a major investment in cloud-based technology, we expect it to impact our ability to deliver our net margin target of 18% over the next few years. For FY22, $22 million before tax ($15 million after tax) of cloud computing-related investment was recognised as an operating expense (previously would have been reported as capital expenditure). FY21 financials have been restated to reflect the change with operating expenses increasing by $4 million ($3 million after tax). 23 Cochlear Limited Annual Report 2022 Letter to shareholders Proposed Oticon Medical acquisition In April we agreed to acquire Oticon Medical for DKK850 million (approx. $170 million) following Demant’s decision to exit its hearing implants business activities. As part of the transaction, we have committed to providing ongoing support for Oticon Medical’s base of approximately 75,000 hearing implant recipients, which includes cochlear and acoustic implants. We look forward to welcoming Oticon Medical’s implant customers to the Cochlear family. Driven by our mission to innovate and deliver a lifetime of hearing outcomes, we will seek to ensure that Oticon Medical’s customers continue to be supported with a lifetime of hearing solutions. We will work closely with Demant to ensure a seamless transition, with continued access to current Oticon Medical technology for customers in the coming years. We will develop next generation sound processors and services that will enable customers to transition to and benefit from Cochlear’s technology platform over time. The acquisition of Oticon Medical will provide us with greater scale and will enable us to increase our investments in R&D and market growth activities. While Cochlear is a market leader in implantable hearing, we are a small player in the hearing loss segment where hearing aids remain the primary treatment option. Oticon Medical is expected to add $75-80 million to annual revenue. The business is currently loss making. Our priority post-closing of the transaction will be to determine and implement a plan that returns the business to profitability as quickly as possible. Integration costs, which include the development of compatible next generation sound processors, are yet to be determined and could range from $30-60 million. Completion of the transaction is conditional upon satisfaction of customary closing conditions and receipt of competition approvals in jurisdictions where the transaction meets relevant notification thresholds. Cochlear will not be assuming any liability for issues that may arise from the voluntary field corrective action for Oticon Medical’s Neuro Zti cochlear implant announced in October 2021. 24 Cochlear Limited Annual Report 2022 FY23 outlook As we look to the future, we remain confident of 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. Our clear growth opportunity and strategy, combined with a strong balance sheet, mean we are well placed to create value for our stakeholders now, and over the long term. For FY23, we expect to deliver underlying net profit of $290-305 million, a 5-10% increase on FY22 underlying net profit, an increase of 8-13% when adjusted for the increase in cloud computing-related expenses. We expect to deliver strong growth in sales revenue and around 18% underlying net profit margin before cloud computing-related expenses. FY23 net profit is expected to be weighted to the second half. We expect trading conditions to progressively improve across the year, with intermittent COVID-related hospital or region- specific elective surgery restrictions likely to continue. The release of the Cochlear™ Nucleus® 8 Sound Processor is expected to contribute from the second quarter as commercial availability commences in European countries. The new sound processor is expected to be launched across other markets by the end of December, subject to the timing of regulatory approvals. Launch costs are expected to be primarily incurred during the first half, with sales revenue weighted to the second half. We will continue our investment in R&D and market growth activities to support long-term market growth. Cloud computing-related investment is expected to lift in FY23 to around $36 million ($25 million after tax), a $14 million increase ($10 million after tax) on FY22. Guidance is based on a 70 cent AUD/USD and 68 cent AUD/EUR. Capital expenditure is expected to be around $80 million. The Board maintains a dividend policy that targets a 70% payout of underlying net profit. Guidance does not factor in earnings from the proposed acquisition of Oticon Medical, which is expected to complete by end CY22. A more material disruption from COVID or hospital capacity restrictions that significantly impacts sales remains a risk factor that does not form part of guidance. Alison Deans Chair Dig Howitt CEO & President 25 Cochlear Limited Annual Report 2022 Our strategy Our goal is to deliver value by helping more people to hear, which contributes to building a healthier and more productive society. We have a responsibility to be here to support a lifetime of hearing for the children, and adults, being implanted with our devices, which means we need to deliver sustainable financial growth, benefiting all our stakeholders. We achieve this through market-leading innovation capabilities in conjunction with a global network of experts and collaborators; the strong and trusted relationships we build with our candidates, recipients, professional customers and payers; and our employees who are central to how we deliver our strategy and create value. The following pages outline our strategy to create long-term value. We have a long track record of delivering growing sales revenue, profits and dividends which stems from maintaining focus on our core strength, implantable hearing solutions, a multi-decade philosophy of investing to grow, combined with disciplined management of capital. This focus continues to drive us into the future. Our mission Our strategy Value creation The passion that drives the organisation and focuses the strategy • Empower • Transform • Innovate Where we focus our time and resources to create value • Growth opportunity • Strategic priorities • A stronger organisation How the outcomes of our activities impact all key stakeholders - our customers, our people, our shareholders and society more broadly • A healthier & more productive society • Empowered customers • A lifetime of hearing solutions • Thriving people • Sustained value How we create value Growth opportunity Our growth opportunity is compelling and has remained unchanged for many years. Hearing loss is a prevalent and under-treated condition and implantable hearing solutions provide life-changing outcomes for recipients. Importantly, they provide a cost-effective solution for all age groups, delivering significant returns on the investment made by the healthcare system. The factors driving industry growth include: • Hearing loss is prevalent and under-treated • Cochlear implants are a cost-effective solution for all age groups • Product indications are broadening and funding is expanding • Cochlear implants can deliver superior outcomes to hearing aids for indicated patients • Good hearing is essential for healthy ageing 26 Cochlear Limited Annual Report 2022 Strategic priorities Our strategic priorities outline how we focus our time and resources to create value. Retain market leadership We are committed to retaining our market leadership position in the industry by continuing to make substantial investments in R&D that enable us to bring to market implantable hearing solutions that deliver a lifetime of hearing outcomes. Grow the hearing implant market We grow the hearing implant market by transforming the way people understand and treat hearing loss. Our efforts are targeted at improving awareness, expanding access and building on the clinical evidence that demonstrates the effectiveness of our products. Deliver consistent revenue & earnings growth To deliver consistent revenue and earnings growth over time, we balance maximising spending to grow the market with investment to maintain our competitive position. A stronger organisation To be successful over the long term, our organisation needs to be strong, agile and sustainable to enable us to execute our strategy, support our customers and deliver on our growth ambitions. Our key priorities in strengthening our organisation are centred around shaping our culture, creating value sustainably and being agile and efficient. Shaping our culture Our people are our most valuable asset and are an engaged, capable, high-performing and diverse team. The way our people work together is a critical determinant of our success. Creating value sustainably We have a responsibility to be here to support a lifetime of hearing for the children, and adults, being implanted with our devices, which means we need to deliver sustainable financial growth. Sustainable business practices contribute to the creation of long-term value for all our stakeholders. Being agile and efficient We are investing in strengthening our business processes and IT platforms to improve efficiency and agility. Successfully executing this transformation program will enable us to scale more effectively and provide even better solutions for our customers. 27 Cochlear Limited Annual Report 2022 Value creation Value creation describes the impact we have on all our key stakeholders – our customers, our people, our shareholders as well as society more broadly. For us, success will be defined by building a healthier and more productive society, having empowered customers, providing a lifetime of hearing solutions for our recipients and having thriving employees. Doing these things well should enable us to achieve sustainable financial returns over time. The value we create Strategic focus Over the coming years, we are focusing our efforts on delivering value across the following initiatives and/or achieving important targets. A healthier & more productive society Empowered customers Grow the hearing implant market • Improve the awareness of cochlear and acoustic implants World-class customer experience • Grow connectivity and • Broaden reimbursement and improve the indications for cochlear and acoustic implants engagement with recipients • Introduce connected care solutions and skills training tools for recipients • Support the development of consistent • Introduce sound processor practice guidelines to strengthen the referral pathway for adults • Build on the clinical evidence that supports the superior outcomes of cochlear implants over hearing aids for people with severe or higher hearing loss • Collaborate with research institutions studying the links between hearing loss and healthy ageing upgrades that provide functional and aesthetic benefits • Develop technology solutions that provide greater convenience and confidence to professional customers How stakeholders benefit Success means achieving the following outcomes for our stakeholders: Payers and society more broadly • Appropriate funding for a cost- effective intervention • Standard treatment pathway for implantable hearing devices for all age groups • Education and productivity opportunities for children and adults • Understanding of the link between good hearing and healthy ageing and the need to take action Our customers Services that deliver: • Convenience and confidence • Improving quality of life • Improving hearing outcomes • Positive customer experience • Reduced cost to serve for professional customers 28 Cochlear Limited Annual Report 2022 A lifetime of hearing solutions Thriving people Sustained value Market-leading technology • Maintain market leadership through growing levels of investment in R&D (targeted at 12% of sales revenue) • Innovation focus on hearing implants, sound processing technology, connectivity and clinical and surgical support • Introduce new products that provide improved hearing outcomes, functionality, connectivity and aesthetic benefits A stronger organisation • Learning and development to facilitate innovation • Talent attraction and retention • Strengthen and nurture the organisational culture • Competitive, inclusive compensation and benefits to attract, motivate and retain talent • Succession planning • Embracing diversity in all forms Our customers Products that deliver: • High quality and reliability • Improving hearing outcomes for both new and existing customers from next generation implants and sound processors • Improving quality of life • Expanded product indications Our people • Engaged, capable and high- performing employees • Diverse, equitable and inclusive workplace • Strong health, wellbeing and safety culture Consistent & sustainable growth • Optimise growth investment • Target an 18% net profit margin over the long term • Target net-zero carbon emissions in our operations by 2030 and across our value chain by 2050 • Grow our contribution to the United Nations Sustainable Development Goals • Maintain a strong balance sheet • Improve efficiency and agility • Maintain high levels of corporate governance Our shareholders Creating value sustainably • Consistent financial performance • Disciplined capital management • Strong corporate governance • Ethical and sustainable supply chain Advancing environmental responsibility • Reduced carbon emissions • Smaller environmental impact 29 Cochlear Limited Annual Report 2022 Growth opportunity 1.3.5 ESTIMATES OF HEARING LOSS9 Growing awareness of the cost-effectiveness and quality of life benefits of our products has the potential to underpin long-term industry growth. Hearing loss currently affects more than 1.5 billion people or 20% of the global population; the majority of these (1.16 billion) have mild hearing loss. However, a substantial portion, or 430 million10 people (i.e. 5.5% of the global population) experience moderate or higher levels of hearing loss which, if unaddressed, will most likely impact their daily activities and quality of life. More detailed information about the severity and distribution of hearing loss is presented in the following data. Opportunity Description HEARING LOSS ACCORDING TO SEVERITY Hearing loss is prevalent and under-treated The World Health Organization estimates that there are over 60 million people worldwide who experience severe or higher hearing loss.1 A challenge for hearing care providers is that less than 5% of the people that could benefit from an implantable hearing solution have received one.2 Cochlear implants are a cost-effective solution for all age groups Cochlear implants provide life-changing outcomes for recipients, empowering them to connect with others and live a full life. Besides the 1.16 billion people worldwide with mild hearing loss, about 400 million live with hearing loss that ranges from moderate to severe; nearly 30 million have profound or complete hearing loss in both ears (Figure 1.5). Figure 1.5 Number of people and percentage prevalence according to grades of hearing loss >60m people with severe or higher hearing loss Figure 1.5 Number of people and percentage prevalence according to grades of hearing loss 1153 million 266 million 103 million 30.7 million 17.2 million 12.6 million 14.9% 3.4% 1.3% 0.4% 0.2% 0.2% Mild Moderate Moderately severe Severe Profound Complete Globally 1.5 billion people live with hearing loss Source: World Health Organization; 2021 9 GBD 2019 Hearing Loss Collaborators. Hearing loss prevalence and years lived with disability, 1990–2019: findings from the Global Burden of Disease Study 2019. The Lancet. (2021). doi: 10.1016/S0140-6736(21)00516-X. 10 Refers to number of people with hearing threshold higher than 35 dB in the better hearing ear. The estimated lifetime societal costs for a pre-lingual deaf child in developed markets exceeds US$1.5 million.3-5 40 WORLD REPORT ON HEARING They also provide a cost- effective solution for all age groups, delivering significant returns on the investment made by the healthcare system. The effective use of implants is cost-effective in adults and seniors with an estimated return on investment of 10:1.6 Cochlear implants can deliver superior outcomes to hearing aids for indicated patients Cochlear implants can provide a significant improvement in hearing outcomes and quality of life when compared to hearing aids for many people with a severe or higher hearing loss. We are the market leader in cochlear implants but a small player in the severe or higher hearing loss segment where hearing aids dominate >60% global market share ~4% global market share Cochlear implant market share Hearing devices treating the severe or higher hearing loss segment 30 Cochlear Limited Annual Report 2022 How we are responding We are focused on transforming the way people understand and treat hearing loss through awareness and access activities aimed at improving the penetration of implantable hearing solutions. For cochlear implants, three key market segments have been prioritised comprising adults and seniors in developed markets, children in developed markets and children in emerging markets, with strategies to improve awareness and access that vary by segment. For acoustic implants, we have developed the Cochlear™ Osia® 2 System, a product that we believe provides the opportunity to drive deeper category penetration by providing a significant improvement in performance and aesthetics for bone conduction patients. We collaborate closely with governments, academic and research institutions, hearing care providers, consumer and professional representative NGOs and significant health setting bodies such as the WHO to build awareness of the importance of properly treating hearing loss. And our investment in R&D continues to focus on improving outcomes for recipients which broadens the population of candidates that can benefit from our hearing solutions. The cost-effectiveness of health interventions is becoming a more important consideration in the allocation of healthcare spending with payers increasingly demanding cost-effectiveness data to support funding for health interventions. We believe we are well positioned with many studies demonstrating the cost-effectiveness of cochlear implants for both children and adults with severe or higher hearing loss. 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.3-5 The effective use of implants is cost-effective and has been proven in adults and seniors with an estimated return on investment of 10:1.6 Dementia and other cognitive decline diseases are some of the costliest conditions to treat in the world7, at an estimated US$1 trillion in 2018 and estimated to double by 2030.8 Unfortunately, individuals with severe hearing loss are almost five times more likely to develop dementia than people without hearing loss. A challenge for professionals and consumers is understanding the potential improvement in hearing outcomes that can be attained from a cochlear implant. There is a growing body of evidence of the superior outcomes of cochlear implants over hearing aids for many people with a severe or higher hearing loss (>70dB).9 In 2018, a Cochlear study of recipient experiences10 found that the number of participants reporting satisfaction with their hearing performance increased significantly after receiving a cochlear implant, rising from 9% when using hearing aids only to 95% after receiving a cochlear implant. In 2021 a trial commenced to compare communication and quality of life outcomes for adults with cochlear implants compared to hearing aids. Cochlear has provided funding to the University of Nottingham, UK, for the trial, which will aim to provide gold standard clinical evidence of the relative efficacy of cochlear implants for this patient group, with results expected in the next several years. These studies are important in helping to educate hearing aid professionals and cochlear implant candidates on the benefits of cochlear implants when compared to hearing aids. 31 Cochlear Limited Annual Report 2022 Growth opportunity Opportunity Description Product indications are broadening and funding is expanding Product indications and funding are expanding as payers increasingly recognise the improved outcomes and cost-effectiveness of our implantable solutions. US: lowered the age of cochlear implantation from 12 to 9 months and included single- sided deafness as an indication for Cochlear’s Nucleus implant Japan, UK and Belgium: expansion of reimbursement criteria for cochlear implants to include severe hearing loss Cochlear™ Osia® 2 System: reimbursement achieved across a number of countries including the US, Germany and UK New Zealand: cochlear implant funding to reduce the adult waiting list Australia: reimbursement for remote programming of cochlear and bone conduction implants France: reimbursement approved for Baha sound processors Good hearing is essential for healthy ageing Growing understanding of the link between good hearing and healthy ageing Cognitive decline Hearing loss associated with accelerated cognitive decline and dementia in older adults.14 Depression Significant association between hearing impairment and moderate to severe depression.15-17 Falls Higher risk of dizziness causing falling.16 Hearing loss is particularly prevalent in people over the age of 60, with one in four suffering moderate or higher hearing loss.11 There is a growing understanding of the importance of properly treating hearing loss in this age group. It affects communication and is associated with social isolation, anxiety, depression and cognitive decline.12 Social isolation Hearing loss linked to withdrawal from social interactions, which can have a significant impact on psychological well-being and physical health.18-19 Ability to work Hearing loss can affect sufferers’ ability to work or stay in the workforce.20-22 Loss of independence Seniors with hearing loss less likely to be able to self-care.17 32 Cochlear Limited Annual Report 2022 How we are responding Cochlear implants started as a solution for people with a profound hearing loss, equivalent to a hearing loss of greater than 90 decibels (dB). Advancements in the technology have driven significant improvements in hearing outcomes for patients with our products today able to provide life-changing outcomes for people with a severe or higher hearing loss (>70dB). At the same time, there is a better understanding of the importance of properly treating hearing loss as we age and a growing body of evidence supporting the cost-effectiveness of cochlear implants. These factors have driven an expansion of indications and/or funding in many markets over the past few years, including the UK, US, Japan, France and Belgium. Our job is to continue to work with governments and payers to recognise the benefits of treating hearing loss so we can continue to increase access to our products. Cochlear implantation for seniors is an important trend, with hearing loss ranked as the leading cause of global years lived with disability for people over the age of 70.13 We have been increasing our public advocacy engagement, our investment in health economics, our market access capability and the collaborations we have with the medical research community to build on the clinical evidence that demonstrates the effectiveness of our products, particularly for seniors. In 2018, we pledged to gift US$10 million over 10 years to the Johns Hopkins Bloomberg School of Public Health to establish the ‘Cochlear Center for Hearing and Public Health’. The Center is the first of its kind at any academic institution focused on addressing hearing loss as a global public health priority. 