Cochlear
Annual Report 2023

Plain-text annual report

Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information We help people hear and be heard. We empower people to connect with others and live a full life. We help 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. Our mission Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Contents Our company About Cochlear Cochlear at a glance Product and services portfolio Financial history Review of FY23 FY23 highlights Year in review Strategy and value creation Our strategy Growth opportunity Key market segments Strategic priorities Creating value for stakeholders - A healthier and more productive society - A lifetime of hearing solutions - Thriving people - Environmental responsibility - Sustained value Financial performance Operational review Financial review Governance and risk Governance Risk Board of directors Executive team Financial statements Remuneration report Financial report Additional information Sustainability data References Notes Shareholder information Corporate directory 2 3 4 5 6 7 8 9 17 18 20 22 24 25 26 33 43 50 55 62 63 64 68 69 73 77 81 85 86 108 153 154 165 167 168 169 About this report Over the past several years sustainability has become increasingly integrated into our business strategy. For the financial year ended 30 June 2023 (FY23), we have combined our reporting on financial and sustainability performance into a single integrated publication, providing all key stakeholders with a holistic view of our business, strategy, value drivers, performance and governance. The report has been prepared with reference to the GRI (Global Reporting Initiative) and in accordance with the IFRS (International Financial Reporting Standards) Foundation’s Integrated Reporting Framework. We use these guidelines to help us to clearly articulate how we aim to deliver long-term sustainable value for all our key stakeholders. Cochlear Limited (Cochlear) publishes a suite of reports annually including the Annual Report, Corporate Governance Statement and Tax Contribution Report, which are available at the Investors section of the website www.cochlear.com. Acknowledgment of Country Cochlear acknowledges the Aboriginal and Torres Strait Islander peoples and their custodianship of the various lands across Australia on which we work, live and learn. We pay our respects to ancestors and Elders past, present and emerging. Cochlear’s global headquarters are located on the unceded lands of the Wallumattagal Peoples of the Darug Nation. Front cover Bernie, Cochlear™ Nucleus® System recipient Find out more about Bernie on page 11. 1 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Our company 2 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information About Cochlear 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 story Our company 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. 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 30 listed Australian company with a market capitalisation of over $15 billion. Our goal is to deliver value by helping more people to hear, which contributes to building a healthier and more productive society. Our strategy is focused on improving awareness of and access to implantable hearing solutions for people indicated for our products. We are pioneers and global leaders in the development, manufacture and commercialisation of implantable hearing solutions, collaborating in over 100 research programs worldwide to further research into hearing loss. We invest around 12% of sales revenue each year in research and development (R&D), with over $2.7 billion invested since listing, and we have a portfolio of more than 1,700 patent and patent applications worldwide. Over the past 40 years we have provided more than 750,000 implant devices to people who benefit from one – or two – of our implantable solutions. And we deliver a lifetime of hearing solutions for recipients, with sound processor upgrades and services to support prior generation products. 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 global workforce of around 4,800 employees and a wide geographical reach, selling in over 180 countries, with employees based in over 50 countries. 3 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Cochlear at a glance Business segments Global presence Cochlear Implants* 58% Services* 30% Acoustics* 12% Cochlear implant systems >$1.9b ~4.8k 50+ 180+ in sales revenue* across employees across countries countries Sound processor upgrades, accessories and other Market leader Bone conduction systems and sound processor upgrades $240m+ in annual R&D investment AAA MSCI ESG rating Healthcare equipment & supplies** implants sold helping 750k+ ~650k 99.87% Cochlear implant reliability^ people to hear# 6 manufacturing locations * Based on sales revenue (FY23) ^Nucleus® Profile™ Plus Series implant cumulative survival percentage within four years ^^Cochlear estimate for cochlear and acoustic implants #Includes cochlear and acoustic implants. ** Measures a company’s resilience to financially material environmental, societal and governance (ESG) risk female 53% gender balanced workforce >60% global market share^^ 4 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Product and services portfolio Cochlear’s market-leading portfolio aims to improve hearing outcomes for recipients and provide a lifetime of hearing solutions. Cochlear implant portfolio Acoustic solutions portfolio Recipient support tools Cochlear™ Nucleus® System Cochlear Osia® System Cochlear Nucleus, Baha and Osia Smart Apps Cochlear CoPilot App Cochlear Baha® System Cochlear Connected Care solutions Cochlear Nucleus SmartNav System Cochlear Custom Sound® Pro Fitting Software Cochlear™ Link Cochlear Remote Assist Cochlear Remote Check solution for cochlear implants 5 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Financial history Cochlear has a long track record of investing to grow, delivering growing sales revenue, profits* and dividends. Consistent investment in R&D and market growth activities Research and development $ million Long-term growth in sales revenue Cochlear implants units 12% $245m 13% ↑ 16% in FY23 Growing profits and dividends Underlying net profit* $ million $305m 14% 15% 16% ↑ 14% in FY23 in CC** 44,156 ↑ 16% in FY23 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 % of sales revenue Operating expenses (excl R&D) $ million Sales revenue $ million $810m $1,956m % of sales revenue Dividends per share ↑ 23% in FY23 ↑ 16% in FY23 in CC** $3.30 ↑ 10% in FY23 * Excluding one-off and non-recurring items. ** Constant currency 6 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 36%34%41%000102030405060708091011121314151617181920212223% of sales revenueCochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Review of FY23 7 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information FY23 highlights In FY23, we helped over 44,000 people hear with one – or two – of our cochlear or acoustic implants, providing an estimated net societal benefit of more than $7 billion over the lifetime of the recipients from improved health outcomes, educational cost savings and productivity gains.1 A healthier and more productive society A lifetime of hearing solutions Thriving people Environmental responsibility Sustained value • Helped over 44,000 more people to hear with an implant, up 15% • Progress made in strengthening the referral pathway for adults • New evidence showing hearing intervention may slow cognitive decline • Expanding indications and reimbursement in a number of countries • Invested over $240m in R&D, 13% of sales revenue, with a strong pipeline of products and services in development • Continued focus on shaping our culture through training and leadership development programs • Launched the Cochlear™ • Employee engagement maintained at 80% • Continued to exceed gender targets with 43% women in senior manager roles and 40% women on the Board of directors Nucleus® 8 Sound Processor which is smaller, smarter and better connected than its predecessor • Delivered latest generation sound processors to over 48,000 prior generation cochlear implant recipients, up 19% • Bimodal control in the Nucleus® Smart App • Reached 96% renewable • Delivered record sales energy at our manufacturing facilities, using 100% renewable energy in five of our six facilities • Reduced our Scope 1 and 2 emissions by 68%, from our FY19 baseline • Reduced the number of flights taken per full time employee by 47%, from our FY19 baseline, and our flight related emissions by 91% • Initiated an inventory of our Scope 3 emissions revenue, up 19% (16% in CC*) • Underlying net profit** up 10% (14% in CC), the top end of the guidance range • Underlying net profit margin of 17% (pre cloud investment) • Full year dividends up 10% • Obtained ISO 27001 Information Security certification of our Connected Care products • Commenced on-market share buyback * Constant currency. ** Excluding one-off and non-recurring items. 8 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Year in review Over the past year, we have made great progress in our mission to help more people to hear. Our strong financial and operational results reflect our unwavering dedication to our customers and our disciplined approach to execution. Our goal is to deliver value by helping more people to hear, which contributes to building a healthier and more productive society. To achieve our goal requires consistent investment over long timeframes. Our R&D investment horizons span over 10 years, and our ambition to improve the uptake of cochlear and acoustic implants requires long-term planning and investment. In FY23 we continued to lift our investment in research and development, with a strong pipeline of products and services in development. After many years in the making, we launched the Cochlear™ Nucleus® 8 Sound Processor. Designed to help recipients hear conversations more clearly and easily, it has enjoyed a strong positive reception in the market and was awarded the 2023 Red Dot Award for Design. An important long-term goal 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. We have continued our work in shaping our culture through training and leadership development programs, with our employee engagement remaining high at 80%. And we made good progress towards our net-zero emissions targets, reducing Scope 1 and 2 emissions by 68% from our FY19 baseline. The evidence linking hearing loss to cognitive decline is building. A multi-year study in the US has been investigating whether hearing loss treatment could delay cognitive decline and dementia in older adults. In July, the study reported that after wearing hearing aids for three years, cognitive decline slowed by 48% for a group of older adults with mild to moderate hearing loss who were at a higher risk of cognitive decline.2 The findings are a major advancement in understanding the broader impact of hearing loss and the need for adults, policy makers and health professionals to prioritise treatment of hearing loss. It not only helps people to hear but has the potential to reduce cognitive decline for adults at high risk. This year we combined our reporting on financial and sustainability performance into a single integrated publication, providing all key stakeholders with a holistic view of our business, strategy, value drivers, performance and governance. Sustainability is embedded in our business strategy. We have long been focused on creating a positive social impact at both the individual and societal level, supported by a strong governance framework. Over the past few years, we have better integrated initiatives to minimise our environmental impact into our strategic priorities. Sales revenue exceeded expectations, increasing 19% (16% in constant currency*) to a record $1,956 million, driven by growth across all business units. Alison Deans Chair Dig Howitt CEO & President Underlying net profit** increased 10% (14% in CC) to $305 million, the top of the guidance range of $290-305 million. The balance sheet remains strong with net cash of $556 million, with operating cash flows sufficient to fund investing activities and capital expenditure whilst delivering dividends to shareholders. A final dividend of $1.75 per share has been determined, an increase of 21% on last year, with full year dividends declared of $3.30 per share, an increase of 10%. Over the following pages we provide greater details on the highlights for FY23, as well as the outlook for FY24. * Constant currency (CC) removes the impact of foreign exchange rate movements to facilitate comparability of operational performance. ** Excluding one-off and non-recurring items. 9 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information A healthier and 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 to hear Our mission is to help more people to hear and in FY23 we helped over 44,000 people hear with one – or two – of our cochlear or acoustic implants. In doing so, we provide an estimated net societal benefit of more than $7 billion over the lifetime of this year’s new recipients from improved health outcomes, educational cost savings and productivity gains.1 loss. Through clearer screening, diagnosis, referral, treatment and aftercare, thousands more people will be able to access the right treatment at the right time and reconnect to life. During FY23 we collaborated with university partners, industry and advocacy groups globally to adapt the Living Guidelines into country-based clinical guidelines, with plans for their roll out over the coming years. We have also focused on increasing professional education to strengthen the referral channel. Strengthening the referral 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 hearing 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. Over the past few years, we have invested in awareness and access activities alongside industry professionals and advocacy groups. Achievements include the development of a global consensus on a minimum standard of care for treating adult hearing loss, the World Health Organization advocating for improved hearing screening, and the establishment of the Living Guidelines initiative. The Living Guidelines set clear, practical, evidence based recommendations to improve the standard of care and quality of life for adults living with hearing New evidence showing hearing intervention slows cognitive decline In July 2023, new research found that after wearing hearing aids for three years, cognitive decline slowed by 48% for a group of older adults with mild to moderate hearing loss who were at a higher risk of cognitive decline.2 The results add to the growing evidence that support addressing modifiable risk factors for cognitive decline and dementia could be effective in reducing the future global burden of dementia. The findings are a major advancement in understanding the broader impact of hearing loss and the need for adults, policy makers and health professionals to prioritise treatment of hearing loss. It not only helps people to hear but has the potential to reduce cognitive decline for adults at high risk. Expanding indications and reimbursement Over the past 12 months we have been successful in expanding indications and funding across a number of countries. In the US, the Centers for Medicare & Medicaid Services expanded coverage of cochlear implants for Medicare beneficiaries to a level of hearing loss more closely aligned with the FDA indications and most private payers. Candidates with a moderate-to-profound hearing loss who demonstrate limited benefit from amplification will now be funded by Medicare.3 The introduction of newborn hearing screening is a key priority in emerging markets where penetration rates are very low. It is important for identification of children needing cochlear implants, enabling early intervention and providing better lifetime outcomes. This year Thailand and Malaysia committed to adopting universal newborn hearing screening and Karnataka in India adopted mandatory newborn hearing screening. The Osia® 2 System achieved funding in Australia and New Zealand, and we achieved additional funding for cochlear implants in Canada, Argentina, Mexico and the Netherlands. 10 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information A lifetime of hearing solutions We innovate to build a market-leading portfolio of high-quality products and services that improve hearing outcomes and support a lifetime of hearing outcomes for recipients. 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. Growing investment in research and development Our market-leading technology underpins our global market share of over 60%4, and in FY23 we invested over $240 million in R&D, representing 13% of sales revenue. Our product pipeline is full, with good progress made across our key projects over the past year. Helping recipients hear better The new Nucleus® 8 Sound Processor has driven strong growth in the Services segment. By delivering our latest sound processor upgrade technology to our recipient base, we helped over 48,000 of our prior generation cochlear implant recipients to hear better, improving their hearing and quality of life. Launch of the Cochlear™ Nucleus® 8 Sound Processor Bimodal control in the Nucleus® Smart App The Cochlear™ Nucleus® 8 Sound Processor achieved regulatory approval across major markets during the first half and has driven strong growth in sales revenue since launch. It is 15% smaller and 13% lighter than its predecessor.5 It’s smarter, designed to help recipients hear conversations more clearly and easily, particularly in noisy situations, and it is better connected, building on the direct streaming capabilities and connectivity features available in our latest sound processors.6 The Nucleus® 8 Sound Processor was awarded the 2023 Red Dot Award for Design in the Medical Devices and Technology category, recognising its outstanding design, including aesthetics, functionality and innovation providing an ‘exceptional user experience’.7 We launched bimodal control in the Nucleus® Smart App to help patients quickly and easily manage their compatible ReSound hearing aid and Cochlear sound processor in one app to get the most out of their bimodal hearing. Recipients can access commonly used features such as volume adjustment and program selection to help achieve their best possible hearing experience. Our products and services provide a lifetime of hearing outcomes for recipients. Bernie, who appears on this year’s cover, is a bilateral cochlear implant recipient. He has worked in media for over 30 years and says he would not have been able to work in the media at all without his cochlear implants. Updating his sound processors has been an important part of Bernie’s ability to work as a journalist, as well as his enjoyment of life. Bernie started with the Freedom® Sound Processor, and has upgraded to Nucleus 5, Nucleus 6 and now the Nucleus 8 Sound Processors, noting a significant improvement with each generation. 