33 Cochlear Limited Annual Report 2022 Strategic priorities: Retain market leadership We create value through innovation, bringing to market new products and services that improve hearing outcomes and provide a lifetime of hearing solutions for recipients. Cochlear has been the global leader in implantable hearing solutions for over 40 years. The investment in R&D aims to strengthen our leadership position through the development of market-leading technology. We invest around 12% of sales revenue each year in R&D, with over $2 billion invested since listing. We have a global innovation network with over 500 R&D employees across the globe. Primary R&D is co- located with the Australian Hearing Hub in Sydney, with the ‘Cochlear Technology Centre’ in Mechelen, Belgium focused on advanced innovation. We have over 100 research partners in over 20 countries and a global network of design consultants and suppliers. Our market-leading product & services portfolio Cochlear implants Acoustic implants Benchmark in size, implant reliability and neural interface, with proven perimodiolar advantage Benchmark in performance and aesthetics Cochlear™ Nucleus® Profile™ Plus implant Slim Modiolar electrode Cochlear™ Osia® 2 System Sound processors Benchmark in size, smartphone connectivity and hearing performance Cochlear™ Nucleus® 7 Sound Processor Cochlear™ Nucleus® Kanso® 2 Sound Processor Cochlear™ Baha® 6 Max Sound Processor 34 Cochlear Limited Annual Report 2022 Convenience & confidence Apps and rehabilitation tools aimed at improving ease of use and quality of life for recipients Nucleus, Baha & Osia Smart Apps Cochlear™ CoPilot Clinical & surgical support Streamlining customer care for surgeons and clinicians Custom Sound® Pro Fitting Software Nucleus® SmartNav System Telehealth solutions Convenient, at-home testing for routine cochlear implant checks outside the hearing clinic Responsive & convenient service Cloud-based service reducing time spent ‘off air’ when recipients need a replacement processor Remote Check solution for cochlear implants Cochlear™ Remote Assist Cochlear™ Link 35 Not all products are available in all countries.Cochlear Limited Annual Report 2022 Strategic priorities: Grow the hearing implant market We grow the market by transforming the way people understand and treat hearing loss. Our efforts are targeted at improving awareness, expanding access and building on the clinical evidence that demonstrates the effectiveness of our products. Our biggest opportunities to create value will be from building a sustainable adult referral pipeline for cochlear implants and by broadening the acoustics market. Segment Description Cochlear implants: Children in developed markets Cochlear implantation has been established as the standard of care for newborns across many developed markets, with bilateral implants indicated across most markets as evidence supports the benefit of binaural hearing. Addressable market* ~130,000 people Current penetration* >80% under 3-year-old children Cochlear implants: Adults and seniors in developed markets Adults and seniors in the developed markets provide the biggest opportunity for us to address the unmet need for hearing implants given the large, and growing, market size as the population ages and the low levels of penetration. Addressable market* >6m people Current penetration* ~3% 36 * Cochlear estimates of segment prevalence of severe or higher hearing loss.Cochlear Limited Annual Report 2022 What are we doing Cochlear implants started as a solution for children with a profound hearing loss. Over the last 30 years, neonatal screening has been successfully established across the developed world leading to high rates of cochlear implantation for children. The key priority for this segment is to maintain our leadership position while aiming to improve the rate of implantation, and/or the uptake of bilateral implants, in markets where current levels are below average. There is also an opportunity to strengthen the treatment pathway for acquired or progressive hearing loss in older children. Lack of screening for children who have progressive hearing loss in childhood means that hearing loss often remains unidentified and without care. The WHO’s World Report on Hearing notes the importance of hearing in education and says that the inclusion of ear and hearing care in school health services is essential. It highlights pre-school and school children as a group ‘at risk’ and proposes that screening and early intervention programs be put in place for this group as part of the holistic package of ear and hearing care interventions it proposes all countries adopt. According to the WHO, hearing loss is particularly prevalent in people over the age of 60, with 65% experiencing hearing loss and one in four people suffering moderate or higher hearing loss. It affects communication and is associated with social isolation, anxiety, depression and cognitive decline.1 The segment is however challenging to penetrate as most candidates suffer from a progressive hearing loss and, together with their care providers, either do not know about cochlear and acoustic implants or do not understand the indications for them. While penetration rates are currently very low, at around 3%, the seniors segment has been the fastest growing segment for us over the past few years as awareness begins to improve. We have three programs for driving growth of the adults and seniors segment including: • Direct-to-consumer (DTC) marketing – building awareness directly with candidates motivated to find a better solution for their hearing loss; • Hearing aid channel referrals – building a referral path from hearing aid and ENT clinics to cochlear and acoustic implants; and • Standard of care initiatives – supporting initiatives to deliver a consistent treatment pathway for all adults with severe or higher hearing loss. 37 Cochlear Limited Annual Report 2022 Strategic priorities: Grow the hearing implant market Segment Description Cochlear implants: Children in emerging markets Cochlear’s emerging markets business has been growing rapidly as awareness of cochlear implants increases and wealth grows across many emerging economies. Addressable market* >1.3m people Current penetration* <10% Acoustic implants: Next generation bone conduction hearing solutions The bone conduction market is under-penetrated and currently has limited geographic reach. We have developed a product that we believe provides the opportunity to drive deeper category penetration. Addressable market* >3m people in developed markets Current penetration* <1% 38 * Cochlear estimates of segment prevalence of severe or higher hearing loss and mixed or conductive hearing loss.Cochlear Limited Annual Report 2022 What are we doing China has become a leading market for cochlear implants driven by a commitment from the government to fund implants for children, which has driven the development of clinical infrastructure. Most other markets however remain under-penetrated. Our priorities for this segment are focused around market expansion with activities targeted at: • Building awareness – public education campaigns, direct-to-consumer marketing and hearing screening; • Expanding funding – driven by the compelling health economics of implantation in children; • Expanding our presence – distributor relationships combined with an expanding direct presence; • Developing professional capability – surgeon training and audiology education; and • Maximising penetration through a tiered product offering. We have recently introduced the next generation of bone conduction hearing solutions into our Acoustics portfolio with the Cochlear™ Osia® 2 System, providing a significant improvement in performance and aesthetics for bone conduction patients. Pre-market trials have demonstrated significant improvements in outcomes for patients2 over traditional bone conduction hearing solutions, and we are already experiencing high demand for the new implant in the US, where it was first launched. We believe the Osia 2 System has the opportunity to become the gold standard acoustics implant in our current markets, more effectively competing with reconstructive surgery, and is the right product to pursue geographic expansion, with our Acoustics business today generating the majority of revenue from just two markets, the US and UK. 39 Cochlear Limited Annual Report 2022 Strategic priorities: Grow the hearing implant market Developing a treatment pathway for adults Standard of care initiatives aim to establish a consistent process for diagnosing and referring adult cochlear implant candidates by all healthcare professionals. Adults and seniors in the developed markets provide the biggest opportunity for us given the large, and growing, market size as the population ages and the low levels of penetration. One of our challenges is that awareness of cochlear implantation among primary and hearing health care clinicians is inadequate, leading to poor identification of eligible candidates. Clearer referral and cochlear implantation candidacy pathways would help increase access to cochlear implants.3 We are making investments in long-term initiatives to develop a standard clinical pathway for adults that aims to establish a more sustained referral model. These investments are geared towards: • Developing consistent referral guidelines to enable early identification and referral; • Building clinical and economic evidence that compels early adult referral and coverage; and • Driving awareness and advocacy through hearing professionals. Developing consistent referral guidelines The development of a standard treatment pathway for care by which all healthcare professionals diagnose, refer and treat adults eligible for cochlear implants has many aspects and requires a co-ordinated effort between industry, hearing health professionals and public policy makers. There have been some important developments over the past few years. In 2020 a global consensus on a minimum standard of care for treating adult hearing loss with a cochlear implant was published in the leading Journal of the American Medical Association, JAMA Otolaryngology. This International Consensus Paper is an important step forward, providing the foundation for the development of formal clinical practice guidelines. In 2021, the World Health Organization (WHO) provided guidance for establishing evidence-based programs for hearing screening via the World Report on Hearing4, aimed at improving the identification and treatment of hearing loss in target age-groups, including adults. And in 2022, the ‘Living Guidelines’ initiative was established, an international taskforce of over 50 leading cochlear implant professionals, academics and cochlear implant users tasked with delivering clinical guidelines to enable early identification and referral for cochlear implant candidates. The initiative aims to create guidelines that can be adapted and adopted in country to optimise the care for adults eligible for cochlear implants. 40 Cochlear Limited Annual Report 2022 “It’s like I’m reliving my life” Lou Ferrigno, on hearing with a cochlear implant Stories from hearing implant recipients also help to raise awareness of the benefits of implantable hearing solutions, and give candidates the confidence to consider whether their current hearing aid is bringing them any benefit. Since May 2021, we’ve been working with Lou Ferrigno, 69, actor, fitness expert and retired bodybuilder, to share his story about receiving a cochlear implant and addressing his hearing loss. Most known for his role in the TV series “The Incredible Hulk” and for being the youngest – and only – two- time consecutive and Guinness World Record™ holder for the IFBB (International Federation of Bodybuilders) Mr. Universe title, Lou has been impacted by profound hearing loss for almost his whole life. Hearing loss started for him when he was a toddler due to ear infections, and he began wearing hearing aids at 4 years of age. Over the years, Lou tried a number of different types of hearing aids, none of which helped him achieve the hearing he needed. In February 2021, Ferrigno underwent surgery for his cochlear implant, the Cochlear™ Nucleus® Profile™ Plus Implant, and now hears successfully with his Cochlear Kanso® 2 Sound Processor. Taking the step to treat his profound sensorineural hearing loss with a cochlear implant is aiding Lou’s desire to remain fit and healthy as he ages. “I worked very hard to speak and hear with hearing aids for so long, but I finally learned that with my profound hearing loss, the best hearing aid in the world was not going to give me the clarity in speech I needed,” said Lou. “My cochlear implant has so quickly taken me to a new level of hearing. It’s like I’m reliving my life.” Cochlear’s US team have been working with Lou Ferrigno to share his story across media tours, professional conferences, candidate and recipient events and social media. 41 Cochlear Limited Annual Report 2022 Building clinical and economic evidence The evidence supports the establishment of an effective clinical pathway for adults. There is growing recognition that hearing is an essential part of healthy ageing and treating age-related hearing loss is cost- effective. An important first of its kind randomised controlled trial has just commenced in the UK. The Comparing Cochlear implants with Hearing aids in adults with severe hearing loss (COACH) study is the first randomised controlled trial to compare communication and quality of life outcomes with hearing aids to unilateral cochlear implants for adults with severe sensorineural hearing loss. The trial will provide the highest standard of clinical evidence and is aimed at resolving uncertainty associated with the treatment of severe or higher sensorineural hearing loss. The study is being is sponsored by the University of Nottingham and co-ordinated by Nottingham Clinical Trials Unit and Cochlear has provided a grant to conduct the study. The COACH study will assess whether a cochlear implant or hearing aids are better at improving speech understanding for adults with severe hearing loss. Half of the trial participants will be randomly assigned with new hearing aids, with the other half receiving a cochlear implant. A second randomised control trial known as The Aging and Cognitive Health Evaluation in Elders (ACHIEVE) study is being undertaken by our partners at Johns Hopkins University and their Cochlear Implant Center. In observational studies, hearing loss has been independently associated with accelerated cognitive decline and incident dementia. To date, there has not been a randomised trial to determine whether hearing loss treatment could reduce cognitive decline and dementia in older adults. ACHIEVE is taking place at four centres in the US and will be the first randomised controlled trial to test the efficacy of hearing treatment in reducing cognitive decline in older adults. There is growing evidence of the individual and societal economic value of treating age-related hearing loss, with cochlear implants considered to be a highly cost-effective medical intervention. In 2022, The Lancet published the first-ever global investment case for integrating ear and hearing care interventions in countries’ universal health coverage services5. Based on the WHO’s proposed interventions, which include cochlear implants for people with severe or higher hearing loss, the study concluded that the investment required to execute these interventions would result in substantial health gains, with an overall return of nearly US$15 for every US$1 invested. 42 Cochlear Limited Annual Report 2022 Driving awareness and advocacy An important part of developing a treatment pathway for adults involves working with hearing health professionals and patient advocacy groups to amplify the work being done on the referral guidelines and evidence building to create broad-based awareness. We engage with a broad range of advocacy groups globally. The Cochlear Implant International Community of Action (CIICA) was formed in 2021 and is the first global cochlear implant user and family advocacy network. It currently has 80 member organisations across more than 50 countries. CIICA aims to increase the number of people globally who have access to cochlear implants and lifelong support. It does this by raising the awareness of the health, social and economic benefits of cochlear implants for those who could benefit from implantation, to health care practitioners and the wider society. Along with many other groups, CIICA plays an important role in building awareness of cochlear implants and lobbying for changes to funding. The Nordic Adult CI Action Group Declaration is a good example of advocacy in action. The declaration bought together hard of hearing and cochlear implant user associations from five Nordic countries to co-ordinate efforts in improving access to cochlear implants for adults. We also have research partnerships with academic institutions including Johns Hopkins University and Macquarie University, engaging on issues of public health, cost-effectiveness and broad awareness. What standard of care looks like for adults Links between good hearing and healthy ageing established Links between hearing loss, cognitive decline and dementia are understood by all medical professionals Primary care providers routinely assess hearing loss in older patients Professionals know when to refer for a cochlear implant assessment The hearing aid channel is educated and the referral process is simple for a cochlear implant After-care is simple 43 Cochlear Limited Annual Report 2022 Strategic priorities: Deliver consistent revenue and earnings growth We create value by maintaining discipline around our long-term investment model and continuing to refine our capital allocation processes to ensure we optimise investment. We balance maximising spending to grow the market with investment to maintain our competitive position while ensuring we have agile, efficient and environmentally responsible business processes to support our growth ambitions. Investment priority Invest to grow We take a long- term approach to investing and have invested in growing the market for implantable solutions since listing in 1995. Consistent investment in sales and marketing Our investment in sales and marketing activities is building awareness of and access to implantable solutions and driving market growth. The increase in investment in selling, marketing & general expenses (SG&A) over many years has supported sales force expansion and investment in awareness building activities, particularly direct-to-consumer marketing initiatives, across a growing number of markets. Selling, general & administration expenses 44 65836%40%0001020304050607080910111213141516171819202122SG&A expenses ($m)SG&A / Sales revenue %Cochlear Limited Annual Report 2022 Sales revenue $m in CC Revenue drivers Cochlear implants • Growing awareness and uptake by adults and seniors • Emerging market expansion • New products driving market growth and market share Services • Growing recipient base • Greater connectivity and engagement with recipients • Next generation sound processor upgrades Acoustics • New products • Market expansion led by Cochlear™ Osia® 2 System Growing R&D capability Delivering stable net profit margins The investment in R&D continues to strengthen our leadership position through the development of market-leading technology. We have a wide range of fully featured products and a broad patent portfolio that protects our intellectual property. Over $2 billion has been invested in R&D since listing and we target an annual R&D investment of 12% of sales revenue. We will continue to invest operating cash flows into market growth activities with the objective of delivering consistent revenue and earnings growth over the long term. Through disciplined investment, we are targeting to maintain the net profit margin, reinvesting any efficiency gains, currency or tax benefits into market growth activities. R&D Net profit margin 45 * Excluding one-off and non-recurring items.21115%13%969798990001020304050607080910111213141516171819202122R&D expenditure ($m)R&D / Sales revenue %27715%18%17%969798990001020304050607080910111213141516171819202122Net profit* ($m)Net profit* / Sales revenue %935504202-4509001,3501,80013141516171819202122Cochlear implantsServicesAcousticsCochlear Limited Annual Report 2022 Strategic priorities: Deliver consistent revenue and earnings growth Investment priority Operational improvement Disciplined capital investment and optimising cost of production strengthens our competitive position. Disciplined use of capital Operating cash flows have been primarily used to fund dividends, capital expenditure and acquisitions. The dividend policy has been to target a payout 70% of underlying net profit as dividends to shareholders since FY00.* Since listing, we have cumulatively paid out around 70% of operating cash flows as dividends. Key acquisitions have been focused on building the core implant business and include: • Sycle – hearing aid practice management software business (FY17) • Otologics – implantable microphone technology (FY10) • Brisbane manufacturing facility (FY07) • Entific – bone conduction implant business (FY05) Cumulative use of operating cash flows since listing The innovation fund has invested around $140 million in companies with novel technologies that may, over the longer term, enhance or leverage our core technology. The innovation fund includes investments in Nyxoah, Precisis, Epiminder, Seer Medical and Sensorion. High return on capital employed (ROCE) ROCE measures the cash return for each dollar invested in the business. We generate a high ROCE reflecting our competitive position in the market and the high barriers to entry to the cochlear implant industry which have proven to be robust over many decades. The high ROCE is also a function of the relatively low level of tangible assets employed by the business. Our competitive advantage is driven by our strong product and patent portfolio, a result of investment in R&D over many years, as well as customer knowledge and strong relationships. As R&D investment is expensed through the income statement, no value for this important asset is captured on the balance sheet. ROCE Investment priority Strong financial position Strong free cash flow generation provides funding for market growth activities and R&D as well as the ability to reward shareholders with a growing dividend stream. 46 Capitalexpenditure22%Acquisitions& other12%Dividends66%1,09922%26%969798990001020304050607080910111213141516171819202122Capital employed ($m)ROCE % (after tax EBIT* / Capital employed)Cochlear Limited Annual Report 2022 Stable gross margin Capital employed The gross margin has been relatively stable since listing. We use our scale to generate efficiency gains to reinvest back into market growth activities. Gross margin Capital employed is comprised of three broad categories: Working capital (24%), which is primarily inventories; Property, plant & equipment (21%) and Intangibles & other (55%). Property, plant & equipment includes our key manufacturing equipment in Australia, Sweden, Malaysia and China. Intangibles & other includes goodwill from acquisitions and innovation fund investments. Capital employed $m Quality operating cash flows Conservative gearing levels One of the highlights of our financial history has been the conversion of reported profits to cash. There has been a strong and consistent correlation between reported net profit and the operating cash flows generated by the business.* We have a strong balance sheet. We are a growth company that has, until FY20, been able to fund investing activities, dividends, capital expenditure and acquisitions whilst maintaining conservative gearing levels. A capital raising in FY20 was made to enhance liquidity in response to the significant impact of an adverse litigation judgement combined with the impact of COVID on sales revenue. Operating cash flow v net profit $m Net cash / (debt) $m 47 * Disrupted in FY20 by the impact of an adverse litigation outcome and COVID. Dividends were suspended in March 2020 until trading conditions improved.** Operating cash flow in FY20-21 excludes the cash impact of patent litigation expenses. 277377969798990001020304050607080910111213141516171819202122Net profit* ($m)Operating cash flows** ($m)1,23074%75%0001020304050607080910111213141516171819202122Gross profit ($m)Gross margin %969798990001020304050607080910111213141516171819202122Working capitalProperty, plant & equipmentIntangibles & other1,099(181)587969798990001020304050607080910111213141516171819202122Net cash / (debt) ($m)Cochlear Limited Annual Report 2022 A stronger organisation To be successful over the long term, our organisation needs to be strong, agile and sustainable to enable us to execute our strategy, support our customers and deliver on our growth ambitions. Shaping our culture Our people are our most valuable asset and are an engaged, capable, high-performing and diverse team. The way our people work together is a critical determinant of our success. Cochlear has a rich history, helping people to hear for over 40 years, underpinned by a strong culture of innovation and customer focus. To continue to serve our customers and fulfil our mission, we have a responsibility to build a reputable and sustainable organisation, now and into the future. We achieve this by nurturing those important elements of our culture that have brought us success, while continuing to evolve, intentionally shaping the culture that will enable us to grow and deliver for our customers as our workforce expands. Over the past few years, our focus has been on building a stronger achievement culture, improving the way we collaborate to achieve company-wide goals. Focused training and development enable us to establish clearer priorities and work more-effectively together, removing boundaries and improving focus on what matters most, our customers. We have continued to develop our systems, processes and organisation design in a deliberate fashion to reinforce this target culture. We have invested in leadership development, notably in Inclusive Leadership and Unconscious Bias and Culture Conversations, with an increased focus on building critical skills and capabilities both at an individual and organisational level. Our top 100 senior leaders and our 100 culture champions – a diverse group of employees from various regions, functions, backgrounds and experience – are engaged in driving and role modelling our culture. This collaborative approach layers a top-down, bottom-up and peer-to- peer approach to reach and inspire all employees to work towards our culture objectives. Overall employee engagement remains strong at 80%, with 91% of employees reporting that they feel proud to tell people they work at Cochlear and 94% understanding how they contribute to the satisfaction of our customers. HEAR THE CUSTOMER EMBRACE CHANGE & INNOVATE ASPIRE TO WIN REMOVE BOUNDARIES Our HEAR behaviours bring our mission to life and reflect what we value as an organisation. 48 Cochlear Limited Annual Report 2022 Creating value sustainably We have a responsibility to be here to support a lifetime of hearing for the children, and adults, being implanted with our devices, which means we need to deliver sustainable financial growth. Sustainable business practices contribute to the creation of long-term value for all our stakeholders. This year we made significant progress in integrating sustainability into our corporate strategy aligned with our value creation model. Our sustainability approach underpins our commitment to create sustainable long-term value by contributing to a healthier and more productive society, empowering customers, providing a lifetime of hearing solutions, thriving people, creating value responsibly and advancing environmental sustainability. We have continued to invest in awareness and access focused on our goal to deliver value by helping more people to hear. In 2022 the ‘Living Guidelines’ initiative was established, an international taskforce aimed to deliver clinical guidelines and enable early identification and referral for cochlear implant candidates. In September, Cochlear Foundation and Malala Fund announced a partnership2 with the aim of removing the barriers that keep millions of children and young people with hearing loss from accessing a quality education and encouraging governments and societies to prioritise hearing health in children. We strongly support the objectives of the United Nations Sustainable Development Goals, a global call to action on the most urgent sustainable development challenges. We also joined the United Nations Global Compact, committing to the ten universal principles relating to human rights, labour, environment and anti-corruption across our business. Courtesy of Malin Fezehai / Malala Fund We advanced in gender balance and achieved our target to have at least 40% female representation amongst our senior leaders by June 2023 ahead of time, with 41% today. At the Board level, we are targeting at least 30% female representation, a target we first achieved in FY21, with 33% female directors at the end of June. We formalised our commitment to recognition and reconciliation through a Reconciliation Action Plan. We advanced our reconciliation strategy, recognising the impact of dispossession on generations of First Nations peoples, celebrating the important role of First Nations peoples in Australia’s past, present and future and our commitment to engaging and working more closely with First Nations communities. We developed our carbon reduction strategy, aligned with Science Based Target Initiative and consistent with efforts to limit warming to 1.5 degrees above pre-industrial levels. We are targeting net-zero emissions in our operations (Scope 1 and 2) by FY30 and across our value chain (Scope 1, 2 and 3) by FY50. For more information, you can read our Sustainability Report at www.cochlear.com. 49 Cochlear Limited Annual Report 2022 A stronger organisation Being agile and efficient We are investing in strengthening our business processes and IT platforms to improve efficiency and agility. Successfully executing this transformation program will enable us to scale more effectively and provide even better solutions for our customers. Our recipient base is fast approaching one million. As we look to the future, we recognise the need for more scalable ways to provide customer service and customer solutions. And with an increasing suite of digital products and services, we must ensure our processes, data and platforms are consistently deployed across the globe. At the same time, we seek to ensure we continue to meet the challenge of increasingly stringent regulatory and security standards that require strong process governance and transparency. Improving strategy execution and meeting customer needs for digital solutions require greater organisational integration and more consistent business processes. To achieve this, we will invest $100-150 million in cloud- based technology solutions over four to five years. We have been preparing for this transformation over the past few years, simplifying our organisational structure, clarifying decision rights and working to standardise processes across the business. We have established strong governance structures for processes and platforms and will build sustainable continuous improvement processes to capture efficiencies in the years to come. We have commenced this program, and expect to progressively introduce scalable, flexible platforms and build the capability to support these platforms. Business process transformation provides broad benefits Employee outcomes • Better, more accessible information • Easier to do higher value work • Easier to train people Business outcomes • Lower costs through scalable and efficient business processes and platforms • Agility and the ability to change quickly • Better data and use of data to enable growth and support decision making • Continuous improvement in key processes to drive ongoing scale benefits Customer outcomes • Seamless digital experience for recipients and increased self help • Integrated solutions for professionals making it easier and lower cost to work with Cochlear • Lower cost of care for payers 50 Cochlear Limited Annual Report 2022 51 Cochlear Limited Annual Report 2022 Business risks Cochlear has a sound and robust risk management framework to identify, assess and appropriately manage risks. Our principal business risks are outlined below. These are risks that may have a material adverse effect on the business strategy, financial position or future performance. It is not possible to identify every risk that could affect the business and the actions taken to mitigate these risks cannot provide absolute assurance that a risk will not materialise. Cochlear’s Risk Management Policy and details of its risk management standard can be found in the Corporate Governance Statement, both available on the website. Risk Description and potential consequences Strategies used to mitigate the risk Pandemics Product innovation and competition As COVID has demonstrated, pandemics have the potential to impact our markets as elective surgeries may be deferred to reduce the strain on healthcare systems. Travel restrictions, government mandated shutdowns and potential supply chain impacts could also have business impacts. Increased competition exposes us to the risk of losing market share and lower average selling prices. This risk may be exacerbated by failure to produce innovative products and services. We are also exposed to the risk that our products are superseded by medical, biological and/or technological advancements resulting in alternative products or treatments being commercialised, which may impact new business. In addition to developed business continuity and crisis management plans, our geographic spread of customers may mitigate the impact of a pandemic on our business. Our active and continuous assessment of markets (new and existing) informs our strategy, operating plans and innovation programs. The creation and protection of intellectual property are a key focus for us. We target an annual investment of 12% of sales revenue on R&D aimed at retaining our market leadership position and growing the hearing implant market. Misappropriation of Cochlear’s know-how and intellectual property infringement We are exposed to the risk that our proprietary know-how may be misappropriated through hacking of our systems, or by employees, consultants or third parties who may have access to systems. Our market share is at risk of competitors accessing and using this information. We are also exposed to allegations of infringement by third parties, including competitors, which could result in us paying damages and/or receiving injunctions preventing us from selling our products and/or paying royalties to continue selling. Confidentiality agreements are in place with staff and third parties with access to our know-how. We limit access to key systems by business need and monitor access by individuals. We have an increasing and evolving patent portfolio across our technologies to assert against competitors, and internal and external legal resources to manage litigation, and our internal product development processes include ‘freedom to operate’ checks. Medical device regulations We operate in a highly regulated industry. Medical devices and the information they produce are strictly regulated in countries where our products are sold. Failure to meet regulations may result in product sanction or recall resulting in loss of sales and reputational harm. Regulatory uncertainty is assessed as part of product development. We actively monitor the regulatory environment with regulators and incorporate requirements and changes into our product quality assurance system. Product quality Delivery of high quality and safe outcomes for our customers is central to our ongoing development of innovative product. As the developer, manufacturer, marketer and distributor, any failure in product quality might lead to injury, litigation, liability, recall and reputational harm. Our focus on quality throughout the design, testing, manufacture and post-market monitoring of our products ensures high standards of product safety and efficacy. Effective collaboration with customers aligns clinical processes and technology with evidence-based practices. We also maintain product liability insurance. 52 Cochlear Limited Annual Report 2022 Risk Description and potential consequences Strategies used to mitigate the risk Market access Credit and currency Interruption to product supply The majority of our developed market customers rely on a level of reimbursement from insurers and government health authorities to fund their purchases. Pressure on healthcare budgets globally may lead to pressure on reimbursement levels. Healthcare-related taxes by government agencies could also impact candidates’ ability to access our products. We provide credit to a limited number of governments, government-supported universities and clinics or major hospital chains. The extension of credit creates a risk that borrowers fail to pay resulting in interrupted cash flow and lower earnings. Over 90% of our revenues and over 50% of costs are denominated in currencies other than Australian dollars. We bear exchange rate risk from AUD fluctuation against primarily US dollars, Euros, Japanese yen, Sterling, Swedish kroner and Swiss francs. Long-term permanent changes in market rates may impact earnings. Our reliance on suppliers for key materials and services carries inherent risk of delay and disruption. This risk is distinct from that where alternative materials/ sources and regulatory requirements make substitution costly, time-consuming or commercially unviable. While products are manufactured across six sites globally, supply may be disrupted by a site becoming inoperative. New manufacturing facilities require regulatory approval for products to be saleable. Such approval could take many months or years. Privacy and information security We handle and store personal information, including health information, for our customers and employees. With expanding information privacy and security regulations, we recognise its security as a key element of our relationship with our customers. We continue to work with reimbursement and government agencies throughout the world to emphasise the health and economic benefits of cochlear and acoustic implants. Credit risk is not significantly concentrated and varies by location and customer type. Credit and receivables management (including identifying high risk customers and potential restrictions on future trading) is executed at a regional level, subject to country limits set by the Chief Financial Officer and overseen by the Audit & Risk Committee. Monthly credit balances and ageing are monitored by the Board. Financial instruments are used to manage foreign exchange risk in accordance with the Board approved policy. We work closely with our suppliers to mitigate potential interruption or delay to supplies. In addition, purchase quantities of inventory are managed to avoid short-term impacts. Where appropriate, lifetime buys, strategic raw materials purchases, alternate sources and other supply chain interventions are undertaken to mitigate production impacts. We also review the business continuity plans for manufacturing and maintain business interruption insurance. We regularly assess our privacy governance and information security controls to ensure that when customer information is held it is secure. Whilst we maintain cyber insurance as part of our overall risk mitigation strategy, our pro-active approach aims to ensure that controls of these risks are prevalent. Talent management We operate in a competitive environment in relation to attracting and retaining scientific, technology and engineering talent. The absence of this talent may cause key positions to be unfilled, impacting our ability to innovate and grow. Talent management programs are in place, both within Australia and in our key international markets. These programs develop the longer-term capabilities required for us to achieve our strategic goals. Geo-political risk Our business is subject to risks associated with doing business internationally. Unexpected geo- political events in foreign countries in which we operate could adversely affect our supply chain or manufacturing through increased cost or a reduced choice of supply, impacting our ability to execute our strategic plans. Whilst the international politics which influence the level of risk are, and will remain, outside our control, we closely monitor our key suppliers, and assess opportunities to diversify supply and reduce key dependencies. Engagement with governments, experts and regulators, enables us to ensure compliance with the latest regulations, economic sanctions and trade rulings. 53 Cochlear Limited Annual Report 2022 Operational review Business segment performance Sales revenue increased 10% (9% in constant currency*) to a record $1,641 million, driven by strong demand for acoustic implants and sound processor upgrades with all regions and product segments tracking above pre-COVID levels. While cochlear implant revenue growth rates improved across the year, we continued to experience variability in performance across countries with COVID and hospital staffing shortages impacting operating theatre capacity. Cochlear implants Cochlear implant units increased 5% to 38,182 units, with emerging markets growing ahead of developed markets. Sales revenue increased 3% in CC to $935.2 million. Developed market units grew low single-digits for FY22 with second half volumes growing following a decline in the first half. Units overall were around 10% above pre-COVID levels. US volumes were around 20% above pre-COVID levels with a swift and strong recovery in FY21 following COVID shutdowns partly offset by a small volume decline in FY22. While our professional partners reported strong patient pipelines and growing waiting lists, access to operating theatres was constrained throughout the year as a result of hospital staffing shortages. Our strong market share position continued to be supported by our market-leading product portfolio and growing suite of service offerings. Performance in Western Europe was strong throughout the year following a COVID-affected FY21. The rate of recovery however continued to vary by country. Continental Europe volumes exceeded pre-COVID levels while volumes in the UK were still below pre-COVID levels. In the Asia Pacific region, Australian volumes were impacted by COVID-driven elective surgery deferrals with units still below pre-COVID levels. The emerging markets experienced a strong recovery following COVID-related shutdowns with many countries trading above pre-COVID levels, including China and the Middle East. India and Brazil recovered well although volumes were still below pre-COVID levels. 54 * Constant currency (CC) removes the impact of exchange rate movements and foreign exchange (FX) contract gains/(losses) to facilitate comparability. See Notes on page 59 for further detail.Cochlear Limited Annual Report 2022 Cochlear implant sales revenue $m in CC Services sales revenue $m in CC Acoustics sales revenue $m in CC 3% in FY22 in CC* 15% in FY22 in CC* 28% in FY22 in CC* Services (sound processor upgrades and other) Services revenue increased 15% in CC to $503.9 million with the growing recipient base underpinning growing demand. Sound processor upgrade revenue experienced strong growth, particularly in the first half, following the restricted access to clinics during COVID lockdowns. Acoustics Acoustics revenue increased by 28% in CC to a record $202.0 million, representing strong demand for new products and a recovery from COVID-related surgery delays. The Cochlear™ Osia® 2 System achieved CE Mark accreditation during the second half of FY21, with the rollout commencing across Western Europe during FY22. Demand for the Osia 2 System continued to be strong in the US. The Cochlear™ Baha® 6 Max Sound Processor was launched in the fourth quarter of FY21 and drove strong demand for sound processor upgrades across all regions. 55 0100200300400500600700800900100013141516171819202122H1H205010015020025030035040045050055013141516171819202122H1H205010015020025013141516171819202122H1H2Cochlear Limited Annual Report 2022 Financial review Profit and loss Sales revenue increased 10% (9% in CC) to $1,641.1 million and underlying net profit increased 18% (10% in CC) to $277.0 million, within the guidance range of $265-285m, and with an underlying net profit margin of 17%. Excluding the impact of cloud computing-related expenses, the underlying net profit margin was 18%, in line with our long-term target. Statutory net profit of $289.1 million includes $12.1 million in one-off gains after-tax. Key points of note: • Cost of sales of $411.0 million was in line with last year (in both reported and CC) with the gross margin increasing two percentage points to 75%, back in line with the longer-term target gross margin; • Selling, marketing and general expenses increased 12% (12% in CC) to $498.7 million reflecting continued investment in market growth activities, standard of care and market access initiatives; • Investment in R&D increased 8% (9% in CC) to $210.7 million with continued investment made in key R&D projects and development of the product and services pipeline; 56 * Excluding one-off and non-recurring items ** Constant currency (CC) removes the impact of exchange rate movements and FX contract gains/(losses) to facilitate comparability. See Notes on page 59 for further detail.Cochlear Limited Annual Report 2022 • Administration expenses (excluding cloud investment) increased 22% (22% in CC) to $137.4 million driven primarily by increases in IT expenses, and also includes increases in insurance and costs associated with the Oticon Medical transaction; and • Other income increased $19.7 million to $13.8 million primarily reflecting $15.8 million in balance sheet FX revaluation losses in FY21. Cash flow Operating cash flow increased $111.1 million to $376.5 million. Key points of note: • Strong sales growth and improved gross margin resulted in a $56.4 million improvement in underlying EBIT; • The $36.8 million increase in working capital and other primarily reflects an increase in inventories; • Income taxes paid of $26.1 million includes the benefit of a $61.5 million tax refund resulting from an overpayment of tax instalments paid in FY21; • Capital expenditure (capex) increased by $10.5 million to $77.2 million, reflecting stay-in-business capex; • Other net investments of $61.7 million comprises additional investment in the innovation fund – Nyxoah, Precisis and Epiminder; and • Dividends paid increased $118.4 million reflecting the return to full dividend payments following COVID- related suspension. 57 Cochlear Limited Annual Report 2022 Financial review Capital employed Capital employed declined by $26.0 million to $1,099.0 million since June 2021. Key points of note: • The increase in working capital was primarily driven by a $54.1 million increase in inventory, reflecting the building of safety stocks of both finished goods and some componentry in anticipation of potential global supply chain shortages; • The $38.9 million decrease in investments & other financial assets includes cash investments in Precisis and Epiminder and net revaluation losses for publicly listed innovation fund investments Nyxoah and Sensorion; • The $85.7 million reduction in other net liabilities primarily reflects the utilisation of tax losses from prior years; • Net cash increased $22.1 million to $586.7 million. Dividends A final dividend of $1.45 per share has been determined, taking full year dividends to $3.00, an increase of 18% and representing a payout of 71% of underlying net profit. The interim dividend was unfranked, and the final dividend is 40% franked. The franking balance had been depleted by losses incurred in FY20. The ex-dividend date is 22 September 2022. The record date for calculating dividend entitlements is 23 September 2022 with the final dividend expected to be paid on 17 October 2022. 58 * Jun21 capital employed has been restated to reflect the impact of changes to recognition of cloud computing investments.Cochlear Limited Annual Report 2022 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 is not placed on any forward-looking statements. Non-International Financial Reporting Standards (IFRS) financial measures Cochlear uses non-IFRS financial measures to assist readers in better understanding Cochlear’s financial performance. Cochlear uses three non-IFRS measures in this document: Sales revenue, Underlying net profit and Constant currency. The Directors believe the presentation of these non-IFRS financial measures are useful for the users of this document as it reflects the underlying financial performance of the business. Each of these measures is described below in further detail including reasons why Cochlear believes these measures are of benefit to the reader. These non-IFRS financial measures have not been subject to review or audit. However, Cochlear’s external auditor has separately undertaken a set of procedures to agree the non-IFRS financial measures disclosed to the books and records of the Group. Sales revenue 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 gains/ losses on hedged sales. Underlying net profit Underlying net profit allows for comparability of the underlying financial performance by removing one-off and non-recurring items. The determination of items that are considered one-off or non-recurring is made after consideration of their nature and materiality and is applied consistently from period to period. Underlying net profit is used as the basis on which the dividend payout policy is applied. The Financial Review section includes a reconciliation of Underlying net profit (non-IFRS) to Statutory net profit (IFRS) which details each item excluded from Underlying net profit. 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 EBIT and net profit is adjusted to calculate the result at constant currency. Reconciliation of constant currency net profit to reported net profit 59 * FY22 actual v FY21 at FY22 rates. ** FY21 net profit has been restated to reflect the reclassification of cloud-related investment from capex to opex.Cochlear Limited Annual Report 2022 Governance Cochlear’s Board and executive team are committed to high standards of corporate governance and transparency, with a focus on long-term sustainability and preserving and enhancing our reputation. The Board is responsible for overall corporate governance including adopting appropriate policies and procedures designed to ensure that Cochlear is properly managed to create, protect and enhance shareholder value. The Board and its committees regularly review governance arrangements and practices to maintain compliance with regulatory requirements and industry practice, and to ensure that they continue to support business objectives. Directors, senior executives and employees are expected to act ethically, lawfully and responsibly at all times. The Board considers that Cochlear’s corporate governance practices have been consistent with the recommendations contained in the 4th edition of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations released on 27 February 2019 (ASX Principles and Recommendations) throughout the reporting period from 1 July 2021 to 30 June 2022. Further details are set out in the Corporate Governance Statement, which outlines key aspects of our corporate governance framework and practices, and is available at the ‘Investors’ section of our website www.cochlear.com. Structure and composition of the Board The Board is committed to ensuring its composition continues to include directors who bring an appropriate mix of skills, experience, knowledge, expertise and diversity, including gender diversity, required to discharge the Board’s duties. The Board is of the view that the tenure profile, represented by the length of service of each director on the Board, is appropriately balanced such that Board succession and renewal planning are managed over the medium to longer term. The directors possess an appropriate mix of skills, experience, knowledge, expertise and diversity to enable the Board to discharge its responsibilities, including overseeing the delivery of the Company’s strategic priorities. Roles and responsibilities of the Board and management The role of the Board is to set Cochlear’s strategic direction for the creation, maintenance and enhancement of long-term sustainable value, to guide and monitor the management of the Company and its implementation of the strategy and to oversee good governance practice. The Board aims to protect and enhance the interests of Cochlear’s shareholders, while taking into account the interests of other stakeholders, including employees, customers, suppliers and the wider community. In performing its role, the Board is committed to a high standard of corporate governance practice and to fostering a culture of compliance which values ethical, lawful and responsible behaviour, personal and corporate integrity, accountability, transparency and respect for others. The Board has a charter which clearly sets out its role and responsibilities and describes those matters expressly reserved for the Board’s determination. The Board Charter is available on our website. The CEO & President has responsibility for the implementation of Cochlear’s strategic objectives, operating within the risk appetite set by the Board and for the day-to-day management of Cochlear. 60 Cochlear Limited Annual Report 2022 Board’s key responsibilities Strategy Financial oversight Set strategic direction, provide input into management’s development of corporate strategy and oversee management’s implementation of strategy. Approve and monitor the progress of major capital expenditure, capital management, operational budgets, acquisitions and divestments and dividend policy. Financial and other reporting Approve Cochlear’s interim and annual financial statements and oversee the integrity of Cochlear’s accounting and corporate reporting systems. Corporate governance Review, ratify and monitor the effectiveness of Cochlear’s systems of governance, risk management and internal compliance and control, legal compliance, codes of conduct and other corporate governance policies and practices. Risk management framework Satisfy itself that Cochlear has in place an appropriate risk management framework. Set the risk appetite within which the Board expects the CEO & President and the Executive team to operate. Board performance and composition Leadership selection Succession and remuneration planning Sustainability Undertake regular external and independent evaluation of Board performance. Review annually the composition of the Board. Evaluate the performance, and selection, of the CEO & President. Plan for Board, CEO & President and Executive succession and remuneration and set non-executive director remuneration. Consider the social, ethical and environmental impact of Cochlear’s activities and operations. Set standards and monitor compliance with Cochlear’s sustainability responsibilities and practices. Material transactions Approve any unbudgeted expenditure and capital transactions, outside the authority delegated to management. Board and Board committee membership as at 30 June 2022 Board Audit and Risk Committee Nomination Committee Medical Science Committee People and Culture Committee Technology and Innovation Committee Director Alison Deans Dig Howitt Yasmin Allen Glen Boreham Sir Michael Daniell Michael del Prado Andrew Denver Christine McLoughlin Prof Bruce Robinson Chair Member 61 Cochlear Limited Annual Report 2022 Governance Board of directors Board composition As at 30 June 2022 Board gender diversity Board tenure Alison Deans Chair Appointed to the Board 1 January 2015 and as Chair 21 August 2021 Chair of the Nomination Committee. 