11 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 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 around 4,800 people across the globe. Their knowledge, expertise, passion and focus on delivering excellence is key to achieving future success. Fostering a diverse and inclusive workplace A diverse, equitable and inclusive organisation improves employee engagement, our performance and productivity as well as our customer engagement. Achieving gender equality is one important element of our diversity and inclusion strategy. Across the business, 53% of our people are female and we have achieved 43% female representation amongst our senior leaders. At Board level, 40% of directors are female. We are committed to maintaining at least 40% female representation at senior manager and Board level. 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. We are pleased to report that overall employee engagement continues to remain strong at 80%, with 92% of employees reporting that they feel proud to tell people they work at Cochlear, 93% understand their contribution to our strategy and 94% understand how they contribute to the satisfaction of our customers. Strengthening enterprise leadership Integral to our culture work has been strengthening our enterprise leadership with a focus on inclusive leadership, building critical skills and capabilities at both an individual and organisational level. We broadened our Culture Conversations training through all levels of the organisation, with 75% of all people leaders globally having completed this training. We also continued to take steps to invest in our talent and made strong progress towards building the strategic capabilities which provide us with a sustainable competitive advantage over the longer-term. Attracting, developing and retaining diverse and highly skilled leaders is key to creating value. Gül joined Cochlear 10 years ago as General Manager Turkiye, Azerbajan and Georgia, and has established herself as a valued member of the global senior leadership team, committed to developing an inclusive culture and championing diversity. Gül led the Turkiye Cochlear team through the devastating earthquakes which struck eastern Turkiye and northern Syria in February. With her team, Gül focused on supporting the more than 1,200 recipients and their families living across the region either through the provision of sound processors, parts and accessories and practical assistance at a time of great need. Gül was recognised for her contributions by the WeQual Asia-Pacific 2023 awards, which celebrates female leaders. 12 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Environmental responsibility We are implementing initiatives to promote the sustainable use of natural resources, reduce our environmental footprint and help tackle climate change. Pathway to net-zero carbon emissions Enhancing resource efficiency We made significant progress in FY23, reducing Scope 1 and 2 emissions by 68% from our FY19 baseline by increasing renewable energy use at our manufacturing sites. We reached 96% renewable energy at our manufacturing facilities, using 100% renewable energy in five of our six facilities. We are making steady progress in reducing business flight- related emissions. Our target is to reduce our flight-related emissions by 50% by FY25 from our FY19 baseline. In FY23 we reduced these emissions by 91%. We achieved this by reducing business flights per full time equivalent employee by 47% from our FY19 baseline and purchasing offsets for approximately 80% of our remaining business flights. In May we initiated a complete Scope 3 emissions inventory and expect to complete the process during FY24. We are identifying ways to improve resource efficiency, reduce waste and drive greater circularity into our operations. In the US we worked with the regulator to achieve changes in our labelling, allowing us to implement electronic labelling for the Nucleus® 8 Sound Processor. As a result, we have saved over 9.4 million paper pages of manual labelling since November, as well as over 45,000 plastic sleeves. We are now exploring opportunities to collaborate with other regulators to see if we can implement these changes in other markets. Environmentally responsible business practices help support our sustainability objectives. In Malaysia we support the recycling centre of a charitable organisation that aims to offer employment opportunities to people who face physical and mental challenges, while also working towards minimising waste sent to landfill. For FY23, our donations amounted to over 1 tonne of various recyclable materials such as paper, metal and glass with income from recycling activities used to fund skills development programs and support services for the disabled community. By supporting the recycling centre, we play a crucial role in helping the charity achieve it’s mission while promoting environmental sustainability. 13 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Sustained value Financial discipline and commitment to high standards of corporate governance and transparency are central to the creation, maintenance and enhancement of long-term sustainable value. Underlying net profit* increases 14% in CC** to $305 million Final dividend increases 21% to $1.75 per share We delivered record sales revenue of $1,956 million, an increase of 19% (16% in CC), driven by strong growth across all business units. Second half growth was particularly strong following the launch of the Nucleus® 8 Sound Processor, increasing 29% (24% in CC). The gross margin was maintained at 75% and was aligned to the longer-term target. Operating expenses excluding cloud investment increased 20% (18% in CC) reflecting growing investment in R&D and market growth activities. As second half sales momentum increased, we took the opportunity to further lift our investment in growth activities. Cloud computing-related investment increased $17 million to $39 million, a little above the $36 million guidance. Underlying net profit increased 10% (14% in CC) to $305 million, the top end of the guidance range. The underlying net profit margin, excluding the impact of cloud computing-related expenses, was 17%, a point below our 18% long-term target. The balance sheet remains strong with net cash of $556 million, with operating cash flows sufficient to fund investing activities and capital expenditure whilst delivering dividends to shareholders. A final dividend of $1.75 per share has been determined, an increase of 21% on last year, with full year dividends declared of $3.30 per share, an increase of 10% and representing a payout of 71% of underlying net profit. On-market share buyback A progressive on-market share buyback program commenced in March with the aim of reducing the cash balance to around $200 million over a number of years. This program complements the existing dividend policy which targets a 70% payout of underlying net profit. A progressive buyback program aligns with the interests of our shareholders by reducing shares on issue, providing gradual accretion in earnings per share and dividends per share over the long term. In February the Board approved an initial 12 month buyback of up to $75 million in shares, with $30 million, or 40% this amount, bought by 30 June. Underlying net profit $ million* $305m ↑ 14% in FY23 in CC** 14 15 16 17 18 19 20 21 22 23 Dividends per share $3.30 ↑ 10% in FY23 14 15 16 17 18 19 20 21 22 23 350 300 250 200 150 100 50 - $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 - * Excluding one-off and non-recurring items. ** Constant currency (CC) removes the impact of foreign exchange rate movements to facilitate comparability of operational performance. 14 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Our new manufacturing facility in Chengdu, China. Commencement of sound processor manufacturing in China In February we achieved certification for the manufacture of our Nucleus® CP802 Sound Processor at the new Chengdu facility and have commenced supplying our Chinese operations. We expect to achieve implant approval within 18 months. In FY23, we obtained ISO 27001 Information Security certification of our Connected Care products. This certification demonstrates that we manage information security according to global best practices and have invested in the people, processes and technology to protect our data. It provides customers with greater confidence that Cochlear can be a trusted partner for delivering innovative digital health solutions. Creating value responsibly Proposed Oticon Medical acquisition We are supported by a large and complex supply chain of over 3,000 suppliers located in countries around the world. In FY23, we developed a Responsible Supply Chain Action Plan that aims to drive continuous improvement across the supply chain with a focus on human rights, labour practices, corporate governance, safety and well-being and environmental sustainability. In June the UK Competition and Markets Authority (CMA) concluded that Cochlear’s acquisition of Oticon Medical’s cochlear implants business does not raise competition concerns and is permitted to proceed, subject to the CMA’s approval of the related terms and conditions but prohibited Cochlear’s acquisition of bone conduction implants business. Cochlear and Demant will pursue a transfer of Oticon Medical’s cochlear implant business to Cochlear at a zero headline purchase price, completion of which will ensure that Cochlear can provide ongoing support for Oticon Medical’s current base of around 20,000 cochlear implant recipients. As market leader, we will seek to ensure Oticon Medical’s cochlear implant recipients can continue to access a lifetime of hearing solutions and look forward to welcoming them to the Cochlear family. 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 plan to develop and commercialise next generation sound processors and services that will enable customers to transition to and benefit from Cochlear’s technology platform over time. We were disappointed to be blocked from acquiring the acoustics business. We will still be able to offer Cochlear’s technology to those customers into the future as our Baha sound processors are already compatible with Oticon Medical’s Ponto acoustic implants. Oticon Medical’s cochlear implant business is expected to add around $10 million to annual revenue. The business is currently loss making. The priority post-closing of the transaction will be to determine a plan that returns the business to sustainable profitability as quickly as possible. The transaction remains conditional on satisfaction of customary closing conditions and receipt of other competition approvals from the Australian Competition and Consumer Commission and the European Commission and is expected to close by December 2023. 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. 15 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information FY24 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 FY24, we expect to deliver underlying net profit of $355- 375 million, a 16-23% increase on FY23, which is expected to be driven by a combination of revenue growth and improved net profit margin. Cochlear implant trading conditions continue to be strong across most markets, with an improving trend in adult referral rates in many developed countries. At this stage, we expect solid market growth rates to drive high single digit growth in our cochlear implant units for FY24. We expect market share gains from FY23 to stabilise and for there to be fewer COVID- related backlog surgeries. The Services segment is expected to perform strongly with continuing strong demand for upgrades to the Nucleus® 8 Sound Processor. Acoustics growth rates are expected to be lower than FY23, with continuing growth from the rollout of the Osia® 2 System to be moderated by a smaller contribution from upgrades to the Baha® 6 Max Sound Processor. We will continue our investment in R&D and market growth activities to support long-term market growth, with an anticipated investment of around 12% of sales revenue in R&D. Cloud computing-related investment is expected to be around $34 million ($24 million after tax) in FY24. Guidance is based on a 67 cent AUD/USD (67.5 cent average in FY23) and 61 cent AUD/EUR (64.4 cent average in FY23). Capital expenditure is expected to be around $70-90 million. The Board maintains a dividend policy that targets a 70% payout of underlying net profit. Guidance does not factor in any impact from the proposed acquisition of Oticon Medical, which is targeted to complete by the end of December 2023. Integration costs, which would include the development of compatible next generation sound processors, are yet to be determined and are currently estimated to be $30-60 million. Alison Deans Chair Dig Howitt CEO & President 16 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Strategy and value creation 17 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Our strategy Our goal is to deliver value by helping more people to hear, which contributes to building a healthier and more productive society. At Cochlear, we are strongly connected to our mission to help people hear and be heard. It’s the passion that drives the organisation and focuses the strategy. With every hearing implant, we begin a lifelong journey with our recipients. We have a responsibility to be here to support that lifetime of hearing which means we need to deliver sustainable financial growth, benefiting all our stakeholders. How we create value Our strategy is focused on improving awareness of and access to implantable hearing solutions for people indicated for our products. In helping more people to hear, we create value for our stakeholders by building a healthier and more productive society, providing a lifetime of hearing solutions for our recipients, having thriving employees and being environmentally responsible. Doing these things well should enable us to achieve sustainable financial returns over time. The following pages provide a comprehensive review of our strategy, from our growth opportunities to our key priorities for creating value over the coming years. We help more people to hear, creating value across five pillars What we aim to achieve over the longer term A healthier and more productive society Delivering societal benefit through improved health outcomes, educational cost savings and productivity gains. Grow the hearing implant market Help at least 8% more people to hear each year with a cochlear or acoustic implant. A lifetime of hearing solutions Innovating to build a market-leading portfolio of products and services that improve hearing outcomes and provide a lifetime of hearing solutions for recipients. Retain market leadership Develop market-leading technology and deliver a world-class customer experience to recipients and professional customers. Thriving people An engaged, capable, high-performing and diverse workforce that delivers on our strategy and supports the creation of sustained value. A stronger organisation Retain employee engagement levels at or above 80%. Environmental responsibility Minimising the impact of our operations on the environment. Minimise environmental impact Net-zero carbon emissions in our operations by 2030 and across our value chain by 2050. Sustained value Maximising spending to grow the market while maintaining our competitive position. Ensuring we operate fairly, honestly and legally. Consistent and sustainable growth Sustainable and responsible business practices, targeting growth in sales revenue of around 10% per annum and an 18% net profit margin. 18 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Our strategy There are many important elements to our strategy which aims to create value over the long term. Key inputs to creating value Key market segments Value creation Central to how we deliver our strategy and create value are the key resources we draw on. • Customers and communities: Our capacity to create value depends on the strong and trusted relationships we build with our candidates, recipients, professional customers and payers. • Innovation: We are pioneers and global leaders in the development, manufacture and commercialisation of implantable hearing solutions, collaborating with a global network of research partners. • Our people: Our people’s knowledge and expertise are central to how we deliver our strategy. • Financial and environmental: Prudent management of financial capital and responsible production and consumption underpin the delivery of sustainable growth over time. Our 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 are detailed on pages 20 to 21. 