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, Ramsay Health Care Limited and Deputy Group Pty Ltd. Member of Investment Committee, CSIRO Innovation fund (Main Sequence Ventures) and member of AICD Corporate Governance Committee. Director of SCEGGS Darlinghurst Limited and The Observership Program. Former directorships Westpac Banking Corporation, Insurance Australia Group Limited and Social Ventures Australia. Qualifications BA, MBA, GAICD Dig Howitt CEO & President and Managing Director Appointed to the Board 14 November 2017 and as CEO & President 3 January 2018 Member of the Medical Science and Technology and Innovation Committees. Background Dig joined Cochlear in 2000 and has a wealth of experience across the Company in roles including Chief Operating Officer, President, Asia Pacific and SVP, Manufacturing and Logistics. Prior to joining Cochlear, Dig worked for Boston Consulting Group and held a General Management role at Boral. Dig is a member of the Champions of Change Coalition, 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 62 Board tenure chart excludes Managing Director.67%33%Board gender diversityMaleFemale38%13%25%25%Board tenure0-3 years3-6 years6-9 years9+ yearsCochlear Limited Annual Report 2022 Yasmin Allen Non-executive Director Glen Boreham, AM Non-executive Director Appointed to the Board 1 January 2015 Chair of the People and Culture Committee. Member of the Audit and Risk, Nomination and Technology and 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. Strategic Advisor, IXUP. Former directorships Chairman of Screen Australia, Advance (Global Australian Network), Business School and Industry Advisory Board for the University of Technology, Sydney and Advisory Board IXUP. Qualifications BEc, FAICD Appointed to the Board 2 August 2010 Chair of the Audit and Risk Committee. Member of the People and Culture, Nomination and Technology and Innovation Committees. Background Extensive career in investment banking with senior roles in strategic analysis and corporate advice. Former Vice President of Deutsche Bank AG, Director of ANZ Investment Bank and Associate Director of HSBC London. Other boards Chair of Australian Federal Government Steering Group for Digital Skills Organisation and Tic:Toc Home Loans. Director, Santos Limited, ASX Limited, QBE Insurance Group Limited and The George Institute for Global Health. Acting President Australian Government Takeovers Panel. Former directorships Insurance Australia Group Limited and National Portrait Gallery. National director of the Australian Institute of Company Directors. Member of The Salvation Army Advisory Board. Chair of Macquarie Specialised Asset Management, Faethm.org and Advance (Global Australian Network). Qualifications BCom, FAICD Sir Michael Daniell, KNZM Non-executive Director Appointed to the Board 1 January 2020 Chair of the Technology and Innovation Committee. Member of the Audit and Risk, Nomination and Medical Science 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 the treatment of obstructive sleep apnea. In June 2021, Sir Michael was made a Knight Companion of the New Zealand Order of Merit for his services to business, healthcare and governance. Other boards Director, Fisher & Paykel Healthcare Corporation Ltd. Director, Tait International Limited. Advisory Board Chair, Te Titoki Mataora (NZ). Director, Medical Research Commercialisation Fund. Qualifications BE (Hons) Electrical, CMInstD (NZ) 63 Cochlear Limited Annual Report 2022 Governance Board of directors Michael del Prado Non-executive Director Appointed to the Board 1 January 2022 Member of the Medical Science, Nomination and Technology and Innovation Committees. Background Over 34 years’ global experience in the medical device and pharmaceutical industries with senior executive leadership roles in Johnson & Johnson medical device businesses in the US, Asia-Pac and EMEA. Former Company Group Chairman of Ethicon, the world’s largest and most comprehensive surgical company. Other boards Ambu A/S Former directorships Co-lead Director, Verb Surgical. Advisory Board, Singapore Management University Lee Kong Chian School of Business. Qualifications BSc Industrial Engineering, MBA, MA Andrew Denver Non-executive Director Christine McLoughlin, AM Non-executive Director Appointed to the Board 1 February 2007 Member of the Audit and Risk, Medical Science, Technology and 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 Appointed to the Board 1 November 2020 Member of the Audit and Risk, Nomination, People and Culture and Technology and Innovation Committees. Background Ms McLoughlin has served on the boards of a number of ASX50 companies and is a highly respected company director with domestic and international experience. She has had wide ranging experience covering health, insurance, resources, infrastructure and financial services. In June 2021, Ms McLoughlin was awarded a Member of the Order of Australia in the Queen’s Birthday Honours for her services to business, the not-for-profit sector and women. Other boards Chairman of the Suncorp Group Limited, Chancellor of the University of Wollongong. Chairman, Destination NSW. Former directorships NIB Holdings, the McGrath Foundation and Venues NSW. Qualifications BA, LLB (Hons), FAICD 64 Cochlear Limited Annual Report 2022 Karen Penrose Non-executive Director Appointed to the Board 1 July 2022 Member of the Audit and Risk, Nomination and Technology and Innovation Committees. Background Extensive executive career in senior leadership and Chief Financial Officer roles in financial services. A highly respected company director, having served on the boards of a number of ASX100 companies and experienced across health care, financial services, property and infrastructure industries. Other boards Director, Ramsay Health Care Limited, Estia Health Ltd, Bank of Queensland Limited and Vicinity Centres (resignation effective 15 September 2022). Director, Ramsay Sante (associated with her directorship of Ramsay Health Care Limited), Rugby Australia and Marshall Investments. Former directorships Include Director, Spark Infrastructure Group. Qualifications BCom, CPA, FAICD Prof Bruce Robinson, AC Non-executive Director Appointed to the Board 13 December 2016 Chair of Medical Science Committee. Member of the Nomination, People and Culture and Technology and Innovation Committees. Background Over 20 years’ leadership experience as an academic physician/scientist across research, healthcare and medicine, and tertiary education. Former Dean, The University of Sydney’s Sydney Medical School, Head of Medicine at Sydney’s Royal North Shore Hospital and Head of the Cancer Genetics Laboratory at the Kolling Institute for Medical Research. Other boards Director, MaynePharma, QBiotics and Ecofibre. Director, Woolcock Institute of Medical Research. Senior Advisor to McKinsey & Company and Advisor to MinterEllison. Former directorships Chairman, National Health and Medical Research Council. Chairman, Medical Benefits Schedule Review Taskforce. Director, Lorica Health Pty Limited, Firefly and Digital Health Agency CRC. Qualifications MD, MSc, FRACP, FAAHMS, FAICD 65 Cochlear Limited Annual Report 2022 Governance Executive team Executive team & senior leader composition As at 30 June 2022 Executive team gender diversity Senior leaders gender diversity Dig Howitt CEO & President Stu Sayers Chief Financial Officer Dig joined Cochlear in 2000 and has a wealth of experience across the Company in roles including Chief Operating Officer, President, Asia Pacific and SVP, Manufacturing and Logistics. Prior to joining Cochlear, Dig worked for Boston Consulting Group and held a General Management role at Boral. Dig is a member of the Champions of Change Coalition, STEM group. He was appointed as President of Cochlear on 31 July 2017 and became CEO & President on 3 January 2018. Stu was appointed as Chief Financial Officer in February 2021. Stu joined Cochlear in July 2016 as inaugural President, Services. Stu has a strong financial background and a wealth of experience in establishing and building customer focused technology and online businesses. Stu ran Amazon’s subsidiary Audible in Asia Pacific, as well as E*TRADE and Yahoo!7 in Australia and New Zealand. He previously held senior roles with ANZ Bank and McKinsey. Executive team tenure Qualifications BE (Hons), MBA Qualifications BEc (Hons), MBA 66 82%18%59%41%MaleFemale18%27%18%36%0-5 years6-10 years11-15 years15+ yearsCochlear Limited Annual Report 2022 Jan Janssen Chief Technology Officer Lisa Aubert President, North America Richard Brook President, EMEA Jan joined Cochlear in 2000. He was appointed Senior Vice President Research & Development in 2005 and became Chief Technology Officer in 2017. Jan leads a team of over 500 highly qualified engineers and scientists who implement the R&D strategy with responsibility for identifying and developing cutting‐edge technology and bringing these innovations through to commercialisation. He is also responsible for Business Development, Quality and Regulatory Affairs. Jan holds 10 granted patents in the field of implantable hearing technology. Qualifications MScEE Lisa is responsible for the development and execution of the strategic direction for our North America operations. Lisa was appointed as President, Americas Region in March 2022. Lisa joined Cochlear in 1994 and has deep experience across the Company in roles in Europe and the United States, including General Manager of UK/ Ireland/South Africa, Regional Director of Europe North and most recently Vice President of Sales for Cochlear North America and Chair of Cochlear’s Global Sales Council. Qualifications BA Communication Disorders, MA in Audiology, MBA Richard is responsible for the development and execution of the strategic direction for all our operations in Europe, the Middle East and Africa (EMEA). 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 67 Cochlear Limited Annual Report 2022 Governance Executive team Anthony Bishop President, Asia Pacific & Latin America Dean Phizacklea Senior Vice President, Global Strategic Marketing David Hackshall Chief Information Officer Anthony was appointed President, Asia Pacific in July 2016 and took on responsibility for Latin America in June 2021. Anthony is responsible for the development and execution of the strategic direction for all our operations in Australia, Asia, the South Pacific and Latin America. Prior to Cochlear, Anthony spent 21 years at Johnson & Johnson Medical in various roles including marketing, sales and general management around the world including Managing Director, Johnson & Johnson Medical, Australia/New Zealand. Qualifications BBus (Hons), MManagement, GAICD 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 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 68 Cochlear Limited Annual Report 2022 Greg Bodkin Senior Vice President, Global Supply Chain Jennifer Hornery Senior Vice President, Global People & Culture Greg has functional responsibility for new product industrialisation, sourcing & procurement, global manufacturing, and logistics. 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 management of Cochlear’s Global Property, facilities and corporate procurement functions. 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. Qualifications BE (Hons), MComm (UNSW) Jennifer joined Cochlear in 2008 working in senior HR business partnering roles until her appointment as SVP People & Culture in 2017. 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, finance, strategy and HR leadership roles across a number of industries in Australia and the US, including senior positions at Campbell Arnott’s and Booz & Company. Qualifications BComm, MBA, GAICD Brian Kaplan Senior Vice President, Global 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. Qualifications BNeuroSci, BA, MD, FACS 69 Cochlear Limited Annual Report 2022 Remuneration report Letter from the Chair of the People & Culture Committee (P&CC) Dear Shareholders On behalf of the Cochlear Board, I am pleased to present the FY22 Remuneration report where we outline our remuneration strategy, summarise the performance outcomes for FY22 and detail the associated remuneration outcomes for key management personnel. Last year, the Board conducted a comprehensive review of executive remuneration with the outcome highlighting gaps in our long-term incentive (LTI) structure and fixed pay for select executives. We made changes to ensure executive pay was aligned to the market: we increased maximum LTI to 125% of base salary for the Chief Executive Officer & President and 90% of base salary for executive direct reports; and aligned fixed pay to market. The Board believes these changes have aligned the executives more effectively with the long-term growth objectives of the organisation and will ensure executive remuneration continues to be balanced, fair and equitable, and closely aligned with the interests of our shareholders. FY22 performance and reward outcomes The Board is satisfied that the reward outcomes under the short-term incentive (STI) plan for FY22 reflect the Company’s performance. Overall sales revenue grew by 10%, exceeding revenue targets for the financial year. We also completed initiatives across several key strategic priorities: retaining our market share and strengthening our market position across the globe; growing the hearing implant market; and building an even stronger organisation as we grow. Strong performance in the year has resulted in the awarding of incentives above target to the CEO & President and executives under the FY22 STI plan. Relative total shareholder return (TSR) against the ASX 100 was below median (at the 42nd percentile) and basic earnings per share (EPS) represented a (2.7)% compound annual growth rate over the last three years, which resulted in no vesting under the FY20-22 LTI plan. Further detail on this year’s remuneration outcomes is provided in this report. Our executive remuneration framework The Board is committed to ensuring our executive remuneration framework and the associated reward outcomes align with our business objectives, performance, and shareholder expectations. Competition for talent in many of the markets in which Cochlear operates has increased in the last year. Cochlear has responded to this through targeted remuneration increases and by introducing changes to our reward offering to achieve greater alignment and consistency of how we reward employees across the business. The Board has also reviewed our STI performance scorecard for FY23 and it incorporates Environmental, Social and Governance metrics which will include targets for reduction of carbon emissions. The Board has also reviewed the exercise period for options awarded under the LTI plan as a direct result of some executives being prevented from exercising vested options due to possessing inside information in a trading window. This approach is also more market aligned and provides a longer timeframe for executives to exercise and realise value from vested LTI, strengthening the alignment of executives’ interests to those of shareholders. Glen Boreham, AM Chair, People & Culture Committee Cochlear Limited Annual Report 2022 70 Contents This report covers: 1. Key management personnel; 2. Executive KMP remuneration received in FY22 (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 (Cth). 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 Term as KMP Non-Executive Directors Alison Deans Chair Yasmin Allen Non-Executive Director Glen Boreham, AM Non- Executive Director Sir Michael Daniell, KNZM Non- Executive Director Appointed as Chair effective 21 August 2021 (Previously Non-Executive Director for the period from 1 July 2021 to 20 August 2021) Full year Full year Full year Michael del Prado Non- Executive Director Part year appointed 1 January 2022 Andrew Denver Non-Executive Director Christine McLoughlin, AM Non-Executive Director Bruce Robinson, AC Non-Executive Director Former Non-Executive Directors Full year Full year Full year Rick Holliday-Smith Former Chairman Part year retired 20 August 2021 Abbas Hussain Executive KMP Dig Howitt Lisa Aubert Anthony Bishop Richard Brook Jan Janssen Stu Sayers Former Executive KMP Former Non-Executive Director Part year until 20 July 2021 CEO & President (CEO&P) Full year President, North America Part year appointed 1 April 2022 President, Asia Pacific & Latin America1 Full year President, EMEA Chief Technology Officer Chief Financial Officer (CFO) Full year Full year Full year Tony Manna Former President, North America Part year retired 31 March 2022 1 Effective 1 July 2021, the Cochlear Latin American organisation reports to Anthony Bishop, President Asia Pacific & Latin America. Cochlear Limited Annual Report 2022 71 Karen Penrose was appointed to the Cochlear Board on 1 July 2022. There are no other changes to KMP after the reporting date and before the date the Directors’ report was authorised for issue. 2. Executive KMP remuneration received in FY22 (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 FY22. Amounts $ Executive KMP D Howitt L Aubert5 A Bishop R Brook J Janssen S Sayers6 Year Fixed remuneration1 Cash STI2 Vested deferred STI3 Vested LTI4 End of service Total FY22 FY21 FY22 FY22 FY21 FY22 FY21 FY22 FY21 FY22 FY21 1,952,875 1,851,043 223,131 683,491 580,655 1,014,978 947,798 972,990 885,655 871,068 406,325 1,362,427 1,730,148 100,351 398,662 395,175 537,123 519,413 465,143 635,708 443,685 220,630 636,243 355,828 – 140,582 92,532 207,250 139,850 243,241 140,270 – – 412,062 1,447,993 – 55,823 110,355 71,260 318,182 85,202 354,151 – – – – – – – – – – – – – 4,363,607 5,385,012 323,482 1,278,558 1,178,717 1,830,611 1,925,243 1,766,576 2,015,784 1,314,753 626,955 Former Executive KMP T Manna7 FY22 FY21 1,881,151 1,856,189 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 FY22 and FY21 excludes employer contributions for social security, accident and sickness and reflects actual ‘take-home pay’. These amounts are included with the non-monetary benefits in the statutory table in section 5. 799,596 836,301 203,144 135,644 528,290 619,509 51,427 264,735 298,694 – 2 Cash STI earned and relating to performance during the financial year. For example, FY22 is reported as STI payments which are accrued at year end, and received in September 2022, 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, FY22 is reported as the FY19 deferred STI grant which vested in August 2021. 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 exercise less the exercise price). For example, FY22 is reported as the FY19 LTI grant which vested in August 2021 (25.04% of awards vested due to performance). 5 Remuneration for Lisa Aubert relates only to the period that she was KMP from 1 April 2022. 6 Remuneration for Stu Sayers relates only to the period that he was KMP from 1 January 2021. 7 Tony Manna retired from Cochlear on 31 March 2022. At the end of his service, he received a payment of $298,694 which relates to statutory entitlements and contractual benefits agreed. Refer to section 6.1 for further detail. In FY22, an ex-gratia cash payment was made to Tony Manna equivalent to the estimated net value of the benefit lost from the expiry of vested options, which were unable to be exercised in accordance with the Trading Policy. A payment of $30,171 was paid to Tony Manna in May 2022 and is included in vested LTI. Cochlear Limited Annual Report 2022 72 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 and organisational capability … Retain market leadership Grow the hearing implant market Deliver consistent revenue and earnings growth Build a stronger organisation … 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 (CAGR) in basic earnings per share (EPS) … with actual outcomes directly driving executive remuneration. Fixed remuneration Short-term incentive Long-term incentive Total remuneration 3.1 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 (69% for the CEO&P and 62% for other executive KMP). A portion of executive remuneration is delivered in equity (48% for the CEO&P and 43% for other executive KMP) to align our executives with shareholder interests. 38% 31% 34% 38% 10% 21% CEO&P 9% 19% Other executive KMP Cochlear Limited Annual Report 2022 73 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. 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 CFO, 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 CFO 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 FY22. 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. Cochlear Limited Annual Report 2022 74 3.4 Long-term incentive Purpose Award vehicle Opportunity Allocation method Performance period Exercise period (for options) Performance measures and hurdles 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. CEO&P: maximum opportunity is 125% of base salary. Other executive KMP: maximum opportunity is 90% of base salary. In FY22, we made changes to executive reward to ensure executive pay was aligned to the market: increasing maximum LTI to 125% of base salary for the CEO&P (previously 100%) and 90% of base salary for executive direct reports (previously 50%). The Board believes that these changes will align executives even more effectively with the long-term objectives of the organisation. 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 is measured over a four-year performance period. There is no retesting of performance hurdles under the LTI plan. Post vesting, options expire seven months after the vesting date if they have not been exercised. The Board reviewed the exercise period for options awarded under the LTI plan as a direct result of some executives being prevented from exercising vested options due to possessing inside information in a trading window. For FY23 and future LTI awards, the exercise period for vested options will be 25 months which is more market aligned and provides a longer timeframe for executives to exercise and realise value from vested LTI, strengthening the alignment of executives’ interests to those of shareholders. The Board will also have discretion to extend the exercise period for vested options by a further 12 months (up to 37 months) if an option holder is in possession of inside information in a trading window and is unable to exercise their vested options before expiry. 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 basic EPS. • The proportion of awards that vest for performance is: Relative TSR Basic EPS Performance Less than 50th percentile At the 50th percentile 50th percentile to 75th percentile Above 75th percentile % of instruments that vest 0% Performance (CAGR) Less than 7.5% 40% 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. Cochlear Limited Annual Report 2022 75 4. Executive KMP remuneration and link to performance 4.1 FY22 STI outcomes STI is based on meeting a Group Performance Gateway of NPAT, and performance against financial measures (60%) and strategic measures (40%). Final allocations to executive KMP are also based on individual performance as assessed by the Board (for the CEO&P) and CEO&P (for other executives). When reviewing financial performance, the Board excludes revaluation gains and losses from non-core investments (the innovation fund) and the impact of one off and non-recurring items from the calculation of STI. For FY22, underlying NPAT was above the Group Performance Gateway and sales revenue grew 10%. In addition to financial measures, the Board also considered progress against strategic measures which are critical to the achievement of Cochlear’s longer-term goals. Validation of performance against the measures set for: • • the CEO&P involves an independent review and endorsement by the CFO, reviewed and approved by the P&CC and Board; and other executive KMP involves a review by the CEO&P based on inputs from the CFO with a final review undertaken by the P&CC. Any anomalies or discretionary elements are validated and approved by the Board. The table below provides a summary, and achievement against each, of the financial measures and strategic measures of the STI plan. Measures are agreed with the P&CC at the commencement of each financial year and are aligned to the delivery of initiatives that support Cochlear’s strategic priorities. 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 Grow the hearing implant market • Maintain market leadership through growing levels of investment in R&D (targeted at 12% of sales revenue) • Innovation focus on hearing implants, sound processing technology, connectivity and clinical and surgical support • Introduce new products that provide improved hearing outcomes, functionality, connectivity and aesthetic benefits • World-class customer experience • Grow connectivity and engagement with recipients • Introduce connected care solutions and skills training tools for recipients • Introduce sound processor upgrades that provide functional and aesthetic benefits • Develop technology solutions that provide greater convenience and confidence to professional customers • Strong market position has been retained or improved in major markets through a very strong product and service portfolio and very good customer service • Invested over $200m in R&D, and achieved good progress in developing new products • Achieved milestones on the commercial roll out of Connected Care solutions being the first company to offer app-based Remote Care solutions to both acoustic and cochlear implant recipients • Cochlear Family membership grew by 20% to 260,000, with a 60% join rate for new Cochlear™ Nucleus® implant recipients • Improve the awareness of cochlear and • Direct-to-consumer leads and surgeries exceeded target, driving growth of the business • Achieved milestones on referral programs and Standard of Care • OSIA roll out on schedule acoustic implants • Broaden reimbursement and improve the indications for cochlear and acoustic implants • Support the development of consistent practice guidelines to strengthen the referral pathway for adults • Build on the clinical evidence that supports the superior outcomes of cochlear implants over hearing aids for people with severe or higher hearing loss • Collaborate with research institutions studying the links between hearing loss and healthy ageing Cochlear Limited Annual Report 2022 76 Build a stronger organisation • Strengthen and nurture the organisational culture • Learning and development to facilitate innovation • Talent attraction and retention • Competitive, inclusive compensation and benefits to attract, motivate and retain talent • Succession planning • Embracing diversity in all forms • Improve quality, efficiency and agility • Complete major programs 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 • Optimise growth investment • Target an 18% net profit margin over the long term • Maintain a strong balance sheet • Improve efficiency and agility • Maintain high levels of corporate governance • Completed initiatives on our cultural priorities to improve how we work together across the organisation to build a more integrated global organisation • Employee engagement maintained at 80% • Introduced changes to our reward offering to achieve greater alignment and consistency of reward across the business • Women in senior and executive management roles increased to 41%, exceeding our 40% target • Formalised our commitment to recognition and reconciliation through our first Reconciliation Action Plan • Deployed a range of training and leadership development programs • Delivered record sales revenue, with revenue growth of 10% • Revenue growth has been supported by strong performance in Acoustics from the Baha 6 launch and continued growth in OSIA • Agreement to acquire Oticon Medical, Demant’s hearing implant business for ~A$170m = Below expectations = Met expectations = Exceeded expectations Key performance targets were exceeded for FY22 resulting in an average actual STI of 110.5% of target and 61.4% of maximum for executive KMP. The following STI payments were made as outlined in the table below. Two-thirds of the actual STI will be delivered in cash in September 2022, and one-third will be deferred into service rights and subject to service conditions until August 2024. STI target as a % of base salary STI maximum as a % of base salary Actual STI as a % of target Actual STI as a % of maximum STI forfeited as a % of maximum Actual STI ($) Executive KMP D Howitt L Aubert1 A Bishop R Brook J Janssen S Sayers 100% 75% 75% 75% 75% 75% 180% 135% 135% 135% 135% 135% 107.6% 102.5% 122.7% 130.7% 100.0% 107.6% 59.8% 57.0% 68.1% 72.6% 55.6% 59.8% 40.2% 43.0% 2,043,640 150,527 31.9% 597,993 27.4% 805,684 44.4% 697,715 40.2% 665,528 Former Executive KMP T Manna2 1 The STI payment presented in the table for Lisa Aubert relates to the time in KMP role from 1 April 2022 to 30 June 2022. 2 The STI payment presented in the table for Tony Manna relates to the time in KMP role from 1 July 2021 to 31 March 2022. The STI payment for Tony 102.5% 43.0% 57.0% 135% 75% 528,290 Manna will be delivered entirely in cash in September 2022. Cochlear Limited Annual Report 2022 77 4.2 FY20-22 LTI vesting outcomes For the FY20 LTI plan, a transitional arrangement was implemented to recognise that increasing the performance period from three to four years would result in a gap year of LTI vesting in FY22 for executives. The transitional arrangement applied to executives excluding the CEO&P. The FY20 LTI measures performance against relative TSR (50%) and basic EPS growth (50%) over a three-year and four-year performance period. Presented below is the performance for the first tranche of the FY20 LTI grant subject to a three-year performance period to 30 June 2022. The second tranche of the FY20 LTI grant will be presented in next year’s report. The graphs below illustrate Cochlear’s relative TSR and basic EPS performance against targets over the past five years. The capital raising in March 2020 and the impact of COVID on hospitals and healthcare systems around the world has significantly impacted the achievement of LTI performance hurdles. For FY22, Cochlear’s TSR performance was 3.6%, which was ranked at the 42nd percentile of the ASX 100 comparator group. This resulted in performance below target, and as a result, 0% of the TSR portion of the LTI vested. Cochlear’s basic EPS1 in FY22 was 421.1 cents, which is a (2.7)% CAGR over the three-year performance period. This resulted in performance below target2 and as a result, 0% of the EPS portion of the LTI vested. R S T r a e y - 3 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% Cochlear TSR performance against targets 157.0% 76.3% 30.6% 26.1% FY18 FY19 FY20 FY21 3.6% FY22 R G A C S P E r a e y - 3 25% 20% 15% 10% 5% - (5%) (10%) (15%) Cochlear EPS performance against targets 18.6% 11.7% FY18 FY19 FY20 FY21 (5.6%) FY22 (2.7%) (12.9%) Cochlear TSR performance Median TSR (target) 75th percentile TSR (stretch) Cochlear EPS performance Target Stretch For the FY20-22 LTI, 0% vests based on performance over the three-year period from 1 July 2019 to 30 June 2022. 1 For the purpose of the FY20-22 LTI, EPS is determined based on underlying NPAT which excludes non-cash after tax gain/loss from the revaluation of innovation fund investments and the impact of one off and non-recurring items. 2 EPS targets were revised in FY20 to ensure targets remained aligned to the Company’s growth targets and current market conditions. Refer to Cochlear’s 2019 Annual Report for further detail. Cochlear Limited Annual Report 2022 78 4.3 Financial performance history (FY18 to FY22) Sales revenue ($million)2 Earnings/(loss) before interest and tax (EBIT) ($million) Underlying EBIT ($million) Reported EPS Net profit/(loss) after tax (NPAT) ($million) Basic earnings/(loss) per share (EPS) (cents) – reported EPS growth (3-year CAGR) Underlying EPS Underlying NPAT ($million)3 EPS (cents)3 EPS growth (3-year CAGR)4 Share price and dividends Total dividend per share ($) Share price as at 30 June ($) FY18 FY19 1,351.4 1,446.1 348.4 350.6 245.8 427.3 18.6% 248.0 427.3 18.6% 370.1 359.3 276.7 460.9 13.2% 263.8 457.2 11.7% 3.00 200.17 3.30 206.84 FY20 1,352.3 (262.2) 206.9 (238.3) (399.6) (200.8%) 149.1 250.0 (12.9%) 1.60 188.93 FY211 FY22 1,493.3 1,641.1 370.2 326.3 323.8 492.6 4.9% 234.0 356.0 (5.6%) 2.55 251.67 400.0 382.7 289.1 439.6 (2.9%) 277.0 421.1 (2.7%) 3.00 198.70 Relative total shareholder return (TSR) (3 years) TSR percentile ranking5 1 Except for EPS growth (3-year CAGR), FY21 has been restated for the accounting policy change in relation to cloud computing. 2 Excludes foreign exchange gain/(loss) on hedged sales. 3 Underlying NPAT and EPS for FY19 to FY21 has been restated for the accounting policy change in relation to cloud computing as they 157.0% 97th 76.3% 81st 30.6% 72nd 26.1% 54th 3.6% 42nd relate to LTI awards vesting in current and future years. Refer to Note 7.6 to the financial statements for further detail. 4 EPS growth for FY18 to FY21 is as reported in prior Remuneration Reports, as it relates to LTI awards that have already vested in prior years. 5 TSR percentile ranking is shown over three financial years to 30 June. For LTI, performance is compared to the TSR of the constituents of the ASX 100 as at the start of the relevant performance period. For further explanation of details on Cochlear performance, see the Operational review and Financial review section on pages 54 to 59 of this Annual Report. Cochlear Limited Annual Report 2022 79 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 End of service Total Deferred STI2 LTI performance rights3 LTI options3 % of performance related remuneration Executive KMP D Howitt FY22 1,927,769 1,362,427 1,827,811 1,730,148 FY21 L Aubert4 FY22 1,538 1,538 23,568 50,872 515,383 595,748 493,294 21,694 (3,577) 472,519 293,673 518,191 – – 4,970,599 4,861,997 196,307 100,351 16,845 9,979 – 60,597 – – A Bishop FY22 659,000 398,662 FY21 558,038 395,175 923 923 23,568 10,490 132,251 122,782 101,346 21,694 5,605 106,554 57,734 64,375 R Brook FY22 818,678 537,123 155,331 136,502 FY21 755,888 519,413 146,392 123,202 – – 175,692 146,558 160,559 132,497 80,754 105,122 J Janssen FY22 947,884 465,143 FY21 862,423 635,708 S Sayers5 FY22 846,577 443,685 FY21 395,020 220,630 1,538 1,538 923 458 23,568 12,897 183,460 185,570 152,856 21,694 (18,030) 176,357 90,036 117,930 23,568 10,847 8,219 9,133 148,066 131,525 109,960 56,846 18,348 24,128 Former Executive KMP – – – – – – – – – 384,079 1,449,022 1,210,098 2,116,382 1,877,329 1,972,916 1,887,656 1,712,523 735,410 T Manna6 FY22 734,346 528,290 53,094 FY21 764,830 619,509 52,057 12,156 19,414 – – 200,493 162,052 207,308 200,214 298,694 2,234,595 75,093 126,835 – 1,819,790 B Cubis FY21 158,486 – 233 6,108 746 47,473 21,611 32,030 327,132 593,819 Total FY22 6,130,561 3,835,681 230,192 252,909 82,478 1,415,942 1,403,492 1,190,167 298,694 14,840,116 FY21 5,322,496 4,120,583 203,139 224,653 (6,123) 1,168,359 637,249 988,611 327,132 12,986,099 59.69% 62.00% 41.90% 52.11% 51.55% 47.53% 45.38% 50.03% 54.04% 48.66% 38.25% 50.85% 54.04% 17.03% 52.87% 53.25% 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 $96,000 for FY22 and $78,000 for FY21. 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 FY22 amount represents the portion of the FY21 and FY22 deferred STI expensed in FY22. The FY21 amount represents the portion of the FY19 and FY21 deferred STI expensed in FY21. There was no expense for FY20 deferred STI as no awards were made in the year. 3 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. 4 Remuneration for Lisa Aubert only relates to the period that she was KMP from 1 April 2022. 5 Remuneration for Stu Sayers only relates to the period that he was KMP from 1 January 2021. 6 Tony Manna retired on 31 March 2022. At the end of his service, he received a payment of $298,694 which relates to statutory entitlements and contractual benefits agreed. Share-based payment values presented include an expense of $101,805 for LTI performance rights and $121,323 for LTI options that would normally have been amortised over future years for awards that remain subject to vesting hurdles and timeframes, and LTI may not be paid out if conditions are not met. Refer to section 6.1 for further detail. In FY22, an ex-gratia cash payment was made to Tony Manna equivalent to the estimated net value of the benefit lost from the expiry of vested options, which were unable to be exercised in accordance with the Trading Policy. A payment of $30,171 was paid to Tony Manna in May 2022 and is disclosed in LTI options in the table above. Cochlear Limited Annual Report 2022 80 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. 6.1 End of service for former executives Tony Manna retired from Cochlear on 31 March 2022. At the end of his service, he received: • • payment of $176,097 as part of a contractual agreement; and payment of $122,597 relating to accrued but unused vacation leave relating to service provided. The Board applied its discretion to allow some prior equity grants to remain on-foot subject to the original terms of those awards (both time and performance hurdles). The awards are detailed in section 8 and are eligible for vesting in August 2022, August 2023, and August 2024. The Board applied its discretion to allow a pro-rata STI to be awarded for FY22 in cash, payable in September 2022, based on both company and individual performance. Cochlear Limited Annual Report 2022 81 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 • Makes recommendations to the P&CC with respect to individual remuneration arrangements for executive KMP • Implements 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 STI and LTI awards • Reviews, applies judgement and, as appropriate, approves recommendations from the P&CC 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 FY22, the P&CC appointed Guerdon Associates (Guerdon) as its external remuneration advisor. The P&CC engaged Guerdon to provide information used as an input to the annual review of Executive KMP and NED remuneration. No remuneration recommendations (as defined by the Corporations Act 2001 (Cth)) were provided by Guerdon or any other advisor during the year. 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. Until this requirement is met, Executive KMP must retain shares derived from participation in incentive plans), except sales to meet the cost of exercising any options and sales to meet tax on participation in the plan. 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 ‘Investors 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 judgement on remuneration outcomes with consideration to all stakeholders. Cochlear Limited Annual Report 2022 82 8. Executive KMP equity disclosures Executive KMP participate in the deferred STI and LTI plans which offer 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 relative TSR and EPS growth. 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. Equity granted in FY22 under the CEIP has been approved by shareholders for the CEO&P in accordance with ASX Listing Rule 10.14. No options or rights vest if the conditions are not satisfied; hence, the minimum value is nil. The maximum value of the grants has been determined as the fair value of awards at grant date that is yet to be expensed. Plan Grant date Options Performance rights Number Maximum value to be expensed ($)1 Number Maximum value to be expensed ($)1 Executive KMP D Howitt R Brook A Bishop L Aubert2 FY19 LTI FY19 deferred STI FY20 LTI FY21 LTI FY21 deferred STI FY22 LTI Total – Total FY19 LTI FY19 deferred STI FY20 LTI FY20 LTI FY21 LTI FY21 deferred STI FY22 LTI Total FY19 LTI FY19 deferred STI FY20 LTI FY20 LTI FY21 LTI FY21 deferred STI FY22 LTI Total FY19 LTI FY19 deferred STI FY20 LTI FY20 LTI FY21 LTI FY21 deferred STI FY22 LTI Total FY21 deferred STI FY22 LTI Total Former Executive KMP T Manna S Sayers3 J Janssen FY19 LTI FY19 deferred STI FY20 LTI FY20 LTI FY21 LTI FY21 deferred STI FY22 LTI Total 17-Oct-18 17-Sep-19 23-Oct-19 21-Oct-20 30-Sep-21 20-Oct-21 – 17-Oct-18 17-Sep-19 23-Oct-19 23-Oct-19 21-Oct-20 30-Sep-21 17-Sep-21 17-Oct-18 17-Sep-19 23-Oct-19 23-Oct-19 21-Oct-20 30-Sep-21 17-Sep-21 17-Oct-18 17-Sep-19 23-Oct-19 23-Oct-19 21-Oct-20 30-Sep-21 17-Sep-21 30-Sep-21 17-Sep-21 17-Oct-18 17-Sep-19 23-Oct-19 23-Oct-19 21-Oct-20 30-Sep-21 17-Sep-21 35,907 – 24,041 21,217 – 21,808 102,973 – – 1,598 – 2,014 2,745 3,230 – 5,371 14,958 4,565 – 2,679 3,652 4,911 – 6,422 22,229 5,223 – 3,237 4,413 5,197 – 7,685 25,755 – 7,636 7,636 7,530 – 3,055 4,165 5,045 – 6,725 26,520 – – 107,409 431,973 – 817,056 1,356,438 – – – – – 12,264 65,762 – 201,229 279,255 – – – 16,316 99,987 – 240,606 356,909 – – – 19,716 105,810 – 287,925 413,451 – 286,089 286,089 – – – – – – – – 1,685 2,634 4,432 4,782 3,851 5,341 22,725 – – 700 582 332 506 728 879 1,315 5,042 857 858 442 673 1,106 1,151 1,572 6,659 981 1,007 534 813 1,171 1,415 1,882 7,803 990 1,870 2,860 353 841 504 767 1,137 1,339 1,647 6,588 – – 73,685 374,538 288,312 697,021 1,433,555 – – – – – 8,413 57,019 65,808 171,612 302,852 – – – 11,189 86,625 86,172 205,152 389,137 – – – 13,517 91,716 105,936 245,608 456,777 74,118 244,042 318,160 – – – – – – – – Vesting date Vested Forfeited 25.0% 100.0% 75.0% 0.0% 23-Aug-21 23-Aug-21 16-Aug-23 21-Aug-24 16-Aug-23 20-Aug-25 – – – 25.0% 100.0% 75.0% 0.0% 25.0% 100.0% 75.0% 0.0% 25.0% 100.0% 75.0% 0.0% 25.0% 100.0% 75.0% 0.0% 23-Aug-21 23-Aug-21 22-Aug-22 16-Aug-23 21-Aug-24 16-Aug-23 20-Aug-25 23-Aug-21 23-Aug-21 22-Aug-22 16-Aug-23 21-Aug-24 16-Aug-23 20-Aug-25 23-Aug-21 23-Aug-21 22-Aug-22 16-Aug-23 21-Aug-24 16-Aug-23 20-Aug-25 16-Aug-23 20-Aug-25 18-Aug-21 18-Aug-21 22-Aug-22 16-Aug-23 21-Aug-24 16-Aug-23 20-Aug-25 1 The options granted in FY22 have an exercise price of $232.52, and an expiry date of 20 March 2026. Fair values (IFRS-2) of FY22 options and performance rights under the LTI plan as at the date of grant are as follows: options (EPS growth: $54.45; relative TSR: $45.46) and Cochlear Limited Annual Report 2022 83 performance rights (EPS growth: $222.32; relative TSR: $125.69). 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. 2 In FY22, Lisa Aubert did not receive any equity grants as a KMP. 3 LTI reported for Stu Sayers relates to his KMP role only and includes a pro-rated LTI to reflect his appointment to the CFO role during FY21. His FY21 deferred STI grant relates to his executive role for the period from 1 July 2020 to 31 December 2020, and his KMP role from 1 January 2021 to 30 June 2021. 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 FY19 deferred STI plan and FY19 LTI plan vested in August 2021, and executives’ options/rights converted into shares under these plans. Balance 1 July 2021 Received on exercise of options/rights1 Purchases and sales Balance 30 June 2022 Executive KMP D Howitt L Aubert2 A Bishop R Brook J Janssen S Sayers Former Executive KMP T Manna 1 For options exercised, the amount paid per option was the exercise price of $202.84. For Lisa Aubert and Stu Sayers, shares received on (8,991) (257) (582) (3,581) (1,252) (420) 48,786 121 3,074 8,000 8,093 2,842 12,046 326 1,157 2,215 2,559 687 45,731 52 2,499 9,366 6,786 2,575 4,729 (269) N/A 929 exercise of options/rights relates to roles prior to appointment as KMP. 2 The opening balance for Lisa Aubert reflects the balance of shares held on commencement in KMP role on 1 April 2022. Movements in shares relate to roles prior to appointment as KMP. Rights held during the year Rights are acquired by executive KMP under the deferred STI and LTI plans. During the year: • Granted: FY22 LTI awards were granted in September/October 2021; and • Vested: 100% of the FY19 deferred STI award and 25.04% of the FY19 LTI award vested in August 2021. Balance 1 July 2021 Deferred STI service rights1 Granted Vested Forfeited LTI performance rights1 Vested Granted Forfeited Executive KMP D Howitt L Aubert2 A Bishop R Brook J Janssen S Sayers Former Executive KMP 13,533 3,851 (2,634) 326 2,848 3,936 4,506 2,026 586 879 1,151 1,415 990 (326) (582) (858) (1,007) (579) – – – – – – 5,341 – 1,315 1,572 1,882 1,870 (421) – (175) (214) (245) (108) (1,264) – (525) (643) (736) (324) T Manna 1 For Lisa Aubert and Stu Sayers, granted and vested awards also relate to roles prior to appointment as KMP. 2 The opening balance for Lisa Aubert reflects the balance of shares held on commencement in KMP role on 1 April 2022. (1,912) 1,647 3,602 1,339 (841) (88) – Balance 30 June 2022 18,406 586 3,760 4,944 5,815 3,875 N/A Cochlear Limited Annual Report 2022 84 Options held during the year Options over ordinary shares are acquired by executive KMP under the LTI plan. During the year, FY22 LTI awards were granted in September/October 2021 and 25.04% of the FY19 LTI award vested in August 2021. All options held at the end of the year are unvested. Balance 1 July 2021 LTI options Granted Vested and exercised1 Vested and lapsed Forfeited Balance 30 June 2022 Executive KMP D Howitt L Aubert A Bishop R Brook J Janssen S Sayers2 Former Executive KMP 81,165 – 9,587 15,807 18,070 7,489 21,808 – 5,371 6,422 7,685 7,636 (8,991) – (400) (1,143) (1,307) – – – – – – (576) (26,916) – (1,198) (3,422) (3,916) (1,727) 67,066 – 13,360 17,664 20,532 12,822 T Manna 1 The value of exercised options at the date of vesting is $38.71 (closing share price at the vesting date 23 August 2021 of $241.55 less the (12,370) (1,885) 19,795 6,725 N/A – exercise price of $202.84). 2 For Stu Sayers, options movements also relate to his role prior to appointment as KMP. Executive minimum shareholding As at 30 June 2022, the Board is satisfied that the executive KMP are compliant with the Share Ownership Policy. The table below presents a summary of executive KMP holdings and compliance with minimum shareholding requirements. Executive KMP D Howitt L Aubert3 A Bishop R Brook J Janssen Ordinary shares held Policy value of Cochlear shares at year end ($)1 % of base salary2 48,786 121 3,074 8,000 8,093 10,799,757 26,786 680,491 1,770,960 1,791,547 568% 3% 105% 215% 193% S Sayers 1 In line with the Share Ownership Policy, the value has been calculated as the average daily share price over the previous 12 months 629,134 2,842 76% ($221.37), as at closing on the ASX up to 30 June 2022, times the number of shares. 2 The % of base salary is calculated as the value of shares divided by the contractual base salary as at 30 June 2022. 3 Lisa Aubert was appointed to the Executive team effective 1 April 2022. Cochlear Limited Annual Report 2022 85 8.3 Potential dilution if options vest and ordinary shares issued (unaudited) The Board encourages employee ownership of Cochlear shares. To restrict dilution of shareholders’ interests, the total employee interests in unvested equity cannot exceed 5% of share capital. At the date of this report, the number of ordinary shares that would be issued if all options were vested (having met the service and performance conditions) and exercised and assuming ordinary shares were issued, is as follows. Grant date Number of options Exercise price per share ($) Exercise period Issued Forfeited/ lapsed1 – 24,231 At report date 24,231 217.28 Aug-22 to Mar-23 57,074 (5,272) 51,802 217.28 Aug-23 to Mar-24 55,729 (998) 54,731 206.06 Aug-24 to Mar-25 80,240 (6,725) 73,515 232.52 Aug-25 to Mar-26 Current net value of outstanding options as at 30 June 2022 ($)2 – – – – FY20 LTI 23-Oct-19 FY20 LTI 23-Oct-19 FY21 LTI 21-Oct-20 FY22 LTI 17-Sep-21 (Executive KMP) 20-Oct-21 (CEO&P) Total 1 Forfeited/lapsed options from unvested grants relate to plan participants who have departed Cochlear. 2 Represents the number of options as at report date multiplied by the value of an option as at 30 June 2022 (exercise price less the closing (12,995) 217,274 204,279 – share price as at 30 June 2022 of $198.70). Total unvested equity currently accounts for approximately 0.45% of the total number of issued shares, as set out below. Number of equivalent shares at 30 June 2022 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 1 Refer to Note 4.3 to the financial statements for further information on the APAC Employee Equity Plan. 204,279 43,873 38,900 9,176 296,228 0.45% 65,775,339 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. Cochlear Limited Annual Report 2022 86 9. Non-Executive Director fees NEDs are paid from an aggregate annual fee pool for FY22 of $3,000,000 (approved at the 2017 Annual General Meeting). Total remuneration paid during the year was $2,370,608 which is within the fee pool limit (represented 79% of the fee pool). NEDs do not receive any performance-related remuneration, options or performance rights. 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 Chair fees by 3% and base Member fees by 4%, effective 1 July 2021. 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. The table below outlines the policy base and committee fees for FY21 and FY22. Amounts $1 Cochlear Board Committees2 Audit & Risk People & Culture Technology & Innovation Medical Science FY21 FY22 Chair 518,547 50,000 40,000 40,000 30,000 Member 169,923 25,000 20,000 20,000 15,000 Chair 534,103 50,000 40,000 40,000 30,000 Member 176,720 25,000 20,000 20,000 15,000 Nomination 1 Superannuation contributions have been made in accordance with Australian superannuation legislation at a rate of 10% up to the No fee No fee No fee No fee 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. NEDs are entitled to reimbursement for costs directly related to Cochlear business including reasonable travel, accommodation and other expenses incurred attending meetings of the Board, committees or shareholders, or while engaged on company business. It is recognised that as an Australian headquartered business, for some overseas-based Non-Executive Directors substantial additional travel may be required to attend meetings or other Board-related matters in Australia. Effective February 2022, a travel allowance of $10,000 per return trip is in place for internationally based Non-Executive Directors who travel to and from Australia to attend Board and/or committee meetings or other Board-related matters (when air travel exceeds 10 hours). The allowance is paid on a per return trip basis and is in addition to the reimbursement of travel costs. In FY22, one NED based in the United States received a travel allowance of $10,000 to reflect one trip to Australia to attend Board meetings. Cochlear Limited Annual Report 2022 87 9.2 NED statutory remuneration The table below presents the total remuneration for NEDs. Amounts $ Year Short-term benefits Fees Travel allowance Post-employment benefits Superannuation Non-Executive Directors A Deans1 (Chair) Y Allen G Boreham, AM M Daniell, KNZM M del Prado2 A Denver C McLoughlin, AM3 B Robinson, AC Former Non-Executive Directors R Holliday-Smith4 A Hussain5 D O’Dwyer6 Total FY22 FY21 FY22 FY21 FY22 FY21 FY22 FY21 FY22 FY22 FY21 FY22 FY21 FY22 FY21 FY22 FY21 FY22 FY21 FY21 FY22 FY21 495,341 253,551 266,720 258,523 261,720 253,550 246,547 203,819 104,231 236,720 228,685 235,797 137,641 246,720 238,631 76,007 515,755 11,034 203,819 68,623 2,180,837 2,362,597 – – – – – – – – 10,000 – – – – – – – – – – – 10,000 – 23,568 21,694 23,568 21,694 23,568 21,694 22,946 20,216 10,423 22,710 21,694 22,979 13,076 23,171 21,694 5,892 21,694 946 20,216 7,309 179,771 190,981 Total 518,909 275,245 290,288 280,217 285,288 275,244 269,493 224,035 124,654 259,430 250,379 258,776 150,717 269,891 260,325 81,899 537,449 11,980 224,035 75,932 2,370,608 2,553,578 1 Alison Deans was appointed as Chair effective 21 August 2021. 2 Michael del Prado was appointed to the Board on 1 January 2022. Michael del Prado is a tax resident of the US and a non-resident of Australia for income tax purposes and is exempt from Australian superannuation guarantee obligations. An equivalent amount of $10,423 was paid over the period from 1 January 2022 to 30 June 2022 as fees in lieu of superannuation guarantee payments which would have been received. 3 Christine McLoughlin was appointed to the Board on 1 November 2020. Effective 1 October 2021, Christine McLoughlin has opted out of receiving superannuation guarantee payments in accordance with the Superannuation Guarantee (Administration) Act 1992 (Cth). An equivalent amount of $17,863 was paid over the period from 1 October 2021 to 30 June 2022 as fees. 4 Rick Holliday-Smith retired from the Board on 20 August 2021. 5 Abbas Hussain resigned from the Board on 20 July 2021. 6 Donal O’Dwyer retired from the Board on 20 October 2020. Cochlear Limited Annual Report 2022 88 9.3 Minimum shareholding requirement for NEDs NEDs are requested to hold shares equivalent to the fees (including both Board and committee fees) received in the previous 12 months. The share ownership requirement must be satisfied within three years of appointment to the Board. As at 30 June 2022, all NEDs with the exception of one are compliant with the Share Ownership Policy which allows three years to build their shareholdings. The table below presents Cochlear Limited shareholdings for each NED. Balance Purchases Sales 1 July 2021 Balance 30 June 2022 Policy value of shares as at 30 June 2022 ($)1 % of fees Non-Executive Directors A Deans Y Allen G Boreham, AM M Daniell, KNZM M del Prado2 A Denver C McLoughlin, AM B Robinson, AC3 4,000 3,714 3,014 1,214 – 4,214 1,000 1,083 Former Non-Executive Directors R Holliday-Smith 10,214 – – – – – – 650 – – – – – – – – – – – 4,000 3,714 3,014 1,214 – 4,214 1,650 1,083 N/A 885,480 822,168 667,209 268,743 – 932,853 365,261 239,744 N/A 166% 308% 255% 105% 0% 394% 151% 97% N/A A Hussain 1 In line with the Share Ownership Policy, available in the ‘Investors 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 ($221.37), as at closing on the ASX up to 30 June 2022, times the number of shares. N/A N/A 1,226 – N/A – 2 Michael del Prado was appointed to the Board on 1 January 2022 and in accordance with the policy has until 1 January 2025 to build his shareholding. 3 Bruce Robinson fell below the minimum shareholding requirement as calculated as at 30 June 2022. He is actively working towards meeting the policy requirement by December 2022. Cochlear Limited Annual Report 2022 89 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 2022, 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 A Deans (Chair), YA Allen, G Boreham, AM, Sir M Daniell, KNZM, M del Prado, A Denver, R Holliday-Smith, D Howitt, A Hussain, C McLoughlin, AM, K Penrose and Prof B Robinson, AC. Information on the current directors is presented in this 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 directors1 of the Company during the financial year were: 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 A Deans2 YA Allen G Boreham, AM Sir M Daniell, KNZM M del Prado3 A Denver R Holliday-Smith4 D Howitt A Hussain5 C McLoughlin, AM 11 11 11 11 5 11 2 11 1 11 11 11 11 11 5 11 2 11 1 11 1 4 4 3 – 4 1 – – 4 1 4 4 3 – 4 1 – – 4 1 4 4 – – – 1 – – 4 1 4 4 – – – 1 – – 4 – – – 2 – 2 – 2 1 – 11 11 Prof B Robinson, AC – 1 K Penrose was appointed to the Board on 1 July 2022 and did not attend meetings during the financial year. 2 A Deans was appointed as Chair effective 21 August 2021. 3 M del Prado was appointed to the Board on 1 January 2022. 4 R Holliday-Smith retired from the Board on 20 August 2021. 5 A Hussain retired from the Board on 20 July 2021. 4 4 2 – – – – 2 – 2 – 2 1 – 2 6 6 6 6 2 6 2 – 1 6 6 6 6 6 6 2 6 2 – 1 6 6 1 4 4 4 1 4 – 4 – 3 4 1 4 4 4 1 4 – 4 – 3 3 Cochlear Limited Annual Report 2022 90 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 Operational review and Financial review on pages 54 to 59 of this Annual Report. Dividends Dividends declared and paid by the Company to members since the end of the previous financial year were: Dollars per share Total amount $m Franked Date of payment Dividends recognised in the current financial year by the Company are: Interim 2022 ordinary Final 2021 ordinary Total amount 1.55 1.40 2.95 102.0 92.0 194.0 0% Franked 21 April 2022 0% Franked 18 October 2021 Since the end of the financial year, the directors declared the following dividend: Final 2022 ordinary Total amount 1.45 1.45 95.4 95.4 40% Franked 17 October 2022 The financial effect of the 2022 final dividend will be recognised in the subsequent financial year as it was declared after 30 June 2022. 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. Cochlear Limited Annual Report 2022 91 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 Taxation compliance and advisory services Other Total non-audit services Consolidated 2022 $ 2021 $ 2,068,476 2,068,476 977,589 68,824 2,030,461 2,030,461 1,370,782 52,942 1,046,413 1,423,724 State of affairs 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 2022 for the Cochlear Limited Board, the CEO & President and other key management personnel, and changes for the financial year ending 30 June 2023, is included in the Remuneration report on pages 70 to 89 of this Annual Report. Indemnification of officers Under the terms of Article 10 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. Cochlear Limited Annual Report 2022 92 Events subsequent to the reporting date Other than the matter noted below, there has not arisen in the interval between the reporting date and the date of this Financial report, any item, transaction or event of a material and unusual nature likely, in the opinion of the directors of the Company, to significantly affect the operations of Cochlear, the results of those operations, or the state of affairs of Cochlear in future financial years: Dividends For dividends declared after 30 June 2022, refer above. Lead auditor’s independence declaration The lead auditor’s independence declaration is set out on page 94 and forms part of the Directors’ report for the financial year ended 30 June 2022. 