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. On pages 22 to 23 we detail what we are doing to address our key market segments. Strategic priorities On page 24 we provide a snapshot of the strategic priorities that determine how we focus our time and resources to create value. At a high level we aim to: • Grow the hearing implant market; • Retain market leadership; • Build a stronger organisation; • Ensure we are environmentally responsible; and • Deliver sustained value. Stakeholder benefits On page 25 we outline how our key stakeholders should benefit over time. Success for us is defined by creating value across all key stakeholders, which includes our customers, our people, our shareholders, the environment as well as society more broadly. On pages 26 to 61 we describe some of the key activities we are pursuing over the next five years to create value. Governance and risk On pages 68 to 76 we outline our approach to governance and risk. We believe high standards of corporate governance and transparency are fundamental to the sustainable, long-term success of the business. Our strong governance framework provides a solid structure for effective and responsible decision-making, and our risk management framework enables us to identify, assess and appropriately manage risks. Our sustainability approach Our sustainability approach is integrated into business strategy and operations. It reinforces our focus on creating positive social impact at individual and societal levels, while minimising our environmental impact. It helps guide our strategic priorities, manage risk and improve performance. Our approach is informed by our materiality assessment and business priorities, as well as the Global Reporting Initiative framework, the United Nations Sustainable Development Goals and the United Nations Global Compact Principles. The Board is responsible for overseeing the approval and integration of sustainability initiatives into business strategy and operations and approving sustainability policies and goals. Further details on our sustainability approach can be found in the Sustainability data appendix on page 154. 19 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Growth opportunity 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 is prevalent and under-treated Cochlear implants are a cost-effective solution for all age groups The World Health Organization estimates that there are over 60 million people worldwide who experience severe or higher hearing loss,1 yet fewer than 5% of the people that could benefit from an implantable hearing solution have received one.2 Cochlear implants provide life changing outcomes for recipients, empowering them to connect with others and live a full life. They also provide a cost-effective solution for all age groups, delivering significant returns on the investment made by the healthcare system. 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. Over 60m people with severe or higher hearing loss Significant return on investment for healthcare systems investing in cochlear implants We are the market leader in cochlear implants but a small player in the severe or higher hearing loss segment where hearing aids dominate 1153 million 266 million 103 million 31 million 17 million 13 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 * Cochlear estimate For a pre-lingual deaf child, the return to society is more than 13 times for every dollar spent on a cochlear implant solution based on the cost savings in education and improved productivity as an adult.3 The effective use of implants is cost- effective in adults and seniors with an estimated return on investment of 10:1.4 60% global market share* ~4% global market share Cochlear implant market share Hearing devices treating the severe or higher hearing loss segment 20 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Growth opportunity Product indications are broadening and funding is expanding Good hearing is essential to healthy ageing Product indications and funding are expanding as payers increasingly recognise the improved outcomes and cost-effectiveness of our implantable solutions. Hearing loss is particularly prevalent in people over the age of 60, with one in four suffering moderate or higher hearing loss.5 There is a growing understanding of the importance of properly treating hearing loss in this age group. It affects communication and is associated with cognitive decline, social isolation, anxiety and depression.6 Recent changes to reimbursement or indications Growing understanding of the link between good hearing and healthy ageing 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 US, UK, Germany and Australia: Cochlear™ Osia® 2 System reimbursement achieved across a number of countries Japan, UK and Belgium: expansion of reimbursement criteria for cochlear implants to include severe hearing loss US: the Centers for Medicare & Medicaid Services expanded coverage for cochlear implants to cover a broader spectrum of hearing loss 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 Cognitive decline Hearing loss associated with accelerated cognitive decline and dementia in older adults.7 Depression Significant association between hearing impairment and moderate to severe depression.8 Falls Higher risk of dizziness causing falling.8 Social isolation Hearing loss linked to withdrawal from social interactions, which can have a significant impact on psychological well-being and physical health.9 Ability to work Hearing loss can affect sufferers’ ability to work or stay in the workforce.10 Loss of independence Seniors with hearing loss less likely to be able to self-care.8 21 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Key market segments Our efforts are targeted at improving awareness, expanding access and building on the clinical evidence that demonstrates the effectiveness of our products across four key market segments. Cochlear implants: Children in developed markets Cochlear implantation has been established as the standard of care for newborns across the developed markets, with bilateral implants indicated across most countries 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% What we are doing What we are 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 young 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 countries 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 address 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 a range of 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. * Cochlear estimates of segment prevalence of severe or higher hearing loss. 22 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Key market segments Cochlear implants: Children in emerging markets Our emerging markets business has been growing rapidly as awareness of cochlear implants increases and wealth grows across many emerging economies. 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* >1.3m people Current penetration <10% Addressable market* >3m people in developed markets Current penetration <1% What we are doing What we are doing Our emerging markets business has been growing rapidly as awareness of cochlear implants increases and wealth grows across many emerging economies. Most countries however remain very 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; 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 markets where we have launched. • 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 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. * Cochlear estimates of segment prevalence of severe or higher hearing loss. 23 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Strategic priorities Our strategic priorities determine how we focus our time and resources to create value. Over the coming years we are focusing our efforts on delivering value across the following initiatives: Grow the hearing implant market Retain market leadership A stronger organisation Minimise environmental impact Consistent and sustainable growth • Strengthen the referral pathway for adults • Develop the acoustic implant segment • Broaden reimbursement and improve indications • Expand access in emerging markets • Advance the product and • Strengthen and nurture the services pipeline, with annual R&D investment of ~12% of revenue • Deliver our latest sound processor upgrade technology to existing recipients • Strengthen our lead in customer service and support • Maintain high standards of product quality, safety and reliability organisational culture • Attract, develop and retain talent • Champion a culture of diversity and inclusion • Support the wellness and safety of our teams • Advance the implementation of initiatives to reduce our Scope 1, 2 and 3 carbon emissions • Embed sustainability into product design, development and manufacturing • Deliver a global approach to managing the environmental impacts of packaging and waste • Optimise growth investment • Maintain a strong balance sheet • Improve efficiency and agility • Maintain high levels of corporate governance and an ethical and sustainable supply chain • Vigilance around data security and privacy A healthier and more productive society A lifetime of hearing solutions Thriving people Environmental responsibility Sustained value 24 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Creating value for stakeholders Value creation describes the impact we have on all our key stakeholders – our customers, our people, our shareholders as well as society more broadly. Successful execution 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 • Improved education and productivity opportunities • Understanding of the link between good hearing and healthy ageing and the need to act Our customers Our people All stakeholders Our shareholders • High quality and reliability • Engaged, capable and high- • Climate change mitigation and • Consistent financial • Improving hearing outcomes and quality of life for new and existing recipients • The right care is available at the right time and is easy to use • Reduced cost to serve for professional customers • Expanded product indications performing employees resilience performance • Diverse, equitable and inclusive workplace • Conservation of natural • Disciplined capital resources management • Engaging development and • Reduced pollution and waste • Strong corporate governance career opportunities • Strong health, wellbeing and safety culture • Healthier communities • Ethical and responsible supply chain A healthier and more productive society A lifetime of hearing solutions Thriving people Environmental responsibility Sustained value 25 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information A healthier and more productive society Delivering societal benefit through improved health outcomes, educational cost savings and productivity gains. 26 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information A healthier and 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. Cochlear implants provide life changing outcomes for recipients, empowering them to connect with others and live a full life. They also provide a cost-effective solution for all age groups, delivering significant returns on the investment made by the healthcare system. Despite this, fewer than 5% of the people that could benefit from an implantable hearing solution have received one.1 Across developed markets, the largest unmet need is in the adults and seniors population. 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 cognitive decline, social isolation, anxiety and depression.2 The adults and seniors segment is however challenging to address 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. Our efforts are therefore targeted at improving awareness, expanding access and building on the clinical evidence that demonstrates the effectiveness of our products, particularly in the adults and seniors segment. Over the next few pages we discuss some of the key initiatives we are pursuing which aim to create value by increasing awareness and access to implantable hearing solutions. Strategic priorities Our target Help at least 8% more people to hear each year with a cochlear or acoustic implant Grow the hearing implant market • Strengthen the referral pathway for adults • Develop the acoustic implant segment • Broaden reimbursement and improve indications • Expand access in emerging markets How payers and society more broadly benefit • Appropriate funding for a cost-effective intervention • Standard treatment pathway for implantable hearing devices for all age groups • Improved education and productivity opportunities • Understanding of the link between good hearing and healthy ageing and the need to act Relevant UN Sustainable Development Goals 27 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 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. Key elements to developing a treatment pathway for adults Creation of evidence The continuous generation of robust clinical evidence that demonstrates improved clinical outcomes and patient quality of life. Living Guidelines An evidenced based set of treatment guidelines for adults who would benefit from a cochlear implant. 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: • Building clinical and economic evidence that compels early adult referral and coverage; • Developing consistent referral guidelines to enable early identification and referral; and • Driving awareness and advocacy through hearing professionals and patient advocacy groups. Policy and Advocacy Engage key stakeholders to raise the awareness and the importance of hearing health in adults and, in particular, the role of cochlear implants. Behaviour change Move hearing professionals into willing and active referrers. 28 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information The findings are a major advancement in understanding the broader impact of hearing loss and the need for adults, policy makers and health professionals to prioritise treatment of hearing loss. It not only helps people to hear but has the potential to reduce cognitive decline for adults at high risk. An important first of its kind randomised controlled trial commenced in the UK in 2022. 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 use of hearing aids versus unilateral cochlear implants in 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 a hearing aid is better at improving speech understanding for adults with severe sensorineural hearing loss. Half of the trial participants will be randomly assigned with hearing aids, with the other half receiving a cochlear implant. The study is expected to take a few years to complete. Building clinical 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. Hearing loss has been found to be associated with accelerated cognitive decline and dementia. A study that tracked 639 adults for nearly 12 years found that mild hearing loss doubled dementia risk, moderate loss tripled risk and people with a severe hearing impairment were five times more likely to develop dementia.4 To investigate this further, our partners at Johns Hopkins University and their Cochlear Implant Center have been conducting a randomised control trial known as the Aging and Cognitive Health Evaluation in Elders (ACHIEVE) study.5 ACHIEVE is the first randomised trial to determine whether hearing loss treatment could delay cognitive decline and dementia in older adults with mild-to-moderate hearing impairment. The multi-year study is taking place at four centres in the US, with close to 1000 participants. In July 2023, the study delivered its first results, finding that for a group of participants who were at a higher risk of cognitive decline, using hearing aids for three years slowed cognitive decline by 48%.6 The results add to the growing evidence that support addressing modifiable risk factors for cognitive decline and dementia could be effective in reducing the future global burden of dementia. 29 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Building economic evidence 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 services.7 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. 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, cochlear implant recipients 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 provided the foundation for the development of formal clinical practice guidelines.8 In 2021, the World Health Organization (WHO) provided guidance for establishing evidence-based programs for hearing screening via the World Report on Hearing9, aimed at improving the identification and treatment of hearing loss in target age-groups, including adults. Over the coming years, we are supporting an international collaboration of hearing experts and cochlear implant recipients, known as the CI Task Force, and CIICA, the Cochlear Implant Community of Action, to lead the effort to develop Living Guidelines. The Living Guidelines will establish evidence-based, best practice recommendations for cochlear implantation in eligible adults. The aim is to optimise care for hearing impaired adults, improve cochlear implant accessibility and standardise treatment globally. The Living Guidelines are now being locally adapted and adopted into country-based guidelines, with plans for their roll out over the coming years. “There is a lack of person-centred and consistent referral pathways, which results in inconsistent diagnosis and delays in referral to cochlear implant specialists for candidates who may benefit.” Cochlear implant audiologist 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. CIICA was formed in 2021 and is the first global cochlear implant user and family advocacy network that draws upon a network of over 480 individuals and 98 organisations from 60 countries across the globe. 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 to candidates, health care practitioners and society more broadly as well as lobbying for changes to funding. 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. 30 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Health, social and economic benefits of cochlear implants The economic benefits associated with cochlear implants extend beyond healthcare budgets with significant net economic gains reported from a broader societal perspective which includes health outcomes, educational costs and productivity gains.7 Expanding product indications 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.10 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 market access teams work with governments and payers to recognise the benefits of treating hearing loss so we can continue to increase access to our products. Based on this study, Cochlear provided an estimated net societal benefit of more than $7 billion over the lifetime of the recipients implanted over just the past 12 months from improved health outcomes, educational cost savings and productivity gains. By improving penetration rates in developed markets, particularly for adults and seniors which currently sits at around 3%, we can not only improve the quality of life of thousands of people each year but also further reduce the cost to society by billions of dollars. Health, social and economic benefits of treating hearing loss Children Education • Children with cochlear implants have a greater likelihood of acquiring oral language, integrating into regular schools and being able to experience sounds along with better speech skills12 Employment • More likely to be in paid employment as adults13 Adults Employment and productivity • Reduces odds of unemployment or underemployment14 Societal benefits of cochlear implants compared to pre-implantation • Cochlear implantation associated with positive change in employment status15 and increase in income A recent European study calculated the net societal benefit of cochlear implants by age group. It estimated that adults and seniors with progressive profound hearing loss with a cochlear implant had a positive net benefit of £275,000 and £76,000 respectively.11 • Stay in work for longer16 – reduces premature retirement Seniors Health and community connection • Untreated hearing loss is associated with lower quality of life and higher cost of care due to higher risk of cognitive decline, depression, social isolation, falls and loss of independence17 31 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Improving access in emerging countries We are continuing to identify opportunities in emerging economies to grow the hearing implant market, with a focus on improving rates of implantation in children. Our emerging markets business has been growing rapidly as awareness of cochlear implants increases and wealth grows across many emerging economies. Most countries however remain very under-penetrated. We support the development of localised training and education tools to raise awareness about hearing loss treatments among professionals and potential candidates. We leverage our global collaborations with organisations including patient advocacy group and researchers, to help implement policy measures, such as newborn hearing screening, expand clinical services and improve reimbursement in these markets. We are also focused on lowering the age of implantation for children as evidence supports improved hearing outcomes from early intervention, which in turn drives improved educational and employment outcomes. This approach is aligned with the Joint Committee on Infant Hearing18 which recommends that all children with hearing loss should receive intervention by six months of age. Asia Pacific Case Study Thai delegation participating in the paediatric workshop at the Australian Hearing Hub (AHH). Cochlear, in collaboration with our partners at the Australian Hearing Hub (AHH), is working with Australian Federal and State Governments to build capacity and capability in paediatric hearing health systems across the Asia Pacific region. The NSW Government has provided support for workshops aimed at South East Asian countries. In June 2023 the National Foundation for Australia-China relations announced funding to support these workshops being held in China and in Sydney with a focus on newborn hearing screening. Through workshops facilitated by Australia’s leading hearing health experts, the AHH is demonstrating the effectiveness of Australia’s approach to paediatric hearing health – universal newborn hearing screening, diagnostics, referral pathway and rehabilitation programs – and creating a forum for knowledge sharing with clinicians and policy officials from around the region. 32 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information A lifetime of hearing solutions Innovating to build a market-leading portfolio of products and services that improve hearing outcomes and provide a lifetime of hearing solutions for recipients. 33 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information A lifetime of hearing solutions We innovate to build a market-leading portfolio of high-quality products and services that improve hearing outcomes and provide a lifetime of hearing solutions for recipients. 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. Cochlear has been the global leader in implantable hearing solutions for over 40 years. Our investment in R&D aims to strengthen our leadership position through the development of market-leading technology that improves hearing outcomes and quality of life for our recipients. We invest around 12% of sales revenue each year in R&D, with over $2.7 billion invested since listing, and we have a portfolio of more than 1,700 patent and patent applications worldwide. We have a global innovation network with over 550 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 Belgium focused on advanced innovation and an acoustics and software hub in Sweden. We helped over 44,000 people hear with one – or two – of our cochlear or acoustic implants in FY23. We have the largest recipient base in the industry, with more than 750,000 implants helping around 650,000 people to hear. With every hearing implant we begin a lifelong journey with our recipients. Our goal is to see our recipients continue to improve their hearing outcomes as our sound processor technology improves, while making aftercare simpler and more cost effective for them and the professionals that support them. Over the next few pages we discuss our innovation priorities, our history of innovation, our growing portfolio of connected care solutions as well as our dedication to product quality and reliability. Strategic priorities Our target Develop market-leading technology and deliver a world-class customer experience to recipients and professional customers. Retain market leadership • Advance the product and services pipeline, with annual R&D investment of 12% of revenue • Deliver our latest sound processor upgrade technology to existing recipients • Strengthen our lead in customer service and support • Maintain high standards of product quality, safety and reliability How our customers benefit • High quality and reliability • Improving hearing outcomes and quality of life for new and existing recipients • The right care is available at the right time and is easy to use • Reduced cost to serve for professional customers • Expanded product indications Relevant UN Sustainable Development Goals 34 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Innovation focus areas Focus areas for R&D span four key areas – improving hearing outcomes, making life easier for customers, integrating our ecosystem of products and services with connected care solutions and exploring options to expand the portfolio. Hearing outcomes We have made significant improvements in hearing outcomes for recipients over the past 40 years. Key innovations like dual microphone technology, pre-processing and user control have improved the ability for recipients to hear in different sound environments. These innovations have also led to an expansion in indications for cochlear implants to now include people with a severe or higher hearing loss. There is still more that can be done to improve hearing outcomes, to reduce listening effort and improve sound quality for recipients. Together with our research partners, we are investigating ways to better protect the structures of the inner ear and improve the electrode-neural interface, exploring drug/device combinations as well as new surgical strategies. Lifestyle and ease-of-use When it comes to lifestyle benefits, recipients want their sound processor to be smaller, lighter and smarter. Each sound processor generation has delivered on these expectations with today’s sound processors integrated with smartphone technology, making life easier. Ultimately, recipients would also like to be able to hear without an external sound processor. The development of totally implantable cochlear implant technology is a long-term development goal for Cochlear. It is an exciting part of our development plan and aims to provide both functional and aesthetic benefits with 24/7 hearing and invisible hearing. A commercially available product is not expected for quite a few years. We are also innovating to deliver even better solutions for professional customers to help ensure patient outcomes are optimised and efficient. In the coming years the fitting process is expected to become simpler, more automated and AI- assisted. Connected care Connected care is our vision for hearing care – where Cochlear, the recipient and hearing care professionals work together to ensure the right care is available at the right time and is easy to use. As the industry grows, connected care tools will increasingly provide additional capacity for our professional customers to manage growing volumes as well as provide convenience to professionals and recipients. By creating a cohesive and interconnected care ecosystem we can ensure a positive customer experience with on-demand and secure access to comprehensive patient and product information to drive evidence-based decision making and delivery of high quality, accessible and patient-centred care. Expanding the portfolio Our innovation focus expands beyond cochlear implants, spanning acoustic implants as well as exploring potential opportunities to broaden the use of our technology outside of hearing loss. A key priority has been to revolutionise our bone conduction technology and we achieved this in 2020 with the introduction of a transcutaneous bone conduction implant. The Cochlear™ Osia® 2 System represents a significant improvement in performance, aesthetics and quality of life for bone conduction patients and has great potential to see broader uptake and geographic expansion of our acoustic implant portfolio. Looking beyond hearing loss, our innovation fund and research partnerships are investigating the potential for our technology to be applied into new treatment areas. 35 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information A history of meaningful innovation Innovation matters. We are focused on delivering key technology improvements to our recipients. These innovations bring performance that matters, a true connection to life and a lifelong commitment to all of our recipients. The most advanced and reliable devices on the market are a result of over 40 years of dedication to innovation. Cochlear™ hearing implants Our R&D is focused on improving hearing outcomes and improving recipient quality of life. For more than 40 years Cochlear™ Nucleus® Implant innovations have delivered: • Improved hearing outcomes, resulting in improved speech perception, particularly in noise. These improvements have led to a broadening of treatment indications from profound to moderate- severe hearing loss and also new indications such and hybrid and single-sided deafness; • The world’s thinnest cochlear implants, designed to be discreet when implanted and providing a natural appearance; • The world’s thinnest electrodes and only perimodiolar electrode designed to sit close to the hearing nerve, supporting cochlea health and delivering clearer sounds; • Convenient and pain-free1 MRI scans at 1.5 and 3.0 Tesla without the need for magnet removal; and • Industry-leading reliability based on exceptional product design, extensive testing and world- class manufacturing that speaks not just to past performance but builds trust in future innovation. Cochlear hearing implants 1985 1997 2000 2005 2009/2014 2019 Nucleus 22 World’s first commercial multi- channel cochlear implant with 22 electrodes Nucleus 24 World’s first cochlear implant with removable magnet for MRI safety Nucleus 24 Contour Released with perimodiolar and straight electrodes Freedom World’s most implanted cochlear implant Nucleus Profile World’s thinnest implant, offers ease of use and faster surgery due to minimal drilling Nucleus Profile Plus World’s thinnest implant, MRI 1.5 and 3 T compatible with magnet in place 36 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Cochlear™ Nucleus® sound processors Over the past 40 years we have been improving the quality of life of our recipients with new sound processing technology that is compatible with both latest generation and older implants. Our sound processor innovation has delivered: • Improved hearing outcomes with sound processing technology designed to provide clearer sound and reduced background noise; • Connectivity to the world and people, by integrating with smartphone technology to allow direct streaming, control and monitoring with apps; and • Lifestyle benefits, with each generation being smaller and lighter, easier to use and with longer battery life. Cochlear Nucleus sound processors 50.7 mm 42 mm 40.9 mm 34.5mm 2005 2009 2016 2022 Freedom Offered input processing technologies designed to mimic natural hearing and is the industry’s first water resistant sound processor Nucleus 5 Was 36% smaller than the Freedom sound processor and offers an average hearing improvement of 30% in noisy environments. Includes AutoPhone, the industry’s first automatic phone detection ability. Winner of the prestigious Red Dot Design Award for Nucleus 5 and Nucleus 8. Kanso At launch, Kanso was the smallest and lightest off- the-ear sound processor available. Kanso was designed to help recipients hear with clarity using SmartSound® iQ with SCAN* and dual microphones, and is compatible with Cochlear™ True Wireless™ devices. Kanso is dust and splash resistant. Nucleus 8 Designed to make communicating with people easier, the Nucleus® 8 Sound Processor delivers our latest hearing technology. It senses changes in the environment and automatically adjusts listening settings. Ready for next generation Bluetooth® LE Audio technology and able to connect directly to what’s being broadcast at public venues such as airports, conference centres and theatres supporting Bluetooth Auracast™. 37 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Connected care solutions providing convenience and confidence Connected care is our vision for hearing care – where Cochlear, the recipient and hearing care professionals work together to ensure the right care is available at the right time and is easy to use. Our connected care solutions comprise a range of digital health solutions that provide new ways to deliver convenient, evidence-based care for patients at every stage of their journey, spanning surgical care, self-managed care, in-clinic care and remote care. Surgical care Surgical care solutions enhance patient outcomes through intraoperative tools and insights that improve the surgical experience. The Nucleus® SmartNav System supports surgeons in optimising electrode placement during cochlear implant surgery. It provides real-time, actionable intraoperative insights that increase confidence in device placement to help surgeons optimise outcomes and postoperative clinical performance. In-clinic care In-clinic care solutions streamline patient management and care, giving clinicians the time and flexibility to optimise every appointment. Our comprehensive range of fitting software uses our extensive fitting and performance data to inform and optimise programming. Our software is created using best-in-class design principles and harnesses over 40 years of experience and input from thousands of clinicians worldwide2 to help drive consistent outcomes, clinic efficiency and personalised care. Our fitting software always keeps the patient at the centre of care, promoting patient engagement and facilitating more effective tracking of progress between appointments.3 A recent innovation is the secure and seamless cloud transfer of a patient’s surgical data from the operating room to the fitting clinic via Nucleus SmartNav. This transfer ensures that hearing health professionals can always commence a patient’s first post-surgical appointment with all the information they need for a successful first fitting. 38 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Remote care Self-managed care Cochlear™ Self-managed care solutions empower patients to actively manage their hearing experience in partnership with their clinician through their smartphone. Self-managed care gives patients the option to proactively manage their device settings as they move through their day and encounter different hearing and communication conditions. Our range of mobile apps provide patients with the tools to manage their everyday situational hearing – whether they are adjusting their volume settings or using device features such as ForwardFocus. With Self-managed care, patients also have access to interactive tools to help them practice and improve their listening and communication skills. These app-based solutions are designed to give patients the confidence to participate in the conversations and moments that matter most. Remote care solutions allow clinicians to monitor patients and deliver quality care without a trip to the clinic. 