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 2022. Signed in accordance with a resolution of the directors: Director Director Cochlear Limited Annual Report 2022 93 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 financial year ended 30 June 2022 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 2022 KPMG, an Australian partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation. Liability limited by a scheme approved under Professional Standards Legislation. Cochlear Limited Annual Report 2022 94 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 Profit before income tax Income tax expense Net profit Basic earnings per share (cents) Diluted earnings per share (cents) 2022 $m 1,648.3 (411.0) 1,237.3 (498.7) (210.7) (159.0) 31.1 – – – 400.0 2.4 (8.6) (6.2) 393.8 (104.7) 289.1 439.6 439.6 2021 (Restated)1 $m 1,497.6 (410.2) 1,087.4 (444.1) (195.0) (116.1) 86.5 (40.4) (6.4) (1.7) 370.2 3.6 (12.0) (8.4) 361.8 (38.0) 323.8 492.6 492.6 Note 2.2 2.3 2.4 2.3 2.3 5.5 3.1 2.5 2.5 1 Comparative information throughout these financial statements has been restated for International Financial Reporting Standards Interpretation Committee (IFRIC) decision Configuration or Customisation Costs in a Cloud Computing Arrangement. Refer to Note 7.6 for further details. The notes on pages 100 to 135 are an integral part of these consolidated financial statements. Cochlear Limited Annual Report 2022 95 Statement of comprehensive income Net profit Other comprehensive income/(loss) Items that will not be reclassified subsequently to the income statement: Defined benefit plan actuarial gain/(loss) 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 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 (loss)/income, net of tax Total comprehensive income 2022 $m 289.1 2021 (Restated)1 $m 323.8 5.1 (83.8) (78.7) (6.2) (16.9) (5.0) (28.1) (106.8) 182.3 (0.1) 40.7 40.6 (14.1) 11.2 (3.0) (5.9) 34.7 358.5 1 Comparative information throughout these financial statements has been restated for IFRIC decision Configuration or Customisation Costs in a Cloud Computing Arrangement. Refer to Note 7.6 for further details. The notes on pages 100 to 135 are an integral part of these consolidated financial statements. Cochlear Limited Annual Report 2022 96 Balance sheet Assets Cash and cash equivalents Trade and other receivables Forward exchange contracts Inventories Current tax assets Prepayments Total current assets Forward exchange contracts Property, plant and equipment Intangible assets Investments Other financial 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 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 2.7(a) 6.4(b) 5.1 3.2 5.2 5.3 5.5 5.5 3.2 5.8 6.3 3.2 4.2 5.6 6.4(c) 6.3 4.2 5.6 3.2 6.4(c) 2022 $m 2021 (Restated)1 $m 629.3 348.5 8.4 270.2 41.9 28.7 1,327.0 2.4 260.2 392.5 119.1 68.8 116.1 179.0 1,138.1 2,465.1 232.4 22.3 42.6 15.2 101.6 22.7 54.7 36.1 527.6 0.3 6.5 – 6.4 33.2 22.4 7.8 175.2 251.8 779.4 1,685.7 1,276.6 (46.2) 455.3 1,685.7 609.6 296.3 17.6 216.1 69.2 21.2 1,230.0 3.3 239.5 385.5 199.5 27.3 152.0 189.0 1,196.1 2,426.1 202.9 4.7 – 12.9 87.9 19.4 42.8 31.9 402.5 0.7 3.2 45.0 12.1 31.0 50.6 4.0 187.4 334.0 736.5 1,689.6 1,276.6 57.9 355.1 1,689.6 1 Comparative information throughout these financial statements has been restated for IFRIC decision Configuration or Customisation Costs in a Cloud Computing Arrangement. Refer to Note 7.6 for further details. The notes on pages 100 to 135 are an integral part of these consolidated financial statements. Cochlear Limited Annual Report 2022 97 Statement of changes in equity $m 2021 Balance at 1 July 2020 - Reported Adjustment due to cloud computing arrangements1 Balance at 1 July 2020 - Restated Total comprehensive income/(loss) Net profit Other comprehensive income/(loss) Defined benefit plan actuarial loss 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 2021 - Restated 2022 Balance at 1 July 2021 - Reported Adjustment due to cloud computing arrangements1 Balance at 1 July 2021 - Restated Total comprehensive income/(loss) Net profit Other comprehensive income/(loss) Defined benefit plan actuarial gain 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 Performance rights vested Share-based payment transactions Deferred tax recognised in equity Dividends to shareholders Balance at 30 June 2022 Issued capital Translation reserve Hedging reserve Fair value reserve Share-based payment reserve Retained earnings Total equity 1,272.4 – 1,272.4 (43.3) – (43.3) 0.9 – 0.9 (2.9) – (2.9) 58.0 – 58.0 116.4 (9.4) 107.0 1,401.5 (9.4) 1,392.1 – – – – – – – – 4.2 – – – – 1,276.6 1,276.6 – 1,276.6 – – – – – – – – – – – (14.1) – – – – – – 11.2 (3.0) – – 40.7 – – – 8.2 8.2 40.7 40.7 (14.1) (14.1) – – – – – (57.4) (57.4) – (57.4) – – – (6.2) – – – – – 9.1 9.1 – 9.1 – – – – – – – – – 37.8 37.8 – 37.8 – – (83.8) – – – – – (16.9) (5.0) (6.2) (6.2) (21.9) (83.8) (83.8) (21.9) – – – – – – – – (1.2) (0.7) 8.1 4.2 – 68.4 68.4 – 68.4 – – – – – – – – 323.8 323.8 (0.1) – – – – (0.1) 323.7 – – – – (75.6) 355.1 367.2 (12.1) 355.1 (0.1) 40.7 (14.1) 11.2 (3.0) 34.7 358.5 3.0 (0.7) 8.1 4.2 (75.6) 1,689.6 1,701.7 (12.1) 1,689.6 289.1 289.1 5.1 5.1 – – – – (83.8) (6.2) (16.9) (5.0) 5.1 294.2 (106.8) 182.3 – – – – 1,276.6 – – – – (63.6) – – – – (12.8) – – – – (46.0) (1.1) 10.8 (1.9) – 76.2 – – – (194.0) 455.3 (1.1) 10.8 (1.9) (194.0) 1,685.7 1 Comparative information throughout these financial statements has been restated for IFRIC decision Configuration or Customisation Costs in a Cloud Computing Arrangement. Refer to Note 7.6 for further details. The notes on pages 100 to 135 are an integral part of these consolidated financial statements. Cochlear Limited Annual Report 2022 98 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 received Government assistance in respect of COVID repaid Interest received Interest paid Income taxes paid Net cash provided by operating activities Cash flows from investing activities Acquisition of leasehold improvements, plant and equipment and land and buildings Acquisition of intangible assets Acquisition of investments and other financial assets Proceeds from term deposits Net cash (used in)/provided by investing activities Cash flows from financing activities Repayments of borrowings Proceeds from borrowings Payments of lease liability principal (Outlay)/proceeds from exercise of share options and performance rights Dividends paid Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents, net of overdrafts at 1 July Effect of exchange rate fluctuations on cash held Cash and cash equivalents, net of overdrafts at 30 June Note 2.4 2.4 2.3 3.1 2.7(b) 5.2 5.3 5.5 2.6 2022 $m 2021 (Restated)1 $m 1,611.8 1,436.0 (1,215.0) (1,156.1) 12.0 – – 2.4 (8.6) (26.1) 376.5 (44.5) (32.7) (61.7) – (138.9) – – (25.6) (1.1) (194.0) (220.7) 16.9 609.6 2.8 629.3 8.3 24.6 (24.6) 3.6 (12.0) (14.4) 265.4 (41.2) (25.5) (18.4) 365.0 279.9 (403.1) 1.7 (20.5) 2.4 (75.6) (495.1) 50.2 565.0 (5.6) 609.6 1 Comparative information throughout these financial statements has been restated for IFRIC decision Configuration or Customisation Costs in a Cloud Computing Arrangement. Refer to Note 7.6 for further details. The notes on pages 100 to 135 are an integral part of these consolidated financial statements. Cochlear Limited Annual Report 2022 99 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 2022 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 and Interpretations adopted by the International Accounting Standards Board. The Board approved the consolidated financial statements on 18 August 2022. (b) 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). (c) Functional and presentation currency These consolidated financial statements are presented in Australian dollars (AUD), which is the Company’s functional currency. The Company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 dated 24 March 2016 and, in accordance with that Instrument, all financial information presented in AUD has been rounded to the nearest one hundred thousand dollars unless otherwise stated. (d) Foreign currency Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of entities at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the foreign exchange rate ruling at that date. Non-monetary assets and liabilities denominated in foreign currencies that are stated at historical cost are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to the functional currency at the foreign exchange rates ruling at the date the fair value was determined. Foreign exchange differences arising on translation are recognised in the Income statement within other income and other expenses. Cochlear Limited Annual Report 2022 100 Financial statements of foreign operations The assets and liabilities of foreign operations are translated to the Company’s functional currency at foreign exchange rates ruling at the reporting date. The revenues and expenses of foreign operations are translated to the Company’s functional currency at rates approximating the foreign exchange rates ruling at the dates of transactions. Foreign currency differences arising from translation of controlled entities are recognised in the foreign currency translation reserve (translation reserve) in equity. When a foreign operation is disposed of, in part or in full, the relevant amount of its translation reserve is transferred to the Income statement and reported as part of the gain or loss on disposal. Foreign exchange gains and losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely in the foreseeable future, are considered to form part of a net investment in a foreign operation and are recognised in other comprehensive income and presented in the translation reserve. (e) Use of judgements and estimates The preparation of financial statements in conformity with AASBs 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 4.3 – Share-based payments – measurement of fair value using the Black-Scholes-Merton pricing model; Note 5.3 – Intangible assets – key assumptions in impairment testing of intangible assets and goodwill; Note 5.6 – Provisions – key assumptions about the likelihood and magnitude of an outflow of economic benefits in relation to the warranty and product recall provisions; Note 5.7 – Contingent liabilities – key assumptions about the likelihood and magnitude of an outflow of economic benefits in relation to patent infringement claims; Note 5.8 – Leases – lease terms and whether Cochlear is reasonably certain to exercise extension options; and Note 6.4 – Financial risk management – measurement of expected credit loss allowance for trade receivables; measurement of the fair value of financial assets. (f) Basis of consolidation Controlled entities The Consolidated Entity controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of controlled entities are included in the consolidated financial statements from the date that control commences until the date that control ceases. Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Special purpose entities Cochlear has established special purpose entities (SPEs) for investment purposes. A SPE is consolidated if Cochlear concludes that it controls the SPE. SPEs controlled by Cochlear were established under terms that impose strict limitations on decision- making powers of the SPE’s management. Cochlear Limited Annual Report 2022 101 (g) Goods and services tax (GST) Revenues, expenses and assets are recognised net of the amount of GST. Where the amount of GST incurred is not recoverable from the taxation authority, the GST is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the relevant taxation authority is included as a current asset or liability in the Balance sheet. Cash flows are included in the Statement of cash flows on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the relevant taxation authority are classified as operating cash flows. (h) Comparability Comparative information is reclassified where appropriate to enhance comparability or to comply with new or revised accounting standards. Refer to Note 7.6 for further details. 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 Reportable segment revenue Reportable segment EBIT Reportable segment assets Reportable segment liabilities Other material items 2022 $m 779.7 414.4 350.8 172.7 2021 $m 724.8 383.8 301.9 151.8 Depreciation and amortisation 11.2 11.2 Write-down in value of inventories Acquisition of non-current assets 1 Europe, Middle East and Africa. 0.7 2.3 0.8 0.9 2022 $m 578.5 274.4 281.2 93.3 6.8 1.1 2.4 2021 $m 517.7 227.6 275.8 91.9 6.5 1.8 2.9 2022 $m 2021 $m 2022 $m 2021 $m 282.9 250.8 1,641.1 1,493.3 92.0 74.2 228.9 138.1 57.0 42.9 780.8 860.9 323.0 685.6 715.8 286.6 5.8 0.3 3.9 5.4 0.7 0.9 23.8 23.1 2.1 8.6 3.3 4.7 Reconciliations of reportable segment revenues, profit or loss, assets and liabilities and other material items Revenues Cochlear implants 2022 2021 $m 935.2 898.6 Services (sound processor upgrades and other) $m 503.9 438.5 Total cochlear implants $m 1,439.1 1,337.1 Acoustics Reportable segment revenue Foreign exchange gain on hedged sales Consolidated revenue $m 202.0 156.2 $m 1,641.1 1,493.3 $m 7.2 4.3 $m 1,648.3 1,497.6 Cochlear Limited Annual Report 2022 102 Profit or loss 2022 2021 (Restated)1 Assets and liabilities 2022 2021 (Restated)1 Reportable segment EBIT Corporate and other net expenses Foreign exchange gain on hedged sales Net finance expense Consolidated profit before income tax $m 780.8 685.6 $m (388.0) (319.7) $m 7.2 4.3 $m (6.2) (8.4) $m 393.8 361.8 Reportable segment assets $m 860.9 715.8 Corporate and manufacturing assets $m 1,604.2 1,710.3 Consolidated total assets $m 2,465.1 2,426.1 Reportable segment liabilities $m 323.0 286.6 Corporate and manufacturing liabilities $m 456.4 449.9 Consolidated total liabilities $m 779.4 736.5 Other material items Reportable segment total Corporate and manufacturing total Consolidated total 2022 $m 2021 2022 $m $m 2021 (Restated)1 $m 2022 $m 2021 (Restated)1 $m 23.8 23.1 49.2 Depreciation and amortisation Write-down in value of inventories Acquisition of non-current assets – Patent litigation expense Equity accounted losses – 1 Comparative information has been restated for IFRIC decision on cloud computing costs. Refer to Note 7.6 for details. 6.4 1.7 138.9 130.3 13.1 73.0 68.4 11.0 53.3 – – – – – – 4.7 3.3 8.2 8.6 2.1 76.4 11.5 73.1 6.4 1.7 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. Revenues from the rendering of services, including ongoing customer support and software licensing, are recognised over time as the services are provided to customers. 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. Customers include implant recipients, medical practitioners and governments. Contracts are short-term with the exception 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 gain on hedged sales Revenue from sale of goods Rendering of services Total revenue 2022 $m 1,608.5 7.2 1,615.7 32.6 1,648.3 2021 $m 1,462.7 4.3 1,467.0 30.6 1,497.6 Cochlear Limited Annual Report 2022 103 2.3 Expenses (a) Cost of sales Carrying amount of inventories recognised as an expense Write-down in value of inventories Other Total cost of sales (b) Other expenses Repayment of government assistance in respect of COVID1 Net foreign exchange loss Total other expenses (c) Patent litigation expense Withholding tax expense Foreign exchange gain Total patent litigation expense 1 Voluntary repayment of government assistance. Refer to Note 2.4 for further details. Patent litigation expense 2022 $m 392.8 13.1 5.1 411.0 – – – – – – 2021 $m 391.4 11.5 7.3 410.2 24.6 15.8 40.4 29.6 (23.2) 6.4 The patent litigation expense related 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). In the prior year, $29.6 million was recognised for withholding tax payable on the settlement amounts paid to AMF and AB following receipt of a private ruling from the Australian Taxation Office (ATO) in December 2020. The foreign exchange gain of $23.2 million represented the revaluation of Balance sheet items related to the patent litigation. This included the United States Dollar (USD) 268 million loan facility for patent litigation at 30 June 2020 which has since been fully repaid. As this matter has now been resolved, there are no provisions remaining in relation to this dispute. 2.4 Other income Other income, including government grants, is recognised on a systematic basis over the years necessary to match it with the related costs for which it is intended to compensate. If the costs have already been incurred, the amount is recognised in the year the entitlement is confirmed. Foreign exchange gains/losses are recognised in accordance with the accounting policy at Note 1.2(d). Grant received or due and receivable Release of contingent consideration Government assistance in respect of COVID1 Fair value change in investments measured at fair value through profit or loss Net foreign exchange gain Other income Total other income 2022 $m 2.7 1.7 – 17.3 0.1 9.3 31.1 2021 $m 2.1 1.6 24.6 52.0 – 6.2 86.5 1 Government assistance received in the financial year ended 30 June 2021 was voluntarily repaid towards the end of the prior period as trading conditions improved. As the payment is voluntary, the repayment has been included as an expense in Note 2.3(b). Changes to the contingent consideration value recognised for the Sycle, LLC business acquisition were considered at 30 June 2022. Based on performance hurdles expected to be met, $1.7 million (2021: $1.6 million) has been released to the Income statement and $0.4 million remains as contingent consideration (2021: $3.0 million). Cochlear Limited Annual Report 2022 104 2.5 Earnings per share Cochlear presents basic and diluted earnings per share (EPS) for its ordinary shares. Basic earnings per share The calculation of basic EPS has been based on the following net profit attributable to equity holders of the parent entity and weighted average number of ordinary shares of the Company: Net profit attributable to equity holders of the parent entity Weighted average number of ordinary shares (basic): Issued ordinary shares at 1 July (number) Effect of options, performance shares and performance rights exercised (number) Effect of shares issued under Employee Share Plan (number) Weighted average number of ordinary shares (basic) at 30 June Basic earnings per share (cents) Diluted earnings per share 2022 2021 $289,104,000 (Restated)1 $323,800,000 65,744,078 26,291 70 65,770,439 439.6 65,687,402 45,869 – 65,733,271 492.6 The calculation of diluted EPS has been based on the following net profit attributable to equity holders of the parent entity and weighted average number of shares outstanding after adjustments for the effects of all dilutive potential ordinary shares: Net profit attributable to equity holders of the parent entity Weighted average number of ordinary shares (diluted): Weighted average number of shares (basic) (number) Effect of options, performance shares and performance rights unvested (number) Weighted average number of ordinary shares (diluted) at 30 June Diluted earnings per share (cents) 1 Comparative information has been restated for IFRIC decision on cloud computing costs. Refer to Note 7.6 for details. 65,770,439 207 65,770,646 439.6 $289,104,000 65,733,271 1,071 65,734,342 492.6 2022 2021 (Restated)1 $323,800,000 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 Date of payment Dividends recognised in the current financial year by the Company are: 2022 Interim 2022 ordinary Final 2021 ordinary Total amount 2021 Interim 2021 ordinary Total amount 1.55 1.40 2.95 1.15 1.15 102.0 92.0 194.0 75.6 75.6 0% Franked 0% Franked 21 April 2022 18 October 2021 0% Franked 20 April 2021 Dollars per share Total amount $m Franked Date of payment Subsequent event Since the end of the financial year, the directors declared the following dividend: Final 2022 ordinary Total amount 1.45 1.45 95.4 95.4 40% Franked 17 October 2022 The financial effect of the 2022 final dividend will be recognised in the subsequent financial year as it was declared after 30 June 2022. Cochlear Limited Annual Report 2022 105 Dividend franking account Total franking account balance at 30% 2022 $m – 2021 $m – The above amount represents the balance of the franking account as at 30 June, after taking into account adjustments for: • • • franking credits that will arise from the payment of income tax payable for the current year; franking credits that will arise from the receipt of dividends recognised as receivables at the year end; and franking credits that the Company may be prevented from distributing in subsequent financial years. It is expected that future income tax payments made during 2022/23 will generate franking credits that could be distributed to shareholders. The ability to utilise the franking account credits is dependent upon the ability to declare dividends. 2.7 Notes to the statement of cash flows (a) Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits with an original maturity of three months or less. Bank overdrafts that are repayable on demand and form an integral part of Cochlear’s cash management are included as a component of cash and cash equivalents for the purpose of the Statement of cash flows. The operating cash account received an average interest rate of 0.39% (2021: 0.58%) per annum. (b) Reconciliation of net profit to net cash provided by operating activities 2022 $m 289.1 0.6 Net profit Add item classified as investing activities: Loss on disposal of property, plant and equipment Add/(less) non-cash items: Depreciation and amortisation Release of contingent consideration Fair value change in investments measured at fair value through profit or loss Equity settled share-based payment transactions Share of losses on equity accounted investments Net cash provided by operating activities before changes in assets and liabilities Changes in assets and liabilities: Change in trade and other receivables Change in inventories Change in prepayments Change in deferred tax assets/liabilities Change in trade and other payables Change in current tax assets/liabilities Change in employee benefit liabilities Change in provisions Change in deferred revenue Effect of movements in foreign exchange Net cash provided by operating activities 1 Comparative information has been restated for IFRIC decision on cloud computing costs. Refer to Note 7.6 for details. (52.2) (54.1) (7.5) 45.0 29.1 29.6 8.0 5.5 15.7 2.9 376.5 73.0 (1.7) (17.3) 10.8 – 354.5 2021 (Restated)1 $m 323.8 0.2 76.4 (1.6) (52.0) 8.1 1.7 356.6 (60.8) 7.7 (3.6) 35.6 31.8 5.9 33.2 (107.0) (2.5) (31.5) 265.4 Cochlear Limited Annual Report 2022 106 3. Income taxes The Company and its wholly-owned Australian resident entities are part of a tax consolidated group. As a consequence, all members of the tax consolidated group are taxed as a single entity. The head entity within the tax consolidated group is Cochlear Limited. 3.1 Income tax expense Income tax expense includes current and deferred tax. Current and deferred tax is recognised in the Income statement except to the extent that it relates to items recognised directly in other comprehensive income or equity. Current tax is the expected tax payable or receivable on the taxable income or loss for the year and any adjustment to tax payable in respect of previous years. It is measured using tax rates enacted or substantively enacted at the reporting date. Income tax expense recognised in the Income statement 2022 $m 2021 (Restated)1 $m Current income tax expense Current year Adjustment for prior years Total current income tax expense Deferred income tax expense Origination and reversal of temporary differences Net utilisation/(recognition) of tax losses Current year deferred income tax expense Adjustment for prior years Total deferred income tax expense 50.4 6.7 57.1 (14.3) 61.2 46.9 0.7 47.6 Total income tax expense recognised in the Income statement 1 Comparative information has been restated for IFRIC decision on cloud computing costs. Refer to Note 7.6 for details. 104.7 84.6 (61.3) 23.3 48.2 (34.4) 13.8 0.9 14.7 38.0 Consolidated Entity – Numerical reconciliation between profit before income tax and income tax expense Profit before income tax Tax at the Australian tax rate of 30% (2021: 30%) (Less)/add adjustments for: Research and development allowances Net non-deductible/(non-assessable) items Effect of tax rates in foreign jurisdictions Patent litigation adjustment for prior year2 Other adjustment for prior years 2022 $m 393.8 118.1 (16.5) 0.3 (4.6) 97.3 – 7.4 2021 (Restated)1 $m 361.8 108.5 (10.1) 3.2 (3.2) 98.4 (63.5) 3.1 Income tax expense on profit before income tax 1 Comparative information has been restated for IFRIC decision on cloud computing costs. Refer to Note 7.6 for details. 2 Cochlear Limited prior year adjustment relating to patent litigation following the receipt of a private ruling from the ATO in December 2020. 104.7 38.0 Cochlear Limited Annual Report 2022 107 Income tax recognised in Statement of changes in equity Income tax on: Fair value (losses)/gains on investments Cash flow hedges Share-based payments Total income tax recognised in Statement of changes in equity Note 3.2 3.2 2022 $m (34.1) (9.4) 1.9 (41.6) 2021 $m 17.4 3.5 (4.2) 16.7 Consolidated Entity – Numerical reconciliation between income tax expense and cash taxes paid 2022 2021 Income tax expense on profit before income tax Timing differences recognised in deferred tax Net (utilisation)/benefit of tax losses recognised in deferred tax Current year tax instalments receivable next year Prior year tax instalments received this year $m 104.7 14.3 (61.2) 21.1 (52.8) Cash taxes paid per statement of cash flows 1 Comparative information has been restated for IFRIC decision on cloud computing costs. Refer to Note 7.6 for details. 26.1 (Restated)1 $m 38.0 (48.2) 34.4 43.3 (53.1) 14.4 Cochlear Limited’s Australian tax consolidated group – Numerical reconciliation between profit before income tax and income tax expense Profit before income tax (excluding dividends from wholly-owned foreign subsidiaries) Add: Dividends from wholly-owned foreign subsidiaries Profit before income tax Tax at the Australian tax rate of 30% (2021: 30%) (Less)/add adjustments for: Research and development allowances Net non-deductible items Controlled foreign company income Exempt foreign sourced dividends from wholly-owned subsidiaries Patent litigation prior year adjustment2 Adjustment for prior years 2022 2021 (Restated)1 $m 253.7 45.8 299.5 89.8 (8.5) 4.4 2.8 (13.7) 74.8 (63.5) 5.1 $m 336.9 95.5 432.4 129.7 (15.8) 2.8 2.3 (28.7) 90.3 – 0.7 Income tax expense on profit before income tax 1 Comparative information has been restated for IFRIC decision on cloud computing costs. Refer to Note 7.6 for details. 