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 they’re travelling. 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. By offering app-based Remote care solutions, we are meeting a recipient need and making care more convenient. We assist our professional partners to increase clinic efficiency, providing greater flexibility and allowing clinicians to see more patients, including new candidates. And by removing the need to travel to and from the clinic. Over the longer-term, remote care solutions have the potential to expand access to those who live in remote areas or otherwise don’t have access to a clinic. 39 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Leading on product quality and reliability When choosing a cochlear implant, the reassurance of high-quality products that support a lifetime of hearing is key. Our market-leading products are the result of our world-class manufacturing process and meet stringent, internationally recognised standards. As the global leader in implantable hearing, with more than 750,000 devices provided, we take our responsibility to report on the reliability of our products seriously. This is why we report with full transparency, in accordance with International Standard ISO 5841-24, the reporting principles outlined in the European Consensus Statement on Cochlear Implant Failures and Explantations5 and ANSI/AAMI CI86 – Cochlear implant systems: Requirements for safety, functional verification, labelling and reliability reporting.6 Cochlear’s implants are the most reliable7 in the industry. Our products are approved by regulators around the world for the treatment of moderate to profound hearing loss after undergoing safety and efficacy reviews. Implant reliability is important for successful patient outcomes, with longevity an important factor when choosing an implant, particularly for a child. Our latest implant, the Nucleus® Profile Plus Series implant, has a combined cumulative survival percentage (CSP) of 99.87% within four years. Our Nucleus CI24RE Series implant, the world’s most widely used cochlear implant, with more than 200,000 registered devices, has a combined CSP of 98.92% after being on the market for 18 years. Each year we publish our product reliability data in the Cochlear™ Nucleus® System Reliability Report, which can be found on the website. Our world-class manufacturing processes meet stringent, internationally recognised standards. Our Quality Management System (QMS) provides the framework, processes and procedures for ensuring: • safety and efficacy of our products; • compliance with regulatory requirements; and • product design, manufacture and marketing consistently meet customer and regulatory requirements. Our QMS plays an integral part in ensuring our product safety and reliability. During the design process, products go through extensive testing both internally and externally to ensure they are designed to meet all applicable standards for intended use. Our products are manufactured to ensure they meet our design specifications. We then continue to monitor the performance of our products throughout their lifetime via an extensive post market surveillance process. Information gathered throughout the product lifecycle is used to improve current and future products. Our QMS is also audited annually by regulatory agencies to ensure compliance with applicable regulations and standards for the countries where we market our products. The Chief Technology Officer has executive accountability for Quality and Regulatory Affairs and, along with the Executive team, oversees the performance of the QMS to evaluate its suitability, effectiveness and ensure it continues to improve. Undertaking pre-clinical and clinical trials to study the efficacy of new technology Cochlear undertakes pre-clinical and clinical trials, often in conjunction with leading universities and research partners, to study the safety and efficacy of new technology in accordance with relevant standards including ISO 14155: Clinical investigation of medical devices for human subjects – Good clinical practice. We currently have 35 active sponsored studies in the areas of technology development and lifecycle product support. We make outcomes from clinical studies available to payers, regulators, health technology assessment bodies and other stakeholders via summary reports on clinical trial public registry platforms and as published peer-reviewed manuscripts. In FY23, there were 18 peer-reviewed publications arising from Cochlear-sponsored studies. 40 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Collaborating to advance hearing science and research As a market leader we strive to help advance hearing health science and research. By working with other leaders in the sector, we can harness our collective expertise, skills, and imagination to achieve more for our customers and for the community. Strategic research partnerships and global collaborations Cochlear has established research collaborations with leading universities and research organisations around the world including strategic research partnerships with Macquarie University in Australia and Johns Hopkins University in the US. These collaborations build on the research expertise of the institutions, as well as their broader networks and ecosystems, to drive innovation in hearing technology and public health. Macquarie University and the Australian Hearing Hub Both Cochlear and Macquarie University are founding members of the Australian Hearing Hub (AHH) which brings together leading researchers, clinicians, service providers and industry with the vision of being the world leading community transforming hearing and communication. Key collaborative AHH research projects include Hearing Impairment in Adults: A Longitudinal Outcomes Study (HALOS) and the Cochlear Implant Neurotrophin Gene Therapy Clinical Trial. In March 2023 the AHH announced a new partnership with Google to explore new applications of artificial intelligence and machine learning hearing solutions as part of Google’s $1 billion Digital Future Initiative. Johns Hopkins University and the Cochlear Center for Hearing and Public Health In 2018 we Cochlear pledged US$10 million over 10 years to establish the Cochlear Center for Hearing and Public Health at Johns Hopkins Bloomberg School of Public Health. Under the leadership of Professor Frank Lin, the Center focuses on hearing loss as a global public health priority, with an emphasis on the public health impacts of hearing loss in senior adults. Priority research areas include the contribution of hearing loss to the risk of cognitive decline and dementia in older adults and the epidemiology of hearing loss prevalence and risk factors. Australian Hearing Hub and Google collaboration partners. In early 2023 we renewed our strategic research partnership with Macquarie University for a further five years strengthening the platform for co-funded multi-year and multi-disciplinary research projects with a focus on advancing clinical practice, education and public policy. 41 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Growing connectivity and engagement with our customers We invest to provide our customers with a world-class customer experience with increased connectivity and engagement for recipients and products and services to improve convenience and confidence for our professional customers. Cochlear Family Cochlear Family is our recipient awareness and education membership program, providing information about the hearing journey and support in living with hearing implant technology for recipients and their families and carers. It aims to help upskill recipients and their carers to live a more confident life with hearing technology via proactive communications and hosted events. Cochlear Family is the world’s largest community of hearing implant recipients and is available in 70 countries. Over 54% of all new customers become Family members and in FY23 membership increased to 296,000 people, up 14%. Cochlear Volunteer Community The Cochlear Volunteer Community is a network of highly engaged, committed recipients and carers who are motivated to help others learn about and successfully live with implantable hearing devices. There are currently over 1,400 official Cochlear Volunteers throughout 24 countries, who have been matched over 2,400 times in FY23 with people considering whether Cochlear technology is right for them or their loved one. Volunteers provide candidates and recipients with relevant information about the benefits of hearing implants and sound processors and opportunities to maximise the benefits of devices in daily life. We work closely with our volunteers to provide them with the knowledge and skills they need to be successful in supporting others along their hearing journey. Professional learning programs In FY23 our European-based professional education learning program provided in-person, virtual and hybrid trainings for ENT surgeons, audiologists and oral rehabilitation therapists across Europe. We held 166 events, reaching over 3,800 professionals. Our Cochlear Clinical Skills Institutes (CCSI) in Sydney and Chengdu conducted surgical and clinical training for professionals in the hearing implant industry. The training attracted nearly 100 surgeons from the Asia Pacific region. We also delivered a diverse range of face-to-face and online training events, benefiting over 11,000 professionals throughout FY23. Professional training. 42 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Thriving people An engaged, capable, high-performing and diverse workforce that delivers on our strategy and supports the creation of sustained value. 43 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 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 around 4,800 people across the globe. Their knowledge, expertise, passion and focus on delivering excellence is key to achieving future success. Cochlear has a rich history, helping people to hear for over 40 years, underpinned by a strong culture of innovation and a focus on our customers. Strategic priorities 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. Diversity, equity and inclusion continue to be key priorities as they are fundamental to our success as an innovation leader. Over the past few years, we have also focused 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. Over the next few pages we discuss some of the key initiatives we are pursuing which aim to create value by investing in our people and culture. Our targets Retain employee engagement levels at or above 80% A stronger organisation • Strengthen and nurture the organisational culture • Attract, develop and retain talent • Champion a culture of diversity and inclusion • Support the wellness and safety of our teams How our people benefit • Engaged, capable and high-performing employees • Diverse, equitable and inclusive workplace • Engaging development and career opportunities • Strong health, wellbeing and safety culture Relevant UN Sustainable Development Goals 44 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Ways of working together Our HEAR behaviours bring to life our mission and reflect what we value as an organisation. Our HEAR behaviours are our ways of working, providing a framework to operate. Together with the Global Code of Conduct, the HEAR Behaviours provide a set of guiding principles that shape our culture and define how employees should behave and make decisions. When setting our individual and department goals each year, employees and managers ensure that the goals incorporate the expected outcome as well as the behaviours we demonstrate to achieve the outcome. Each year we review the micro behaviours associated with each pillar and adapt where either the strategy or the behaviour needs evolving. This year, Aspire to Win micro behaviours have been adapted to reflect a greater focus on prioritisation, taking risks, experimenting and taking initiative – key areas we want to further develop as we enter the next phase of growth. H E A R Hear the customer Put the customer at the centre of all that we do • I see what we are doing through the customers’ eyes • I factor in what the customer needs in my decision making • I bring the voice of the customer into our conversations Embrace change and innovate Think differently to change and grow • I simplify complex information to make it easy to understand • I look for the simplest solution without adding complexity in the future • I change my mind when persuaded by a better idea Aspire to win Inspire each other to achieve • I push the team to take actions toward our stretch goals • I prioritise my actions to get things done • I raise difficult and important issues • I take calculated risks to achieve our goals • I take action without being told what to do Remove boundaries Unite and act as one • I challenge others’ opinions in a constructive way • I speak supportively of decisions made by others outside my immediate team • I seek and use input from other parts of the business to make decisions • I put the interests of the organisation ahead of my own or my team 45 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Championing a culture of diversity and inclusion A diverse, equitable and inclusive organisation improves employee engagement, our performance and productivity as well as customer engagement. Our workforce We are proud of our diverse and capable global workforce. Our people are based in more than 50 countries around the world with 53% females. Targeting to maintain at least 40% female representation at senior management and Board level 53% 43% All employees Senior managers* 47% 40% Senior placements Board More information about our workforce is in the Sustainability data appendix on page 154 and the 2023 Corporate Governance Statement, available on the Investors section of the website. Our diversity and inclusion strategy Our diversity and inclusion (D&I) strategy is aimed at creating an environment where our people feel safe, valued, included and empowered to do their best work. The strategy is built around target setting and policies, hiring and development, training and communication and engagement. Targets and policies Since implementing our Diversity and inclusion policy in 2021, our focus has been on gender diversity. We introduced gender targets for our Board and senior leaders, reaching these targets by FY22. In FY23, 43% of senior managers were female. Flexible work is an important part of our employee value proposition and is a key driver of attracting and retaining talent. Our Global Flex@Cochlear policy sets expectations around flexibility with 87% of our employees saying their manager provides them with the flexibility to manage their work and personal responsibilities. Our commitment to diversity, equity and inclusion is enshrined in our Global Code of Conduct which states that our people have a responsibility to make our workplace fair and inclusive and we do not tolerate any form of discrimination and harassment. Hiring and development In FY23 we continued to invest in our Hiring Manager Learning Program ‘Hiring to win’, which is focused on the removal of unconscious bias from our selection processes. We have seen some pleasing results from our work in this area with females comprising 47% of all senior placements made during the year. We achieved our Board target of 30% female representation in FY21, with females now comprising 40% of our Board. To ensure we maintain and embed these achievements, we are continuing to improve the gender diversity of our succession pipelines to all senior leadership roles. We continuously monitor outcomes and metrics to ensure fairness and equity in our talent management activities, such as recruitment practices and performance and remuneration review outcomes, while identifying opportunities for further improvement. Female * For the purposes of this Statement, senior managers are defined as all managers in Bands 1, 2 and 3; the three most senior levels with Band 1 being the Executive team. 46 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Career Trackers internship program. 2023 Sydney WorldPride event at our headquarters in Australia. An important element of our talent strategy is to build our relationships with school and university programs so that we continue to grow a diverse pipeline of entry-level talent. Females comprised 62% of our 2022/2023 Summer Student Intern Program and 50% of our 2023 Graduate Program intake. In Australia, we sponsor students as part of the Cadetship to Career initiative jointly developed by The Smith Family and the Business Council of Australia. This initiative provides students from disadvantaged backgrounds with paid work experience to help them transition from study to employment and explore future career options. In August we became a CareerTrackers partner with the aim of offering more, high quality internship opportunities to Australian First Nations students. This initiative aligns with our Reconciliation Action Plan (RAP) commitment to explore opportunities to promote STEM (Science, Technology, Engineering and Mathematics) development and career pathways for First Nations peoples. Training We continue to upskill our people to support our D&I principles and goals. By the end of FY23 80% of all leaders globally have completed our Inclusive Leadership program. In addition, we launched an Embrace Equity online learning pathway for all employees to build greater awareness of equity and why it is important. Other key learning programs aimed at building an inclusive workplace include Respectful Workplace training, Mental Health for Managers and Smarter Meetings. In June we launched an online First Nations Knowledge Building and Engagement course as part of our efforts to increase cultural safety and understanding under our RAP. The course is available to our Australian based people and aims to provide our people with a foundational understanding of First Nations history, culture and people. Communication and engagement Our culture work and goals are closely integrated with our D&I strategy. The work of our 100 Culture Champions has continued to focus on building a more inclusive workplace and environment where we ensure people are heard and differences are valued. The Culture Champions introduced an organisation wide experiment entitled ‘Challenger in the Room’ designed to encourage behaviours of raising difficult issues and encouraging diverse perspectives. This experiment required people to apply the skills learnt through the Culture Conversations series. Over the past year, we took steps to acknowledge and celebrate a broader range of significant events or dates to better reflect the diversity of our people and the communities they live in, including celebrating World Pride Day with an event featuring personal stories from leaders from across the globe and their experience as an LQBTQIA+ employee. In Australia we celebrated National Reconciliation Week, a time for all Australians to reflect on First Nations’ peoples, learn about our shared histories, cultures and achievements and explore how we can contribute to reconciliation. We ran online events providing a platform to encourage more people to join us in this important journey. 47 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Attracting, developing and retaining talent We strive to attract and retain passionate and highly skilled professionals. We have continued to build on our efforts to engage and retain our talent, focussing on career progression and development, pay and recognition and ensuring all our employees feel a sense of belonging, regardless of their background and experiences. As a result, we have seen a significant number of employees taking on a new career development opportunity with 30% of open roles filled by employees. In FY23, overall employee engagement remained strong at 80%, with 91% of our employees completing our global engagement survey. We are particularly pleased to see contribution to the satisfaction of our customers (94%), employee understanding of their contribution to strategy (93%) and pride in the organisation (92%) remain our strongest areas, a result that can be attributed to the power of our mission and our strong commitment to our customers. We have also continued to see a strong uptake in our all- employee share purchase plan, with 47% of eligible employees participating in the second year of the plan offering. Our retention levels remain strong with our global annualised voluntary turnover for FY23 of 8%, almost three points below the previous year. We have made a significant global investment in efforts to prepare for our new People and Culture operating model with the new IT platform launching in September 2023. The new operating model is designed to support our organisation as it grows and will enable greater empowerment of our leaders and greater opportunities for our people to share their talents and skills and build their career. 80% Overall engagement 28.5 hrs per employee of formal learning globally in FY23. 48 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Supporting the wellness and safety of our teams We are committed to providing safe, healthy and secure workplaces for our employees and all others in our workplaces. Our care and commitment to safe and healthy working environments allows our people to thrive and deliver their best work. In FY23 our Total Recordable Injury Frequency Rate was 3.3, having increased slightly from FY22. Our main risks relate to the development of musculoskeletal disorders, which comprise 21% of all injuries sustained in our operations. We continue to focus on the prevention of musculoskeletal disorders through early intervention, evidenced based exercise programs and increased frequency of rotation through our operations to further lower exposure times to operations of a repetitive nature. We are taking a holistic approach to the wellness of our people through maintaining both a physically safe and mentally healthy work environment. Our confidential Employee Assistance Program is available to all employees and their immediate family members ensuring comprehensive assistance is available to address their mental health needs. To help our managers recognise and fully support their teams’ mental health we have implemented mandatory ‘Mental Health for Managers’ training and are upskilling the workforce through the provision of Mental Health First Aid training. We have also commenced a comprehensive review of our existing psychosocial risk assessment, with a particular focus on sexual harassment. In FY24 we will continue our work in this critical area to ensure that we take a holistic and robust approach towards the prevention of sexual harassment in the workplace. 81% Feel safe at work 76% Satisfied with health and wellbeing 85% Feel leadership is committed to employee health and wellbeing 49 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Environmental responsibility To be a sustainable business, we aim to minimise the impact of our operations on the environment. 50 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Environmental responsibility We are implementing initiatives to promote the sustainable use of natural resources, reduce our environmental footprint and help tackle climate change. We are implementing initiatives and actions to meet our science-based carbon emissions reduction targets. Our short-term focus is on expanding renewable energy use at our sites and reducing our Scope 1 and 2 emissions. Additionally, we are reducing our business flight related carbon emissions and mapping our other Scope 3 emissions in line with our net-zero strategy. Strategic priorities Our target Sustainability is integrated into our operations, processes and procedures. We consider the environmental impact of our product development, manufacturing, packaging, and logistics. We are committed to utilising natural resources in a responsible and efficient manner. Addressing climate-related risks is part of our risk management strategy. To enhance our approach, we are progressively implementing climate-related scenario analysis in line with the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations. This section outlines the initiatives and processes we have established to drive our progress towards our targets. Net-zero carbon emissions in our operations by 2030 and across our value chain by 2050 Minimise environmental impact • Advance the implementation of initiatives to reduce our Scope 1, 2 and 3 carbon emissions • Embed sustainability into product design, development and manufacturing • Deliver a global approach to managing the environmental impacts of packaging How all stakeholders benefit • Climate resilience • Efficient use of natural resources Relevant UN Sustainable Development Goals 51 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Our pathway to net-zero emissions We are committed to taking an active role in the global effort to tackle climate change and are using climate science to better understand our impacts and define our strategy. In FY22 we set short, medium and long-term Greenhouse Gases (GHG) emission reduction targets. Our targets are in line with the Science Based Target Initiative (SBTi) methodology, consistent with the reductions required to limit warming to 1.5 degrees above pre-industrial levels. Our emission reduction targets 2025 • 25% reduction in our absolute Scope 1 and Scope 2 emissions • 50% reduction in business flight emissions 2030 • Net-zero emissions in our operations (Scope 1 and 2) 2050 • Net-zero emissions across our value chain (Scope 1, 2 and 3) Electric van at our Macquarie site in Australia. Our climate-related strategy Scope 1 and 2 emissions Implementing efficiency initiatives is a key element of our strategy, and we are on target to meet our Scope 1 and 2 emission reduction targets. We have continued to expand the use of renewable energy at our key sites and reached an overall rate of 70% renewable electricity globally. Our manufacturing facilities account for 70% of the total energy consumption. We have made significant progress in reducing Scope 1 and 2 emissions by 68% from our FY19 baseline by increasing renewable energy use in our manufacturing sites. In FY23, we reached 96% renewable energy at our manufacturing facilities, using 100% renewable energy in five of our six facilities. Due to restrictions in the availability of renewable energy at the remaining site, we were not able to obtain 100% renewable energy during FY23. We expect to be able to move to 100% renewable energy in FY24. We are also implementing other initiatives to further reduce our fossil fuel use and energy consumption. For example, we have replaced the petrol van used to transport production components, consumables and finished goods between our Sydney facilities with an electric van, and we have renovated the air conditioning system at our Macquarie University site, representing annual savings of around 360 MWh, almost 8% of the annual consumption. Our historical emissions and energy use data are available in the Sustainability data appendix on page 158. Scope 3 emissions We are making steady progress toward accomplishing our business flight-related targets. In FY21, we set a target to reduce our business flights per full-time equivalent employee by 20% and our flight-related emissions by 50% by 2025 (from a FY19 baseline). In FY23 we reduced our flight related emissions by 91%. We achieved this by reducing business flights per full time equivalent employee by 47% from our FY19 baseline and purchasing offsets for approximately 80% of our remaining business flights. For other Scope 3 emissions, we have initiated a complete inventory in line with the GHG Protocol. The initial result indicates that 10 out of the 15 GHG Protocol categories apply to our business. We intend to disclose the results of this process in our next Annual Report and will also develop a reduction plan in line with the SBTi. 52 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information US environment champions The US team has established a voluntary environmental working group aimed at advancing our global environment objectives by implementing local initiatives focused on employee commuting, energy efficiency, waste management and promoting sustainable lifestyles. This initiative is endorsed by the US management team and supported by the Global Sustainability Team. The working group comprises 29 members from different parts of the business including sales, clinical, finance, product management, communication, warehouse, clinics, field staff and people and culture. Initiatives delivered in FY23 include an education program about waste and recycling and ‘Bike to Work’ day, raising awareness about sustainable transportation. Managing our climate-related sustainability risks Our enterprise risk management approach includes assessment of our physical climate-related risks (riverine and urban flood, extreme heat, cyclones and wildfires). It also includes the assessment of potential climate-related risks to critical production-related suppliers and critical business infrastructure providers. We have considered the risks and opportunities of transitioning to a low carbon economy. Although we are not a carbon-intensive industry, we assess our supply chain to identify relevant climate impacts so that ambitions to decarbonise are aligned. Metrics and targets As we further align our approach with the TCFD and the International Sustainability Standards Board Sustainability Disclosure Standards, we intend to extend our climate-related scenario analysis in FY24 to provide a more detailed assessment of risks and opportunities associated with climate change and the transition to a low carbon economy. The main metrics used to assess and manage climate-related risks and opportunities are: • Scope 1, 2 and 3 GHG emissions. Please refer to the Sustainability data appendix on page 154 for more details; • Location of relevant facilities; and • Our targets to reach net-zero emissions, in line with the SBTi. Governance The Audit and Risk Committee assists the Board to discharge its responsibilities in monitoring sustainability performance and overseeing the implementation of sustainability initiatives and commitments and reviewing the assessment, management and response to these risks and opportunities. Please refer to the Governance and risk section on page 68 for more details. 53 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Enhancing environmental management and compliance We continue to integrate environmental considerations into our business, focused on minimising our impact, complying with regulation and improving efficiency. Sustainable design and packaging Life Cycle Assessment We incorporate a sustainability mindset into our product development, packaging and logistic processes. Multidisciplinary teams are working on increasing the environmental efficiency of our products, aligned with the medical device regulations focused on protecting the safety of patients. As part of our product design process, we comply with the International Electrotechnical Commission Standard - IEC60601-1-9:2020: Requirements for environmentally conscious design, focused on minimising the environmental impact of each stage of a product’s life cycle. In light of growing environmental regulation related to packaging, we are exploring initiatives to minimise the environmental impact of our packaging while still meeting medical device safety standards. For example, we use recyclable PaperFoam and biodegradable packaging across all our products. By replacing plastic bubble-wrap with a paper filler in shipping boxes, we have reduced the use of plastic shipped from Australian sites to our regional distribution centres by 80%. We also transport batteries required for our products. With the implementation of shipping optimisation actions in FY23, we have reduced the distance travelled by air for these batteries by 69%. We have initiated a systematic Life Cycle Assessment (LCA) of the Cochlear™ Nucleus® 8 Sound Processor using the SimaPro modelling software, a leading science-based methodology. The LCA measures environmental impacts during all stages of the product’s life. This will help us define a baseline for sustainable product innovation and enable us to make better decisions throughout the life cycle of our products in areas such as: • Waste management; • Environmental impact of packaging; • Material preferences for products and packaging; and • Carbon footprint. Environmental management Our Environmental Policy sets out our commitment to managing and reducing our impact on the global environment. Working closely with our partners and suppliers, we monitor our environmental performance across our operations and across the value chain. Resource efficiency We are identifying ways to improve resource efficiency, reduce waste and drive greater circularity into our operations. We continuously identify ways to reduce waste going to landfill by effective sorting of recyclable materials and waste avoidance. In FY23 we reused 250 square meters of our carpet and refurbished tables and white boards in the renovation of our Lane Cove office. Our current production processes use limited quantities of water, with the majority consumed through staff kitchens and bathrooms. We encourage responsible water consumption and continuously identify appropriate water-saving initiatives. Environmental compliance We comply with the European Union (EU) Restriction of Hazardous Substances (RoHS) Directive 2002/95/ EC, which governs the use of heavy metals and halogenated compounds in electrical and electronic equipment. We also comply with the EU’s regulation on the Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH) for the safe manufacture and use of chemical substances throughout their lifecycle. In addition, we comply with the Directive 2012/19/EU aiming to prevent and reduce waste from electrical and electronic equipment. In addressing packaging and packaging waste, we comply with the European Parliament and Council Directive 94/62/ EC aimed at preventing the production of packaging waste, reusing packaging, recycling and other forms of recovering packaging waste and, hence, at reducing the final disposal of such waste. 54 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Sustained value Maximising spending to grow the market while maintaining our competitive position. Ensuring we operate fairly, honestly and legally. 