2 Cochlear Limited prior year adjustment relating to patent litigation following the receipt of a private ruling from the ATO in December 2020. 91.0 16.4 Cochlear Limited Annual Report 2022 108 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 it 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 Deferred tax assets Deferred tax liabilities Deferred tax assets Reconciliation of deferred tax assets and liabilities 2022 $m 116.1 (22.4) 93.7 2021 (Restated)1 $m 152.0 (50.6) 101.4 Opening balance (Restated)1 Recognised in the Income statement Recognised in other comprehensive income Recognised in equity Closing balance Property, plant and equipment Intangible assets Inventories Provisions Deferred revenue Forward exchange contracts Tax losses and offsets carried forward Other 0.7 3.6 39.0 28.8 4.8 (3.9) 61.2 (32.8) 0.8 3.6 14.6 4.6 0.6 – (61.2) (9.9) – – – – – 9.4 – 34.1 – – – – – – – (4.3) Deferred tax assets/(liabilities) 1 Comparative information has been restated for IFRIC decision on cloud computing costs. Refer to Note 7.6 for details. (46.9) 101.4 (4.3) 43.5 1.5 7.2 53.6 33.4 5.4 5.5 – (12.9) 93.7 Unrecognised deferred tax liabilities At 30 June 2022, a deferred tax liability of $49.4 million (2021: $48.1 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. Carried forward tax losses Total tax losses brought forward Total losses recognised Total losses utilised against current taxable income Total losses carried forward to be utilised in future years Cochlear Limited Annual Report 2022 2022 $m 61.2 – (61.2) – 2021 $m 26.8 63.9 (29.5) 61.2 109 Current tax assets and liabilities The current tax assets for the Consolidated Entity of $41.9 million (2021: $69.2 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 $15.2 million (2021: $12.9 million) represent the amount of income taxes payable in respect of current and prior financial years. 4. Employee benefits 4.1 Employee expenses Wages and salaries Contributions to superannuation plans Increase/(decrease) in leave liabilities Equity settled share-based payment transactions Total employee expenses 4.2 Employee benefit liabilities Wages, salaries and annual leave 2022 $m 463.6 37.4 5.0 10.8 516.8 2021 $m 410.6 30.5 (0.4) 8.1 448.8 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 (2021: 84 employees). Cochlear contributed cash of $1.5 million (2021: $1.4 million) to defined benefit plans in the year ended 30 June 2022 and expects to contribute $1.7 million in the year ending 30 June 2023. 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. Cochlear Limited Annual Report 2022 110 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 2022 $m 14.7 40.1 46.8 101.6 6.3 0.1 6.4 108.0 2021 $m 13.5 36.6 37.8 87.9 6.1 6.0 12.1 100.0 4.3 Share-based payments 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 2022, the unissued ordinary shares of the Company under option and rights and the terms and conditions of the grants and issues are as follows: Grant date October 20191,2 October 20191,2 September 20203 October 20201,2 September 20214 October 20211,2 October 20213 Exercise price of options Number of options Number of performance rights Contractual life $217.28 $217.28 N/A $206.06 N/A $232.52 N/A 24,231 51,802 – 54,731 – 73,515 – 3,994 9,546 4,665 12,332 38,900 18,001 3,281 4 years 5 years 2 years 5 years 2 years 5 years 2 years Total 1 Options and performance rights offered under long-term incentives. 2 From FY20, LTI award is subject to a four-year performance period and as a transition for the FY20 LTI plan, two grants were offered including three-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. 3 Services rights offered under the CEIP. 4 Performance rights offered under deferred short-term incentives. 204,279 90,719 Grants are split between deferred short-term incentives (STI) and long-term incentives (LTI). Under the CEIP, certain employees receive a portion of their STI achievement in the form of performance rights. 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. Cochlear Limited Annual Report 2022 111 Grants under LTI are in two equal tranches assigned to compound annual growth rate (CAGR) in EPS and ranking of total shareholder return (TSR) against the Australian Securities Exchange (ASX) 100 index. The conditions for minimum vesting are four years of service and: • • 50% weighting on 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. 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: 20 October 2021 (4 years) 30 September 2021 21 October 2020 (4 years) TSR-based conditions EPS performance- based conditions Deferred STI service- based conditions Rights service- based conditions TSR-based conditions EPS performance- based conditions 18 September 2020 Rights service-based conditions $45.46 $54.45 N/A N/A $38.88 $42.56 N/A $125.69 $222.32 $224.60 $224.60 $124.47 $188.83 $195.20 $226.85 $226.85 $226.85 $226.85 $201.75 $201.75 $201.75 $232.52 $232.52 N/A N/A $206.06 $206.06 N/A 30.87% 30.87% 38.06% 38.06% 30.77% 30.77% 39.13% Fair value of options at grant date Fair value of performance rights at grant date Share price at valuation date Option exercise price Expected volatility1 Option/right life (years) Expected dividend 4 - 5 0.51% 4 - 5 2 2 4 - 5 0.51% 0.51% 0.51% 1.66% Risk free interest rate2 1 Measure captures the characteristics of fluctuations in the share price. 2 Based on government bonds. 0.30% 0.30% 0.30% 0.30% 0.30% 4 - 5 1.66% 0.30% 2 1.66% 0.30% The numbers 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 2022 $209.03 $205.88 $202.84 $232.52 $219.76 $217.28 Number of options 2022 208,331 (70,634) (13,658) 80,240 204,279 24,231 Weighted average exercise price 2021 $188.12 $159.34 $154.73 $206.06 $209.03 $202.84 Number of options 2021 261,426 (60,401) (48,423) 55,729 208,331 75,745 Cochlear Limited Annual Report 2022 112 13,658 options were exercised in 2022 (2021: 48,423 options were exercised). The weighted average market share price on the ASX at date of exercise was $237.25 (2021: $207.72). The weighted average remaining contractual life of options outstanding at the end of the year is three years (2021: two years). ShareWave Employee Share Plan In 2021, Cochlear launched ShareWave, replacing all existing employee share purchase plans. Under the plan, eligible employees can become a Cochlear Limited shareholder by purchasing shares at the current market value through after-tax salary deductions, with Cochlear Limited providing a matching benefit at no extra cost to the employees at the end of the contribution period, subject to vesting conditions. A maximum value of $1,000 or $1,500 applies to ShareWave, depending on the eligibility of the participating employee. APAC Employee Equity Plan The APAC Employee Equity Plan, established in 2016, provided approximately $1,000 of service rights annually per eligible employee in selected Asian countries. Service rights were subject to a three-year service condition. Upon vesting, each service right converted to one share. For the year ended 30 June 2022, the Company issued nil shares under the plan (2021: 1,068 shares). The plan ceased in effect following the launch of ShareWave. 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 A Deans (Chair), YA Allen, G Boreham, AM, Sir M Daniell, KNZM, M del Prado1, A Denver, C McLoughlin, AM, Prof B Robinson, AC, R Holliday-Smith2 and A Hussain3. Executive KMP D Howitt, L Aubert4, A Bishop, R Brook, J Janssen and S Sayers. Former Executive KMP T Manna5. 1 Appointed on 1 January 2022. 2 Retired on 20 August 2021. 3 Retired on 20 July 2021. 4 Commenced as a KMP on 1 April 2022. 5 Ceased as a KMP on 31 March 2022. Key management personnel disclosures The KMP compensation is included in employee expenses as follows: Short-term employee benefits $ 12,387,271 Post-employment benefits $ 432,680 Other long-term benefits $ 82,478 Share-based payments $ 4,009,601 End of service payment $ 298,694 Total $ 17,210,724 12,008,815 415,634 (6,123) 2,794,219 327,132 15,539,677 2022 2021 Information regarding individual KMP remuneration and some equity instruments disclosures as permitted by section 300A of the Corporations Act (Cth) 2001 is provided in the Remuneration report of this Annual Report on pages 70 to 89. The KMP have not received any loans from Cochlear and there have been no other related party transactions with any of Cochlear’s KMP. Cochlear Limited Annual Report 2022 113 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 99.9 87.4 Work in progress $m 25.2 32.9 Finished goods $m 145.1 95.8 Total inventories $m 270.2 216.1 2022 2021 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. 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. Cochlear Limited Annual Report 2022 114 Leasehold improvements Plant and equipment Land and buildings Total At cost Accumulated depreciation Net book value 2022 $m 70.9 (38.3) 32.6 Reconciliations of the carrying amounts are: Opening balance 34.0 Additions Disposals Depreciation Effect of movements in foreign exchange Net book value 3.4 – (6.2) 1.4 32.6 2021 $m 66.1 (32.1) 34.0 38.9 2.5 – (5.4) (2.0) 34.0 2022 $m 347.4 2021 $m 308.3 (192.7) (174.8) 154.7 133.5 2022 $m 75.5 (2.6) 72.9 133.5 41.1 (0.6) (22.5) 124.5 72.0 33.9 (0.2) – – (23.2) (1.1) 3.2 (1.5) 2.0 2021 $m 73.1 (1.1) 72.0 67.1 4.8 – (0.8) 0.9 2022 $m 493.8 2021 $m 447.5 (233.6) (208.0) 260.2 239.5 239.5 44.5 (0.6) (29.8) 230.5 41.2 (0.2) (29.4) 6.6 (2.6) 154.7 133.5 72.9 72.0 260.2 239.5 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. Goodwill and intangible assets with an indefinite useful life are systematically tested for impairment annually. Cochlear Limited Annual Report 2022 115 Intangible assets with indefinite useful life Goodwill 2022 At cost Accumulated amortisation and impairment losses Net book value Reconciliations of the carrying amounts are: Opening balance Additions Amortisation Effect of movements in foreign exchange Net book value 2021 At cost Accumulated amortisation and impairment losses Net book value Reconciliations of the carrying amounts are: Opening balance Additions Amortisation Effect of movements in foreign exchange $m 257.1 – 257.1 267.3 – – (10.2) 257.1 267.3 – 267.3 270.9 – – (3.6) Intangible assets with finite useful life IT system costs (Restated)1 $m 113.5 (80.5) 33.0 37.1 5.2 (8.5) (0.8) 33.0 109.5 (72.4) 37.1 44.7 – (7.6) – Acquired technology, patents and licences $m 163.5 (84.3) 79.2 58.5 24.1 (3.0) (0.4) 79.2 140.3 (81.8) 58.5 53.6 13.0 (8.1) – Other intangible assets $m 50.5 (27.3) 23.2 22.6 3.4 (3.8) 1.0 23.2 52.7 (30.1) 22.6 27.7 0.5 (3.8) (1.8) Net book value 1 Comparative information has been restated for IFRIC decision on cloud computing costs. Refer to Note 7.6 for details. 267.3 58.5 37.1 22.6 Intangible assets Total $m 584.6 (192.1) 392.5 385.5 32.7 (15.3) (10.4) 392.5 569.8 (184.3) 385.5 396.9 13.5 (19.5) (5.4) 385.5 Impairment Cochlear annually tests goodwill and other intangible assets with indefinite useful life for impairment. Other non-financial assets, other than inventories (see Note 5.1) and deferred tax assets (see Note 3.2), are tested if there is any indication of impairment or if there is any indication that an impairment loss recognised in a prior period may no longer exist or may have decreased. Assets are impaired if their carrying value exceeds their recoverable amount. The asset’s recoverable amount is estimated based on its value in use. An asset that does not generate independent cash flows and its individual value in use cannot be estimated is tested for impairment as part of a cash-generating unit (CGU). An impairment loss is recognised in the Income statement when the carrying amount of an asset or CGU exceeds its recoverable amount. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. An impairment loss in respect of goodwill is not reversed. Cochlear Limited Annual Report 2022 116 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: 2022 2021 Americas EMEA Asia Pacific $m 178.1 183.4 $m 69.5 73.9 $m 9.5 10.0 Total $m 257.1 267.3 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 an EBIT growth rate, considered modest compared to historical growth rates in the CGUs. Cash flows for year six onwards are extrapolated using a terminal growth rate of 3.0% (2021: 3.0%) per annum which is consistent with long-term growth rates. The pre-tax discount rate for each CGU is as follows: Americas 7.0% (2021: 6.8%), EMEA 7.1% (2021: 6.9%) and Asia Pacific 7.5% (2021: 7.4%). The key assumptions and the approach to determining their value in the current year are: Assumption Discount rate EBIT growth rate Approach 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. Based on the range and depth of sensitivities applied no reasonable change in assumptions would result in an impairment. 5.4 Business combinations On 27 April 2022, Cochlear announced an agreement had been reached to acquire Oticon Medical for DKK850 million (approximately AUD170 million) from Demant. The acquisition is expected to close in the second half of calendar year 2022, subject to competition approvals in jurisdictions where the transaction meets relevant notification thresholds. Should the acquisition proceed, it will be funded through existing cash balances. 5.5 Investments, equity-accounted investments and other financial assets Cochlear has a number of strategic investments that may, over the longer term, enhance or leverage Cochlear’s intellectual property. These include investments in Nyxoah S.A., Saluda Medical and Epiminder. As these investments are held for strategic purposes, Cochlear elects to fair value investments through other comprehensive income, when possible, in accordance with accounting standards. 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. Cochlear Limited Annual Report 2022 117 Balance at 1 July 2021 Additions Fair value (loss)/gain in investments measured at fair value through profit or loss Fair value loss through other comprehensive income (before tax) Balance at 30 June 2022 Investments $m 199.5 40.8 (3.3) (117.9) 119.1 Other financial assets $m 27.3 20.9 20.6 – 68.8 At 30 June 2022, $88.2 million (2021: $50.0 million) of Investments and Other financial assets are measured at fair value through profit or loss and designated as Level 3 financial assets (refer to Note 6.4(d)). The remaining $99.7 million (2021: $176.8 million) are measured at fair value through other comprehensive income, with $68.5 million (2021: $160.4 million) designated as Level 1 and $31.2 million (2021: $16.4 million) designated as Level 3. A pre-tax fair value loss of ($121.8 million) was recorded in other comprehensive income in relation to Level 1 assets, with net gains of $17.3 million and $3.9 million recorded in the Income statement and other comprehensive income respectively in relation to Level 3 assets. Investment in Nyxoah S.A. (Nyxoah) In July 2021, Cochlear invested an additional $29.9 million in Nyxoah through its US initial public offering which saw Nyxoah achieve a secondary listing on the Nasdaq exchange. At 30 June 2022, the total fair value of this investment is $68.2 million (2021: $158.8 million) based on the listed share price, resulting in a loss of $120.5 million before tax recognised through other comprehensive income. 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. 2022 Warranties Opening balance Provision made Provision used Effect of movements in foreign exchange Total provisions Represented by: Current Non-current Total provisions Warranties $m 34.3 14.0 (11.4) 0.6 37.5 14.8 22.7 37.5 Legal and insurance $m 5.0 4.4 Product recall $m 8.0 – Make good lease costs $m 3.1 1.0 (2.4) – 7.0 6.7 0.3 7.0 (0.6) – 7.4 1.2 6.2 7.4 – (0.1) 4.0 – 4.0 4.0 Total $m 50.4 19.4 (14.4) 0.5 55.9 22.7 33.2 55.9 A provision for warranty claims is recognised in relation to sales made prior to the reporting date, based on historical claim rates and respective product populations. Warranty periods on hardware products extend for three to 10 years. Legal and insurance 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 proceedings, including legal fees, a provision is recognised. Cochlear Limited Annual Report 2022 118 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 2022. Make good lease costs Cochlear has several 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. 5.7 Contingent liabilities Contingent liabilities are disclosed where a provision is not recognised due to the uncertainty regarding the outcome of future events and/or inability to reliably measure such 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. Patent infringement claims Cochlear operates in an industry that has substantial intellectual property and patents protecting that intellectual property. From time to time, Cochlear is involved in confidential discussions with patent owners including competitors regarding threatened litigation for alleged infringement of patent rights. If confidential discussions are taking place, the discussions are not expected to result in a significant adverse outcome for Cochlear. Patent infringement claims – University of Pittsburgh In September 2021, the University of Pittsburgh (the “University”) filed a complaint for patent infringement against Cochlear in the United States District Court for the Western District of Texas, Waco division. The asserted patent is US Patent No. 8,421,274, which is related to a wireless energy transfer system. It was filed at the US Patent Office in 2009 and will expire in 2030. The complaint initially alleged that Cochlear’s Nucleus 6 and Nucleus 7 cochlear implant systems infringe and names Cochlear Limited and USA subsidiaries Cochlear Americas Corporation and Cochlear Clinical Services, LLC as defendants. In December 2021, the Cochlear defendants filed their answer and counterclaims denying the University’s complaint. In February 2022, the University amended its infringement claims, focusing its case on the headpiece coils of the Nucleus 5, Nucleus 6, and Nucleus 7 sound processors. The implanted components (i.e., the CI612 implant) are no longer accused of infringement in this case. The directors maintain the view that the University’s patent is invalidated by Cochlear’s own prior art patents and products. Cochlear’s defences in this suit include non-infringement and invalidity based upon Cochlear’s prior art patents (US Patent Nos. 7,260,435 and 7,623,827), which were filed and published well before the filing date of the University’s patent. Cochlear’s invalidity defences also rely upon its legacy products (ESPrit 3G and Freedom sound processors), which practised these prior art patents well before the filing date of the University’s asserted patent. 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 Limited Annual Report 2022 119 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. Individual significant confidential investigation(s) by an authority are not disclosed, as disclosure may prejudice Cochlear. 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 reset 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. 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. The right of use asset depreciation is 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; while interest expense incurred on the lease liability is recognised in finance expense – interest in the Income statement. For the year ended 30 June 2022, lease interest was $6.6 million (2021: $6.6 million). For the purpose of presentation of the Statement of cash flows, the lease payments are separated into principal payments (financing activities) and interest payments (operating activities). Total cash outflows related to leases was $32.2 million for the year ended 30 June 2022 (2021: $27.1 million). The following table shows movements in the right of use asset during the year: Balance at 1 July 2021 Additions Remeasurement Depreciation expense Effect of movements in foreign exchange Balance at 30 June 2022 Cochlear Limited Annual Report 2022 Land and buildings Other assets $m 177.8 8.0 4.7 (23.8) 2.9 169.6 $m 11.2 2.5 (0.1) (4.1) (0.1) 9.4 Total $m 189.0 10.5 4.6 (27.9) 2.8 179.0 120 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: • • • • gearing ratio – defined as total borrowings as a proportion of total equity; dividend payout ratio – defined as dividends as a proportion of net profit after tax excluding one-off and non-recurring items (underlying net profit) for a given period; growth in EPS – defined as the CAGR in EPS over a three-year period; and TSR – defined as the percentage growth in share price over a three-year period plus the cumulative three-year dividend return calculated against the opening share price in the same three-year period. Senior management tracks, manages and reports against these capital management metrics periodically as part of broader corporate governance responsibilities. The Board undertakes periodic reviews to assess whether the metrics continue to be appropriate and whether the capital management structure is appropriate to meet Cochlear’s medium and long-term strategic requirements. In order to maintain or adjust the capital structure, Cochlear may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. Neither the Company nor any of its subsidiaries is subject to externally imposed capital requirements. There were no significant changes in Cochlear’s approach to capital management during the year. 6.2 Capital and reserves Share capital The Company does not have authorised capital or par value in respect of its issued shares. On issue 1 July – fully paid Issued under Employee Share Plan Issued from exercise of APAC Equity Plan Issued from the exercise of options Issued from the exercise of performance rights On issue 30 June – fully paid Total number of issued shares 2022 65,744,078 236 1,075 – 29,950 2021 65,687,402 – 1,068 26,689 28,919 65,775,339 65,744,078 During the 2022 financial year, Cochlear purchased 16,766 shares (2021: 24,990 shares) on-market to satisfy exercise of options and performance rights and issued 236 shares to employees under the Employee Share Plan (2021: 0 shares). 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. Translation reserve The translation reserve records the foreign currency differences arising from the translation of the financial statements of foreign operations as well as from the translation of liabilities that hedge the Company’s net investment in a foreign subsidiary, where their functional currency is different to the presentation currency of the reporting entity. See Note 1.2(d) for further details. Cochlear Limited Annual Report 2022 121 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. 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 Total borrowings, net cash and finance costs 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 an amount of $1.0 million (2021: $0.7 million) in relation to unamortised loan establishment fees has been recognised in prepayments. They are recorded initially at cost and are amortised over the period of the loan. Cash Cash and cash equivalents Total cash Less: Total borrowings Current Non-current Total borrowings Net cash Gearing ratio Total borrowings 2022 $m 629.3 629.3 (42.6) – (42.6) 586.7 2022 $m 42.6 Total equity Gearing ratio2 1 Comparative information has been restated for IFRIC decision on cloud computing costs. Refer to Note 7.6 for details. 2 Gearing ratio = Total borrowings/Total equity. 1,685.7 2.5% 2021 $m 609.6 609.6 – (45.0) (45.0) 564.6 2021 (Restated)1 $m 45.0 1,689.6 2.7% Cochlear Limited Annual Report 2022 122 Financing arrangements 2022 Utilised at reporting date1 Not utilised at reporting date Total facilities 2021 Utilised at reporting date1 Not utilised at reporting date Multi-option bank facilities Unsecured bank loan Bank guarantees2 Other credit facilities Unsecured bank loan Bank guarantees2 Unsecured bank overdrafts $m 42.6 300.0 342.6 45.7 300.0 $m 6.0 9.0 15.0 5.5 9.5 $m – 2.9 2.9 – 2.7 $m – 4.8 4.8 – 5.4 5.4 $m 6.4 2.9 9.3 6.2 3.4 9.6 Total facilities 1 Excludes the amount of $1.0 million (2021: $0.7 million) in relation to unamortised loan establishment fees. 2 Bank guarantees include standby letters of credit. 345.7 15.0 2.7 Multi-option bank facilities – Unsecured bank loan During the year ended 30 June 2022, Cochlear restructured its bank loan facilities as follows: Facility type Committed debt including guarantees <1 year term $m 1 - 2 year term $m 2 - 3 year term $m 3 - 4 year term $m 4 - 5 year term $m 5 - 6 year term $m Total facilities $m 42.6 115.0 – – 100.0 100.0 357.6 All facilities are unsecured and have interlocking guarantees provided by certain controlled entities. Interest on the facilities is variable and charged at prevailing market rates. Other credit facilities Unsecured bank overdrafts Certain unsecured bank overdrafts are payable on demand and are subject to annual review. Interest on unsecured bank overdrafts is variable and is charged at prevailing market rates. Unsecured bank loan Cochlear has a Japanese yen (JPY) 450.0 million loan facility and a Swedish kroner (SEK) 300.0 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 2022, Cochlear had additional contingent liability facilities denominated in USD, Euros (EUR), Sterling (GBP), Indian rupees and New Zealand dollars totalling AUD 9.3 million (2021: AUD 9.6 million). 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. Cochlear Limited Annual Report 2022 123 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), Chinese yuan (CNY), EUR, GBP, JPY, SEK and USD. 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 2022 was as follows, based upon notional amounts: Amounts local currency/millions CHF CNY EUR GBP JPY SEK USD 2022 Trade receivables Unsecured bank loan Trade payables Balance sheet exposure 2021 Trade receivables Unsecured bank loan Trade payables Balance sheet exposure 0.5 – (1.3) (0.8) 0.3 – (1.4) (1.1) 18.3 – (57.4) (39.1) 6.4 – (47.4) (41.0) 49.4 – (23.1) 26.3 45.1 – (17.3) 27.8 3.1 1,126.4 5.9 101.7 – (5.8) (2.7) 2.2 – (4.5) (2.3) – (300.0) – (79.1) (108.2) (25.1) 1,047.3 (402.3) 76.6 922.2 5.5 – (300.0) 97.0 – (54.2) (46.6) (23.4) 868.0 (341.1) 73.6 Cochlear Limited Annual Report 2022 124 Derivative assets and liabilities 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 2022, 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 until 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 2022, all cash flow hedges were effective at the reporting date. 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 2022 Buy CHF Sell EUR Sell GBP Sell JPY Buy SEK Sell USD Total 2021 Buy CHF Sell EUR Sell GBP Sell JPY Buy SEK Sell USD Total 0.664 0.627 0.548 82.331 6.629 0.732 0.678 0.617 0.544 76.901 6.414 0.741 (21.8) 131.9 20.1 18.4 (40.0) 258.6 367.2 (18.6) 146.3 21.3 18.2 (32.7) 264.5 399.0 – 61.1 9.1 8.5 – 159.6 238.3 – 95.9 9.0 9.2 – 171.4 285.5 Cochlear Limited Annual Report 2022 125 Currency risk – Sensitivity analysis An analysis based on a 10% strengthening of foreign currencies would have increased Cochlear’s profit for the year ended 30 June 2022 after tax by approximately AUD 9.5 million (2021: increased profit by AUD 11.4 million) and decreased Cochlear’s equity by AUD 58.8 million (2021: decrease by AUD 40.4 million). A 10% weakening of the foreign currencies would have decreased Cochlear’s profit for the year ended 30 June 2022 after tax by approximately AUD 9.9 million (2021: decreased profit by AUD 10.3 million) and increased equity by AUD 25.2 million (2021: increase by AUD 49.9 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 2022 0.674 4.685 0.643 0.546 85.242 6.696 0.724 Reporting date spot rate 2021 0.679 4.940 0.625 0.553 2022 0.657 4.607 0.658 0.567 79.464 94.010 6.421 0.745 7.037 0.688 2021 0.692 4.856 0.631 0.542 83.025 6.561 0.752 Cochlear is exposed to interest rate risks in Australia, Japan and Sweden. See Note 6.4(c) for effective interest rates, repayment and repricing analysis of outstanding debt. At the reporting date, the interest rate profile of Cochlear’s interest-bearing financial instruments is financial assets of $629.3 million (2021: $609.6 million) and financial liabilities of $42.6 million (2021: $45.0 million). Interest rate risk – Sensitivity analysis For the year ended 30 June 2022, it is estimated that a general increase of one percent in interest rates would have reduced Cochlear’s profit after income tax and equity by approximately $0.5 million (2021: reduced profit by $0.3 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. Cochlear Limited Annual Report 2022 126 The maximum exposure to credit risk for trade receivables at the reporting date by geographic region was: 2022 2021 Americas EMEA Asia Pacific $m 109.5 88.4 $m 129.4 125.9 $m 69.5 47.8 Total $m 308.4 262.1 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. 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 2022 $m 246.8 36.8 15.8 19.9 6.1 325.4 (17.0) 308.4 40.1 348.5 2021 $m 220.7 29.9 14.0 6.3 9.0 279.9 (17.8) 262.1 34.2 296.3 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. Cochlear Limited Annual Report 2022 127 Non-derivative liabilities Contractual maturities of non-derivative financial liabilities, including estimated interest payments and excluding the impact of netting agreements, are as follows: 2022 SEK floating rate loan Trade and other payables Lease liability Total 2021 SEK floating rate loan Trade and other payables Lease liability Total Effective interest rate Per annum Carrying amount $m Contractual cash flows $m < 1 year $m 1 - 2 years $m 2 - 5 years $m More than 5 years $m 1.66% – – 0.66% – – 42.6 232.7 211.3 486.6 45.7 203.6 219.3 468.6 43.1 232.7 247.6 523.4 46.2 203.6 260.3 510.1 43.1 232.4 35.4 310.9 0.3 202.9 31.9 235.1 – 0.3 31.8 32.1 45.9 0.7 29.1 75.7 – – 69.7 69.7 – – 72.6 72.6 – – 110.7 110.7 – – 126.7 126.7 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: 2022 Assets Liabilities Total 2021 Assets Liabilities Total Carrying amount $m Contractual cash flows $m 10.8 (28.8) (18.0) 20.9 (7.9) 13.0 10.8 (29.8) (19.0) 20.9 (7.9) 13.0 < 1 year $m 8.4 (22.8) (14.4) 17.6 (4.7) 12.9 1 - 2 years $m 2.4 (7.0) (4.6) 3.3 (3.2) 0.1 The expected impact on the Income statement is not considered to be significantly different to the cash flow impact 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 assets 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. Cochlear Limited Annual Report 2022 128 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: – taxation compliance and advisory services – other Total non-audit services 7.2 Commitments Capital expenditure commitments 2022 $ 2021 $ 2,068,476 2,068,476 2,030,461 2,030,461 977,589 68,824 1,370,782 52,942 1,046,413 1,423,724 As at 30 June 2022, Cochlear entered into contracts to purchase property, plant and equipment for $22.1 million (2021: $20.4 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 2021 2022 % % Country of incorporation/ formation Company Cochlear Limited Controlled entities Cochlear AG Cochlear Americas Cochlear Austria GmbH Cochlear Benelux NV Cochlear Bone Anchored Solutions AB Cochlear Boulder LLC Cochlear Brasil Ltda 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 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 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 – 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Australia Switzerland USA Austria Belgium Sweden USA Brazil Canada USA Colombia Germany Australia Germany UK Australia France Australia Australia Australia Australia Italy Cochlear Limited Annual Report 2022 129 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 Russia LLC Cochlear Shared Services S.A. Cochlear Sweden Holdings AB Cochlear Taiwan Limited Cochlear Tibbi Cihazlar ve Saglik Hizmetleri Limited Sirketi Cochlear Verwaltungs GmbH Cochlear (HK) Limited Cochlear (Thailand) 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) Dormant. (i) 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 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 51 100 100 Korea Australia Panama Malaysia USA China China India Mexico UAE Sweden Norway New Zealand UK Russia Panama Sweden Taiwan Turkey Germany Hong Kong Thailand UK Singapore Japan China USA Canada Cochlear Limited Annual Report 2022 130 7.4 Parent entity disclosure At, and throughout the financial year ended, 30 June 2022, the parent company of Cochlear was Cochlear Limited. Result of the parent entity Net profit Other comprehensive (loss)/income Total comprehensive income Financial position of the parent entity at year end Current assets Total assets Current liabilities Total liabilities Total equity of the parent entity comprising: Share capital Hedging reserve Share-based payment reserve Profit reserve Accumulated losses 2022 $m 329.1 (22.2) 306.9 1,367.2 2,034.1 356.5 496.7 1,276.6 (12.8) 76.2 308.0 (110.6) Total equity 1 Comparative information has been restated for IFRIC decision on cloud computing costs. Refer to Note 7.6 for details. 1,537.4 Dividends will be paid from the profit reserve of Cochlear Limited, as the parent of the Consolidated Entity. 2021 (Restated)1 $m 245.8 8.3 254.1 1,192.6 1,891.1 282.8 474.7 1,276.6 9.1 68.4 172.9 (110.6) 1,416.4 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 of Cochlear Limited are disclosed in Note 5.7. Parent entity capital commitments for acquisition of plant and equipment As at 30 June 2022, the parent entity entered into contracts to purchase plant and equipment for $16.8 million (2021: $16.0 million). 7.5 Deed of Cross Guarantee Cochlear Limited (the holding entity) together with the wholly-owned subsidiaries set out below (together referred to as the Closed Group) entered into a Deed of Cross Guarantee (the Deed) on 17 April 2019. As a result, pursuant to ASIC Corporations (Wholly-owned Companies) Instrument 2016/785, the wholly-owned subsidiaries set out below are relieved from the Corporations Act 2001 requirement to prepare and lodge an audited financial report and directors’ report. Under the Deed, 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. Cochlear Limited Annual Report 2022 131 Set out below is the Income statement, Statement of comprehensive income, a summary of movements in retained earnings/(accumulated losses) and Balance sheet of the entities party to the Deed for the year ended 30 June 2022 and 30 June 2021: 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 Profit before income tax Income tax expense Net 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 cash flow hedges transferred to the Income statement, net of tax Total comprehensive income Retained earnings/(accumulated losses) at beginning of year Net profit Dividends recognised 2022 $m 1,169.3 (405.8) 763.5 (69.1) (133.6) (156.6) 118.8 (86.4) – – 436.6 3.1 (7.0) (3.9) 432.7 (91.0) 341.7 (83.8) (0.1) (16.9) (5.0) 235.9 116.2 341.7 (194.0) Retained earnings at end of year 1 Comparative information has been restated for IFRIC decision on cloud computing costs. Refer to Note 7.6 for details. 263.9 2021 (Restated)1 $m 959.7 (351.1) 608.6 (65.3) (129.8) (110.5) 105.5 (95.0) (6.4) (1.7) 305.4 4.3 (10.1) (5.8) 299.6 (16.4) 283.2 40.7 (0.1) 11.2 (3.0) 332.0 (91.4) 283.2 (75.6) 116.2 Cochlear Limited Annual Report 2022 132 2022 $m 542.7 614.5 8.0 150.3 34.0 18.4 1,367.9 2.4 122.3 436.0 119.0 68.8 118.8 102.6 44.8 104.9 1,119.6 2,487.5 Balance sheet Assets Cash and cash equivalents Trade and other receivables Forward exchange contracts Inventories Current tax assets Prepayments Total current assets Forward exchange contracts Loans and borrowings – internal Investments in subsidiaries Investments Other financial assets 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 Forward exchange contracts Loans and borrowings – external Loans and borrowings – internal Employee benefit liabilities Provisions Deferred tax liabilities Lease liability Total non-current liabilities Total liabilities Net assets Equity Share capital Reserves Retained earnings Total equity 1 Comparative information has been restated for IFRIC decision on cloud computing costs. Refer to Note 7.6 for details. 177.8 22.3 42.6 150.1 4.3 54.6 19.1 24.9 15.5 511.2 6.5 – 264.6 3.8 20.7 21.5 109.8 426.9 938.1 1,549.4 1,276.6 8.9 263.9 1,549.4 2021 (Restated)1 $m 514.2 441.9 17.6 141.0 65.1 13.4 1,193.2 3.3 121.3 432.2 199.5 27.3 111.7 91.2 89.5 113.5 1,189.5 2,382.7 201.7 4.6 – 86.8 2.8 45.1 14.4 5.2 14.8 375.4 3.2 45.0 265.1 4.0 21.2 50.2 118.7 507.4 882.8 1,499.9 1,276.6 107.1 116.2 1,499.9 Cochlear Limited Annual Report 2022 133 7.6 Changes in accounting policies In April 2021, the International Financial Reporting Standards Interpretations Committee issued an agenda decision, Configuration or Customisation Costs in a Cloud Computing Arrangement. The decision discussed whether configuration or customisation expenditure relating to cloud computing arrangements can be recognised as an intangible asset and if not, over what time period the expenditure is expensed. Cochlear’s accounting policy has historically been to capitalise all configuration and customisation costs related to cloud computing arrangements as intangible assets. The adoption of this agenda decision has resulted in a change in accounting policy to expense in Income statement configuration and customisation costs in cloud computing arrangements. A portion of previously capitalised intangible assets has been reclassified to an expense in the Income statement, impacting both the current and prior periods presented. Following the adoption of the new policy, Cochlear has expensed $21.6 million in configuration and customisation expenditure for the year ended 30 June 2022. These costs have been classified as Administration expenses in the Income statement and $21.6 million in related payments classified as Cash paid to suppliers and employees in the Statement of cash flows. The change in accounting policy has been retrospectively applied and comparative information in the primary statements and notes have been restated, including as follows: As at 30 June 2021 As at 1 July 2020 Reported Adjustment $m $m Restated $m Reported Adjustment $m $m Restated $m 402.8 146.8 1,208.2 2,438.2 1,701.7 367.2 1,701.7 (17.3) 5.2 (12.1) (12.1) (12.1) (12.1) (12.1) 385.5 152.0 1,196.1 2,426.1 1,689.6 355.1 1,689.6 410.3 147.1 1,098.2 2,575.7 1,401.5 116.4 1,401.5 (13.4) 4.0 (9.4) (9.4) (9.4) (9.4) (9.4) 396.9 151.1 1,088.8 2,566.3 1,392.1 107.0 1,392.1 Balance sheet - Extract Intangible assets Deferred tax assets Total non-current assets Total assets Net assets Retained earnings Total Equity Income statement - Extract Administration expenses Results from operating activities Profit before income tax Income tax expense Net profit Basic earnings per share (cents) Diluted earnings per share (cents) Statement of cash flows - Extract Cash paid to suppliers and employees Net cash provided by operating activities Acquisition of IT system costs Net cash provided by investing activities 2021 Adjustment $m (3.9) (3.9) (3.9) 1.2 (2.7) (4.1) (4.1) 2021 Adjustment $m (5.9) Reported $m (112.2) 374.1 365.7 (39.2) 326.5 496.7 496.7 Reported $m (1,150.2) 271.3 (5.9) 274.0 (5.9) 5.9 5.9 Restated $m (116.1) 370.2 361.8 (38.0) 323.8 492.6 492.6 Restated $m (1,156.1) 265.4 – 279.9 There have been no other changes to accounting policies materially impacting Cochlear in the current financial year. Cochlear Limited Annual Report 2022 134 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 2021 and have not been applied in preparing these consolidated financial statements. These new standards 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 matter noted below, there has not arisen in the interval between the reporting date and the date of this Financial report, any item, transaction or event of a material and unusual nature likely, in the opinion of the directors of the Company, to significantly affect the operations of Cochlear, the results of those operations, or the state of affairs of Cochlear in future financial years: Dividends For dividends declared after 30 June 2022, see Note 2.6. Cochlear Limited Annual Report 2022 135 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 2022 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 2022. 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 2022. Director Director Cochlear Limited Annual Report 2022 136 Independent auditor’s 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 2022; In our opinion, the accompanying Financial Report of the Company is in accordance with the Corporations Act 2001, including: • • giving a true and fair view of the Consolidated Entity’s financial position as at 30 June 2022 and of its financial performance for the year ended on that date; and • complying with Australian Accounting Standards and the Corporations Regulations 2001. Income statement, Statement of comprehensive income, Statement of changes in equity, and Statement of cash flows for the year then ended; • 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 (including Independence Standards) (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. 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. Recoverability of trade receivables $308.4 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 governments, government-supported universities, clinics and major hospital chains; 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; KPMG, an Australian partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation. Liability limited by a scheme approved under Professional Standards Legislation. Cochlear Limited Annual Report 2022 137 Independent auditor’s report to the shareholders of Cochlear Limited • The different geographical locations of customers and the political and economic environments they are subject to, which may affect the timely recovery of certain receivables; • Trade receivables past due at the reporting date which have certain risk characteristics relevant to the assessment of recoverability; • 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. - the system configuration of credit limits; and - management’s review of trade receivables ageing and trade receivables past due; • Assessing the Consolidated Entity’s expected credit loss model in significant geographies against the requirements of the accounting standards; • 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 including customer correspondence; and questioned the Consolidated Entity’s knowledge of future conditions which may impact expected customer receipts based on consistency of the results of the procedures performed above. • Assessing the Consolidated Entity’s disclosures of the quantitative and qualitative considerations in relation to trade receivables credit risk, by comparing these disclosures to our understanding of the matter and the requirements of the accounting standards. Warranty provision $37.5 million Refer to Note 5.6 Provisions The key audit matter The warranty provision was considered a key audit matter due to: • The estimation uncertainty inherent in the key assumptions applied by the Consolidated Entity to determine the warranty provision; • The Consolidated Entity’s evolving product portfolio, through the introduction of new generations, where each product’s design and quality attributes can impact the key assumptions; • The inherent unpredictability of future failures resulting in claims under warranty; and 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; • Challenging the Consolidated Entity’s ability to reliably estimate the key assumptions by comparing previous estimates to actual outcomes; KPMG, an Australian partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation. Liability limited by a scheme approved under Professional Standards Legislation. Cochlear Limited Annual Report 2022 138 Independent auditor’s report to the shareholders of Cochlear Limited • 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; • 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; • The ratio of repairing to replacing failed products; • Comparing the forecast proportion of claims that can • 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. be repaired and associated repair costs to historical performance of the Global Repair Centre; • Comparing the forecast replacement cost to standard manufacturing costs at the end of the period and actual manufacturing costs during the period 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. Responsibilities of the Directors for the Financial Report The Directors are responsible for: • preparing the Financial Report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001; • implementing necessary internal 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 and Company’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 KPMG, an Australian partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation. Liability limited by a scheme approved under Professional Standards Legislation. Cochlear Limited Annual Report 2022 139 Independent auditor’s report to the shareholders of Cochlear Limited 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 2022, 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 70 to 89 of the Directors’ report for the year ended 30 June 2022. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. KPMG Julian McPherson, Partner Sydney, 18 August 2022 KPMG, an Australian partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation. Liability limited by a scheme approved under Professional Standards Legislation. Cochlear Limited Annual Report 2022 140 Notes Cochlear Limited Annual Report 2022 141 References FY22 highlights 1. Cochlear estimates based on the published economic model findings of Neve et al 2021. Dollar amount relates to all recipients implanted with one or more cochlear implants in FY22 across the developed markets. 2. Hearing Screening: considerations for implementation. https://www.who.int/publications/i/item/9789240032767 3. The relationship between Malala Fund and Cochlear Foundation is described as a "partnership" for convenience and does not constitute a legal partnership, joint venture, agency, employment or any other relationship by which either party may become liable for the acts or omissions of the other. Letter to shareholders 1. Cochlear estimates based on the published economic model findings of Neve et al 2021. Dollar amount relates to all recipients implanted with one or more cochlear implants in FY22 across the developed markets. 2. Hearing Screening: considerations for implementation. https://www.who.int/publications/i/item/9789240032767 3. Weaver, J. "Single-Sided Deafness: Causes, and Solutions, Take Many Forms." Hearing Journal 68.3 (2015): 20-24. Web. 28 Apr. 2017. http://journals.lww.com/thehearingjournal/Fulltext/2015/03000/Single_Sided_Deafness___Causes,_and_Solutions,.1.as px 4. The relationship between Malala Fund and Cochlear Foundation is described as a "partnership" for convenience and does not constitute a legal partnership, joint venture, agency, employment or any other relationship by which either party may become liable for the acts or omissions of the other. 5. Cochlear Limited. D1926565. PSB Insights LLC. Cochlear Telehealth Study - December 2020 Growth opportunity 1. World report on hearing. Geneva: World Health Organization; 2021. Licence: CC BY-NC-SA 3.0 IGO. (https://www.who.int/activities/highlighting-priorities-for-ear-and-hearing-care). 2. Market penetration estimate based on Cochlear sourced data. 3. Mohr et al., 2000. 4. CPI Inflation Calculator (http://www.in2013dollars.com). 5. Estimated from Mohr et al., 2000. 6. The Ear Foundation (2018). Spend2Save Report (2nd Edition). 7. World Alzheimer Report 2015 (https://www.alz.co.uk/research/WorldAlzheimerReport2015.pdf). 8. Lin et al., 2011. 9. Mohr et al., 2000. 10. Lupo JE, Biever A, Kelsall DC. Comprehensive hearing aid assessment in adults with bilateral severe-profound sensorineural hearing loss who present for Cochlear implant evaluation. Am J Otolaryngol. 2020;41(2):102300. doi:10.1016/j.amjoto.2019.102300. 11. WHO 2021 World Report on Hearing (https://www.who.int/activities/highlighting-priorities-for-ear-and-hearing-care). 12. Fact 5. Deafness and hearing loss. World Health Organization [Internet]. [cited July 2018]. Available from: http://www.who.int/features/factfiles/deafness/en/. 13. Haile L.M et al., 2021; Hearing loss prevalence and years lived with disability, 1990–2019: findings from the Global Burden of Disease Study 2019; Lancet, March 2021. Cochlear Limited Annual Report 2022 142 14. Livingston G, Sommerlad A, Orgeta V, Costafreda S, Huntley J, Mukadam N, et al. The Lancet Commissions: Dementia prevention, intervention, and care. The Lancet [serial on the Internet]. (2017, Dec 16), [cited July 2, 2018]; 3902673- 2734. 15. Hsu W, Hsu C, Wen M, Lin H, Tsai H, Hsu Y, et al. Increased risk of depression in patients with acquired sensory hearing loss: A 12-year follow-up study. Medicine [serial on the Internet]. (2016, Nov), [cited July 3, 2018]; 95(44): e5312. 16. Stam M, Kostense P, Lemke U, Merkus P, Smit J, Kramer S, et al. Comorbidity in adults with hearing difficulties: which chronic medical conditions are related to hearing impairment? International Journal Of Audiology [serial on the Internet]. (2014, June), [cited July 3, 2018]; 53(6): 392-401. 17. Barnett S. A hearing problem. American Family Physician [serial on the Internet]. (2002, Sep 1), [cited July 3, 2018]; 66(5): 911. 18. Mick P, Kawachi I, Lin F. The Association between Hearing Loss and Social Isolation in Older Adults. Otolaryngology And Head And Neck Surgery [serial on the Internet]. (2014), [cited July 3, 2018]; (3): 378. 19. Tomaka J, Thompson S, Palacios R. The Relation of Social Isolation, Loneliness, and Social Support to Disease Outcomes Among the Elderly. Journal Of Aging And Health [serial on the Internet]. (2006), [cited July 3, 2018]; (3): 359. 20. Kramer S, Kapteyn T, Houtgast T. Occupational performance: comparing normally-hearing and hearing-impaired employees using the Amsterdam Checklist for Hearing and Work. International Journal Of Audiology [serial on the Internet]. (2006, Sep), [cited July 3, 2018]; 45(9): 503-512. 21. Nachtegaal J, Festen J, Kramer S. Hearing ability in working life and its relationship with sick leave and self-reported work productivity. Ear And Hearing [serial on the Internet]. (2012, Jan), [cited July 3, 2018]; 33(1): 94-103. 22. Nachtegaal J, Kuik D, Anema J, Goverts S, Festen J, Kramer S. Hearing status, need for recovery after work, and psychosocial work characteristics: Results from an internet-based national survey on hearing. International Journal Of Audiology [serial on the Internet]. (2009, Oct), [cited July 3, 2018]; 48(10): 684-691. Strategic priorities: Grow the hearing implant market 1. WHO 2021 World Report on Hearing (https://www.who.int/activities/highlighting-priorities-for-ear-and-hearing-care). 2. 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. 3. Unilateral Cochlear Implants for Severe, Profound, or Moderate Sloping to Profound Bilateral Sensorineural Hearing Loss. A Systematic Review and Consensus Statements, JAMA Otolaryngol Head Neck Surg. doi:10.1001/jamaoto.2020 4. World report on hearing. Geneva: World Health Organization; 2021. Licence: CC BY-NC-SA 3.0 IGO. (https://www.who.int/activities/highlighting-priorities-for-ear-and-hearing-care). 5. Tordrup et al 2022. Global return on investment and cost-effectiveness of WHO's HEAR interventions for hearing loss: a modelling study. The Lancet. https://www.thelancet.com/journals/langlo/article/PIIS2214-109X(21)00447-2/fulltext Cochlear Limited Annual Report 2022 143 Shareholder information Additional information required by Australian Securities Exchange Listing Rules and not disclosed elsewhere in this report. The information presented is as at 29 July 2022. Substantial shareholders Investor BlackRock Inc State Street Corporation ABP (Algemen Burgerlijk PSF) Total Distribution of shareholders Number of shares held Number of ordinary shares 4,220,962 3,780,558 3,618,341 11,619,861 % 6.4 5.7 5.5 17.6 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 – 224 shareholders held less than a marketable parcel of ordinary shares. 43,504 2,604 118 67 15 46,308 Twenty largest shareholders Shareholder HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Pty Limited Citicorp Nominees Pty Limited BNP Paribas Noms Pty Ltd National Nominees Limited BNP Paribas Nominees Pty Ltd HSBC Custody Nominees (Australia) Limited-GSCO ECA HSBC Custody Nominees (Australia) Limited Australian Foundation Investment Company Limited Netwealth Investments Limited BNP Paribas Nominees Pty Ltd Hub24 Custodial Serv Ltd Mr Christopher Graham Roberts Citicorp Nominees Pty Limited Custodial Services Limited HSBC Custody Nominees (Australia) Limited - A/C 2 BNP Paribas Nominees Pty Ltd ACF Clearstream HSBC Custody Nominees (Australia) Limited Netwealth Investments Limited Cochlear Incentive Plan Pty Ltd BNP Paribas Nominees Pty Ltd Total The 20 largest shareholders held 78.27% of the ordinary shares of the Company. On market buy-back There is no current on market buy-back. Number of ordinary shares 29,929,736 9,232,006 5,195,387 2,049,928 1,812,476 715,344 386,396 360,746 324,174 304,947 239,876 172,387 171,493 147,414 102,317 86,107 63,693 62,655 60,109 59,445 51,476,636 10.9 7.6 1.2 2.6 77.7 100.0 % 45.50 14.04 7.90 3.12 2.76 1.09 0.59 0.55 0.49 0.46 0.36 0.26 0.26 0.22 0.16 0.13 0.10 0.10 0.09 0.09 78.27 Cochlear Limited Annual Report 2022 144 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 19 August 2022 FY22 results announced 18 October 2022 Annual general meeting 15 February 2023 HY23 results announced* 15 August 2023 FY23 results announced* * Indicative dates only. Annual general meeting The annual general meeting of Cochlear Limited will be held on 18 October 2022 at 10.00am. Further details will be provided in the Notice of Meeting, which will be provided to shareholders in mid-September 2022. The Notice of Meeting will also be available on the ASX Company Announcements Platform and Cochlear’s website at www.cochlear.com. Cochlear Limited Annual Report 2022 145 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 700,000 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, MP3000, myCochlear, mySmartSound, NRT, Nucleus, Osia, Outcome Focused Fitting, Off-Stylet, Profile, 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, Human Design, Piezo Power, SoundArc, Vistafix, and WindShield are either trademarks or registered trademarks of Cochlear Bone Anchored Solutions AB. , Contour Advance, Custom Sound, ESPrit, Freedom, Hear now. And always, Hugfit, Hybrid, Invisible Hearing, Kanso, MET, MicroDrive, , , 코클리어 コクレア , Cochlear SoftWear, コントゥア 科利耳 Android, Google Play and the Google Play logo are trademarks of Google LLC. 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. ReSound is a trademark of GN Hearing A/S. © Cochlear Limited 2022. D2016447 V1 2021-08

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