55 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Sustained value Financial discipline and commitment to high standards of corporate governance and transparency are central to the creation, maintenance and enhancement of long-term sustainable value. Cochlear has a long history of delivering growing sales revenue, profits and dividends. This track record can be attributed to our unwavering dedication to our core competency, the development of implantable hearing solutions, and has been supported by a multi-decade philosophy of investing to grow, disciplined management of capital and high standards of corporate governance. As a business we plan and invest over long timeframes. Our R&D investment horizons span over 10 years, and our ambition to improve the uptake of cochlear and acoustic implants requires long-term planning and consistent investment over many years. Over the coming years we expect to continue to invest consistently to improve the adoption of our products. We see a significant opportunity to grow by strengthening the clinical pathway for adults and seniors through improving awareness and access for those who would benefit from a cochlear implant. Improving these pathways takes time, requires us to trial novel approaches and adapt quickly as we learn. We need to constantly challenge ourselves on how best to prioritise and optimise this growth investment and measure progress. We have set high level targets to guide our investment, aiming to balance financial objectives and expectations with the organisation’s capacity to grow at a manageable pace. Over the coming years we aim to grow sales revenue at around 10% per annum, while targeting an investment of 12% of sales revenue in R&D and an underlying net profit margin of 18%. While the outcomes for any individual year may vary as a result of prevailing trading conditions, these guiderails provide us with the ability to grow our investment in market growth activities. We are also cognisant that to be successful over the long term, we must create value responsibly. We recognise that high standards of corporate governance and transparency are important for the creation, maintenance and enhancement of long-term sustainable value. Over the coming pages we discuss some of the key elements of our financial and governance objectives aimed at creating sustained value. Strategic priorities Our target Sustainable and responsible business practices, targeting growth in sales revenue of around 10% per annum and an 18% net profit margin Consistent and sustainable growth • Optimise growth investment • Maintain a strong balance sheet • Improve efficiency and agility • Maintain high levels of corporate governance and an ethical and sustainable supply chain • Vigilance around data security and privacy How shareholders benefit • Consistent financial performance • Disciplined capital management • Strong corporate governance • Ethical and sustainable supply chain Relevant UN Sustainable Development Goals 56 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Delivering sustainable financial returns Our long-term approach to investing, combined with disciplined capital management, has delivered consistent growth in sales revenue, profits and dividends over many decades. Investing to grow Growing R&D capability Operational improvement 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 $2.7 billion has been invested in R&D since listing and we target an annual R&D investment of 12% of sales revenue Delivering stable net profit margins 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 an 18% net profit margin over the long-term, reinvesting any efficiency gains, currency or tax benefits into market growth activities. We take a long-term approach to investing and have consistently invested in growing the market for implantable solutions since listing in 1995. Consistent investment in sales and marketing Our investment in sales and marketing is building awareness of and access to implantable solutions and driving market growth. Over the past few years, we have accelerated our investment in growth activities including direct-to-consumer marketing, standard of care initiatives and market access. Operating expenses (excl R&D) $million 36% 34% 41% 810 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 % of sales revenue Disciplined capital investment and optimising cost of production strengthens our competitive position. Disciplined use of capital Since listing, 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); and • Entific – bone conduction implant business (FY05). The innovation fund has invested around $170 million in companies with novel technologies that may, over the longer term, enhance or leverage our core technology. The innovation fund includes investments in Nyxoah, Precisis, Epiminder, Seer Medical and Sensorion. 57 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Strong financial position Quality operating cash flows Being agile and efficient Strong free cash flow generation provides funding for market growth activities and R&D as well as the ability to reward shareholders with a growing dividend stream. High return on capital employed (ROCE) ROCE measures the cash return for each dollar invested in the business. We generate a high ROCE reflecting our competitive position in the market and the high barriers to entry to the cochlear implant industry which have proven to be robust over many decades. The high ROCE is also a function of the relatively low level of tangible assets employed by the business. Our competitive advantage is driven by our strong product and patent portfolio, a result of investment in R&D over many years, as well as customer knowledge and strong relationships. As R&D investment is expensed through the income statement, no value for this important asset is captured on the balance sheet. ROCE 22% 25% 1,194 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Capital employed ($m) ROCE % (after tax EBIT* / Capital employed) 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 underlying net profit and the operating cash flows generated by the business. Operating cash flow v net profit $million We are investing in strengthening our business processes and IT platforms to improve efficiency and agility. Successfully executing this transformation program will enable us to scale more effectively and provide even better solutions for our customers. Our recipient base is fast approaching one million. As we look to the future, we recognise the need for more scalable ways to provide customer service and customer solutions. And with an increasing suite of digital products and services, we must ensure our processes, data and platforms are consistently deployed across the globe. 305 At the same time, we seek to ensure we continue to meet the challenge of increasingly stringent regulatory and security standards that require strong process governance and transparency. 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Underlying net profit* ($m) Operating cash flows (adj for dep)** ($m) Conservative gearing levels We have a strong balance sheet, with over $550 million in net cash. We are a growth company that had, 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. A progressive on-market share buyback commenced in February 2023 with the aim of reducing the cash balance to around $200 million over a number of years. 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. 58 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Creating value responsibly We recognise that high standards of corporate governance and transparency are important for the creation, maintenance and enhancement of long-term sustainable value. The Board is committed to high standards of corporate governance practice and fostering a culture of compliance which values ethical, lawful and responsible behaviour, personal and corporate integrity, accountability, transparency and respect for others. The Board and its committees regularly review the governance arrangements and practices to maintain compliance with regulatory requirements and industry practice and to ensure they continue to support business objectives. Our 2022 Modern Slavery Statement provides an overview of this framework as it relates to these risks as well as further detail on our global approach to modern slavery and is available on the website. In FY23, we established a cross-functional working group to manage opportunities for improvement in our processes, address emerging trends and monitor our progress. This working group was involved in a review of our Supplier Code of Conduct, which is available on our website. Key aspects of our corporate governance framework and practices are set out in our 2023 Corporate Governance Statement, which is available on the website. In FY23, we updated our Global Code of Conduct, maintaining the high standard of conduct, business ethics and integrity required of all our people around the world in driving our business forward. We conduct mandatory training on the Global Code of Conduct for all staff globally on an annual basis. In the following section we discuss a few important areas where we have been increasing our governance metrics. These areas include procurement, cybersecurity and data privacy. Responsible supply chain We have a framework of policies, procedures and processes in place to manage risks relating to human rights, labour practices, corporate governance, safety and wellbeing and environmental sustainability in our supply chain. During FY23, we continued to implement our supplier due diligence assessments to support sustainable and ethical procurement. No suppliers have required mitigation action plans. We are taking action to engage a more diverse range of suppliers with the aim of generating social value beyond the value of goods or services being procured. In FY23, our spending with First Nations suppliers generated over $3.1 million in social value (as calculated by Supply Nation1, provider of verified Australian Indigenous businesses). As a signatory to the voluntary Business Council of Australia Supplier Code, we aim to pay eligible Australian small businesses within 30 days of receiving correct invoices and/or products. As at 31 December 2022, we procured 15% of our supplies from Australian small businesses with 86% of invoices (by value) paid within 30 days. We continue to drive process improvements to ensure we pay small businesses promptly. Cyber security We handle and store personal information, including health information, for our customers and employees. With expanding information privacy and security regulations, we recognise data security as a key element of our relationship with our stakeholders. We design and implement our information technology systems and applications with security controls in line with industry standards. In FY23, we obtained ISO 27001 Information Security certification of our Connected Care products, enhancing our capability to identify emerging threats and manage cyber-risks. All employees must comply with our policies, standards and procedures to protect our information technology systems and data. We maintain a defence-in-depth approach to security with multiple layers of controls and countermeasures in place to protect our information technology systems and data. We have strong resilience controls which are tested regularly and we conduct incident response drills to ensure our teams remain vigilant and ready to respond. Independent third- party specialists conduct regular security assessments of our Information Technology systems. We conduct regular information security awareness training for all employees to ensure our people are aware of the importance of information security. 59 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information The Chief Information Officer is charged with overseeing the organisation’s information and cyber security programs and reports is a member of the Executive team. We conduct mandatory privacy training for all staff as part of the onboarding process and supplement this training with specific training for targeted audiences. The Audit and Risk Committee is responsible for revising our Risk Management Framework and risk management practices, including risks associated with the technology and research and development aspects of the business. Data privacy Our commitment to privacy is reflected in our Global Code of Conduct and our Privacy Values. As part of our vision and ambition for data, we have made commitments to process and protect the personal information of all our stakeholders in a compliant and ethical way. Our Global Privacy Program reinforces this commitment and ensures that privacy is embedded into our business operations and that we adopt a privacy-by-design approach in designing our products and services and keep the personal information entrusted to us secure. Privacy and data protection matters are led by the Chief Privacy Officer and is supported by employees globally. As a multinational company, we operate in many jurisdictions, subject to different laws and regulations. To ensure we meet our privacy commitments and evolving stakeholder expectations we have a Global Privacy Program based on internationally recognised privacy and data protection principles that promotes transparency in data use practices. We strive to be transparent with individuals in relation to how we process their personal information and to provide them with meaningful control over how their personal information is collected and used, including responding to their requests and complaints. Our Global Privacy Notice explains how we handle personal information across our global operations. We ensure proper third-party management and vendor compliance with data protection standards. Our vendors who process personal information are subject to a vendor privacy risk assessment as part of our privacy compliance and vendor management. We aim to prevent and address privacy issues wherever they occur within the business and across our vendors. If we receive reports of data incidents, we investigate allegations and take action if there is evidence of wrongdoing. Over the past year, we have not identified any substantial complaints concerning breaches of customer privacy or losses of customer data. Tax transparency We have a strong commitment to transparency and compliance from a regulatory and financial perspective and value the principles of being transparent with respect to tax strategy and compliance in Australia and globally. A key driver of our global tax strategy is our longstanding commitment to Australian-based R&D and manufacturing as well as growing the business with broad economic benefits for Australia. Our tax strategy reflects the generation of intellectual property that occurs primarily in Australia. The assets, risks and functions of implementing that strategy mean that the majority of our corporate income tax is paid in Australia. Our 2023 Tax Contribution Report details taxes paid globally, tax strategy and tax governance, and is available on the website. 60 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Public policy engagement Animal welfare We participate in the formulation of public policy that could affect our business operations, patient access to appropriate care, public health and other areas of material interest. We engage with governments directly and through participation in industry groups and other forums. We also collaborate with a range of other stakeholders including consumer/patient organisations, professional associations and industry peers on public policy issues at global, national and local levels. In FY23, we contributed a total of $9,000 to political organisations in Australia, solely as a payment for attendance at events and briefings. These payments complied with our Global Code of Conduct. In compliance with the Code, we did not make any cash donations to political parties or make direct campaign funding donations to either individuals or political parties. We paid more than $3.5 million to industry associations, advocacy groups, professional associations and other related groups across 25 countries including Australia, Colombia, France, Germany, India, Japan, South Korea, Switzerland, Turkey, the UK and the US. As a medical device industry, we are required to demonstrate and document both safety and efficacy of our products in accordance with relevant regulations, guidelines and international standards. Where an assessment of biological safety is required and animal studies are mandated by the regulations or guidelines, we subcontract studies to experienced and accredited contract research organisations. Our Animal Ethics Policy outlines the core ethical principles in the respectful and humane use of animal subjects when required to be used in product development and research projects. We apply the 3R principle – replacement, reduction, refinement – limiting animal testing as much as possible. Please refer to our Animal Ethics Policy for more details, which is available on the website. 61 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Financial performance 62 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Business segment performance $m FY23 FY22 Change % (reported) Change % (CC*) Sales Mix Cochlear implants (units) 44,156 38,182 ↑ 16% Sales revenue Cochlear implants Services (sound processor upgrades and other) Acoustics Total sales revenue 1,131.4 584.4 239.9 1,955.7 935.2 503.9 202.0 1,641.1 ↑ 21% ↑ 16% ↑ 19% ↑ 19% ↑ 17% ↑ 14% ↑ 15% ↑ 16% 58% 30% 12% 100% The clinical capacity constraints we experienced in FY22 from hospital staffing shortages stabilised during the first half, with indications that much of the remaining COVID-related surgical backlog cleared during FY23. We are seeing an improving trend in adult referral rates in key markets, providing us with early indications that initiatives to improve awareness and access for adult cochlear implant candidates are having some success. Emerging market units grew close to 20% with strong growth across all regions, with most countries now trading well above pre-COVID levels. Growth was particularly strong in markets most impacted by COVID, including India and Latin America. Government tender activity increased following subdued activity during COVID shutdowns and private pay continued to perform strongly. China also delivered strong growth. Sales revenue increased 19% (16% in constant currency*) to a record $1,956 million, with strong growth across all business units. Cochlear implants Cochlear implant units increased 16% to 44,156 units, with strong growth across both developed and emerging markets. Sales revenue increased 21% (17% in CC) to $1,131.4 million. Developed market units grew around 15% (18% in the second half) with strong growth across all markets driven by a combination of market growth, improved clinical capacity, market share gains and COVID catch-up surgeries. The Cochlear™ Nucleus® 8 Sound Processor has been well received, commencing its rollout in Western Europe from October and the US during November. Services (sound processor upgrades and other) Services revenue increased 16% (14% in CC) to $584.4 million. First half revenues slowed in anticipation of the Nucleus® 8 Sound Processor, which was launched late in the half. Second half revenues grew 32% (27% in CC) with strong uptake of the new sound processor across the developed markets. Emerging markets also performed well with growing rates of sound processor upgrade penetration across most markets. Acoustics Acoustics revenue increased 19% (15% in CC) to a record $239.9 million, with strong demand across all regions as the business benefits from a strong product offering and a continued recovery in surgery volumes following COVID delays. The Cochlear™ Osia® 2 System continues to gain momentum with new accounts opened in existing markets and a growing presence in new markets, with more than 12,000 systems sold since launch. The Cochlear™ Baha® 6 Max Sound Processor continued to generate demand for sound processor upgrades across all regions. * Constant currency (CC) removes the impact of exchange rate movements and foreign exchange (FX) contract gains/(losses) to facilitate comparability. See Notes on page 67 for further detail. 63 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Profit and loss $m FY23 FY22 Change % (reported) Change % (CC) Sales revenue increased 19% (16% in CC) to $1,955.7 million and underlying net profit increased 10% (14% in CC) to $305.2 million. Statutory net profit increased 4% to $300.6 million. Sales revenue Cost of sales % Gross margin Selling, marketing and general expenses Research and development expenses % of sales revenue Administration expenses (excluding cloud investment) Administration expenses (cloud investment) 1,955.7 488.0 75% 606.5 1,641.1 411.0 75% 498.7 244.9 210.7 13% 165.4 38.5 13% 137.4 21.6 Operating expenses 1,055.3 868.4 19% 19% 22% 16% 20% 78% 22% Other income FX contract gains / (losses) EBIT (underlying)* % EBIT margin* Net finance expense / (income) Income tax expense* % Effective tax rate Underlying net profit* % Underlying net profit margin* % Underlying net profit margin (pre cloud investment)* 3.3 (19.6) 396.1 20% (7.1) 98.0 24% 305.2 16% 17% One-off and non-recurring items (after-tax): Innovation fund gains / (losses) Statutory net profit (4.6) 300.6 13.8 7.2 382.7 23% 6.2 99.5 26% 277.0 17% 18% 12.1 289.1 * Excluding one-off and non-recurring items. See Notes on page 67 for further detail. 16% 15% 19% 17% Key points of note: • Cost of sales increased 19% (15% in CC) to $488.0 million, in line with the increase in sales revenue. The gross margin was maintained at 75% and was in line with the long-term target gross margin; • Selling, marketing and general expenses increased 22% (19% in CC) to $606.5 million reflecting continued investment in market growth activities, standard of care and market access initiatives; • Investment in R&D increased 16% (17% in CC) to $244.9 million with continued investment made in key R&D projects and development of the product and services pipeline; • Administration expenses (excluding cloud investment) increased 20% to $165.4 million primarily driven by increases in short-term incentives, additional headcount, costs associated with the Oticon Medical transaction as well as restructuring expenses; and 20% • Cloud investment of $38.5 million forms part of the $100-150 million investment in cloud- based technology solutions which will be incurred over four to five years. 4% 7% 10% 14% 4% 7% 64 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Cash flow $m EBIT (underlying) Depreciation and amortisation Increase in working capital and other Net interest received / (paid) Income taxes paid Operating cash flow Capital expenditure Other net investments Free cash flow Outlay from exercise of share options and performance rights Payments for share buyback Dividends paid Payment of lease liability and other Change in net cash – increase / (decrease) FY23 396.1 80.9 (42.4) 7.1 (79.3) 362.4 (95.9) (29.8) 236.7 (10.7) (29.6) (197.4) (30.2) (31.2) FY22 382.7 73.0 (46.9) (6.2) (26.1) 376.5 (77.2) (61.7) 237.6 (1.1) - (194.0) (20.4) 22.1 Change 13.4 7.9 4.5 13.3 (53.2) (14.1) (18.7) 31.9 (0.9) (9.6) (29.6) (3.4) (9.8) (53.3) Operating cash flow decreased $14.1 million to $362.4 million, with free cash flow declining $0.9 million to $236.7m. Key points of note: • The $42.4 million increase in working capital and other reflects investment in working capital as the business grows; • Income taxes paid of $79.3 million is lower than the income tax expense in the income statement as a result of the timing of tax instalments and the receipt of a tax refund relating to prior year losses. Income taxes paid increased $53.2 million on FY22 primarily reflecting timing of tax payments and the larger tax refund received last year; • Capital expenditure (capex) increased by $18.7 million to $95.9 million and includes the commencement of an upgrade to the Lane Cove facility and stay-in-business capex; • Other net investments of $29.8 million comprises additional investment in the innovation fund for Precisis, Epiminder and Nyxoah; and • Payments for share buyback reflects the $29.6 million outlay for the repurchase of ordinary shares as part of the on-market share buyback. 65 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Capital employed $m Trade receivables Inventories Less: Trade payables Working capital Working capital / sales revenue Property, plant and equipment Intangible assets Investments and other financial assets Other net liabilities Capital employed Funding sources: Equity Less: Net cash Capital employed Dividends Interim ordinary dividend (per share) Final ordinary dividend (per share) Total ordinary dividends (per share) % Payout ratio (based on underlying net profit) % Franking (final dividend) Jun23 388.4 311.5 (270.4) 429.5 22% 276.7 444.1 188.1 (145.1) 1,193.3 1,748.8 (555.5) 1,193.3 FY23 $1.55 $1.75 $3.30 71% Jun22 308.4 270.2 (232.4) 346.2 21% 260.2 392.5 187.9 (87.8) 1,099.0 1,685.7 (586.7) 1,099.0 FY22 $1.55 $1.45 $3.00 71% 70% 40% Change Capital employed increased $94.3 million to $1,193.3 million since June 2022. Key points of note: • Working capital increased $83.3 million, lifting from 21% to 22% of sales revenue. The increase in trade receivables reflects the strong growth in sales revenue in the second half. Inventory levels remain higher than pre-COVID levels reflecting the building of safety stocks over the past few years in anticipation of potential ongoing global supply chain shortages; • Intangible assets increased $51.6 million to $444.1 million, reflecting IT system costs and acquired and licenced technology; • Other net liabilities increased $57.3 million to $145.1 million, primarily the result of the increase in employee incentives; and • Net cash decreased $31.2 million to $555.5 million. 80.0 41.3 (38.0) 83.3 16.5 51.6 0.2 (57.3) 94.3 63.1 31.2 94.3 Change % 0% 21% 10% A final dividend of $1.75 per share has been determined, taking full year dividends to $3.30, an increase of 10% and representing a payout of 71% of underlying net profit. The interim dividend was 35% franked and the final dividend is 70% franked. The franking balance had been depleted by losses incurred in FY20. The ex-dividend date is 18 September 2023. The record date for calculating dividend entitlements is 19 September 2023 with the final dividend expected to be paid on 11 October 2023. 66 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Notes Forward-looking statements Constant currency 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 compare 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 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 $m Underlying net profit FX contract movement Spot exchange rate effect to sales revenue and expenses* Balance sheet revaluation* Underlying net profit (CC) One-off net gains / (losses) Statutory net profit (CC) * FY23 actual v FY22 at FY23 rates. FY23 305.2 305.2 (4.6) 300.6 FY22 277.0 (26.8) 27.8 (10.2) 267.8 12.1 279.9 Change % 10% 14% 7% 67 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Governance and risk 68 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Our approach to governance High standards of corporate governance and transparency are fundamental to the sustainable, long-term success of the business. Cochlear’s strong governance framework provides a solid structure for effective and responsible decision-making. Corporate governance plays an integral role in supporting our business and helping us deliver on our strategy. It provides the frameworks and practices through which our strategy and business objectives are set, performance is monitored, and risks are managed. It includes a clear framework for decision making and accountability across the business. 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. Our corporate governance framework The Board is responsible for setting the strategic direction for the business aimed at creating, maintaining and enhancing long-term sustainable value. They guide and monitor management to implement the strategy and oversee good governance practice. The Board aims to protect and enhance the interests of shareholders, while taking into account the interests of other stakeholders, including employees, customers, suppliers and the wider community. For FY23, the Board considers that Cochlear’s governance practices have been consistent with the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (fourth edition) and addressed additional aspects of governance which the Board considers important. The Corporate Governance Statement outlines key aspects of our corporate governance framework and practices and is available at: https://www.cochlear.com/ au/en/corporate/investors/corporate-information/corporate-governance. 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 the website. The CEO & President has responsibility for the implementation of strategic objectives, operating within the risk appetite set by the Board and for the day-to-day management of Cochlear. The CEO & President is supported in this function by the Executive team. 69 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Governance framework Cochlear Board of directors t n e d n e p e d n I e c n a r u s s A Oversee the leadership of the Company with the aim of maximising its long-term sustainable value while delivering on Cochlear’s mission to help people hear and be heard. Audit and Risk Committee Medical Science Committee Nomination Committee People and Culture Committee Product and Services Innovation Committee Oversee corporate reporting, the audit process, risk management and internal controls. Oversee medical aspects of Cochlear’s implantable devices program. Oversee Board and Committee composition, renewal and succession planning. Oversee values and behaviours, organisational culture and remuneration framework. Oversee strategy and implementation of product and related services innovation. CEO & President Responsible for the implementation of Cochlear’s strategic objectives and the day-to-day management of Cochlear. Executive team Responsible for supporting CEO & President with the implementation of the strategic objectives and operational, financial and risk management. Our people Aim to achieve individual and team goals (objectives) while conducting themselves in line with the mission, HEAR behaviours, Global Code of Conduct, Company policies and procedures. 70 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Supporting value creation Board meetings are an important part of setting the expectations of management and providing the Board with oversight of the strategy, the organisation, risk management, governance and operations. These meetings include the presentation to the Board of key reports on business performance, significant developments as well as deep dives into key strategic initiatives. In FY23 a multi-day Board strategy session was held and one meeting held offshore to provide detailed local and regional reviews and engagement with offshore employees, customers and research partners. The Board recognises that our five focus areas of value creation, supported by disciplined governance and risk management, contribute to performance and drive the creation of long- term value for our business. During the year, examples of some of the specific matters to support value creation that the Board deliberated on are set out below. While these do not represent the full scope of Board activities, they highlight some of the areas of focus by the Board. Thriving people • Employee engagement and the strategies to improve engagement and strengthen corporate culture • Review of the remuneration framework to assess its effectiveness and relevance to the market • Risks and opportunities relating to health, safety and wellbeing, culture, talent and capability • Oversight of plans to develop people capabilities across the business Environmental responsibility • Sustainability initiatives, including the pathway to net-zero carbon emissions in our operations by 2030 • Development of the sustainability governance framework A healthier and more productive society Sustained value • A review of key strategic initiatives to create long term value with a focus on developing a treatment pathway for adults, enhancing market access and improving access across the emerging markets • Deep dives into key regional and functional priorities • Considering and approving financial reports, audit reports, market guidance, funding requirements and liquidity, and the implementation of the internal audit program • Assessment of the capital structure and launch of an on-market share buy-back • A periodic review of the Board Charter, Committee Terms of Reference and key • Oversight of the proposed acquisition of Oticon Medical governance policies A lifetime of hearing solutions • Cyber and data security including the adequacy of controls and disaster recovery testing • Oversight of the product and services pipeline and long-term R&D investment priorities to mitigate these risks 71 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Board skills matrix The Board skills matrix sets out the mix of skills that the Board currently has in its membership and is reviewed annually to ensure the prescribed skills address our strategy and operating environment. It is also used to guide the identification of potential director candidates as part of the ongoing Board renewal process and to identify professional development initiatives for existing directors. A summary of the key skills of current directors is set out below. The full Board skills matrix including the criteria for each skill is set out in our Corporate Governance Statement, available on the website. Skills No. of Directors (10) Medical device industry Capability to oversee product commercialisation by applying a deep understanding of the medical device industry. Healthcare industry Competency in the healthcare industry including international health systems and medical science. Ability to influence public policy development in healthcare. Research and development Ability to develop product innovation to drive long-term business growth through strategic investment in research and development activities. Technology and digital expertise Ability to leverage new technologies, innovation processes and digital services to drive growth, realise scale benefits and enhance the customer experience. Strategy Ability to develop and implement successful strategies. Global perspective Ability to manage and oversee an organisation’s business and strategic objectives from an international perspective. Financial acumen Ability to understand and analyse financial statements to assess financial performance and probe the adequacies of internal financial and risk controls. Understanding capital management and capital markets. Public policy and regulatory affairs Ability to manage the implications of public and regulatory policy on product development and commercialisation. Ability to influence public policy development. Risk management Sustainability Governance People and culture Ability to identify and manage key risks to an organisation to ensure the delivery of long-term value to shareholders. Ability to oversee the integration of environmental, social and governance into business strategy and operations to support long term value creation for all stakeholders. Commitment to the highest standards of governance. Ability to assess the effectiveness of process and procedures, and to manage legal, compliance and reputational risks. Understanding of remuneration practices and frameworks. Ability to attract talent, oversee talent management and retention initiatives and develop succession plans. Ability to set and oversee corporate culture (‘tone from the top’). 7 9 7 10 10 10 9 7 10 6 10 10 72 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Managing our strategic risks Cochlear has a sound and robust risk management framework to identify, assess and appropriately manage risks. Our approach to risk Risk governance framework The Board sets the appetite for risk and provides oversight of the practices used by management to govern risk, and addresses specific issues escalated by the Audit and Risk Committee or management. The Board recognises that a sound culture is fundamental to an effective risk management framework. We promote a culture which values the principles of honesty, transparency, integrity, fairness, constructive challenge and accountability, and these values are reflected in the Global Code of Conduct. Senior management are responsible for reinforcing and modelling the key behaviours required to maintain a sound risk culture, including encouraging constructive reporting, challenging and transparency. These elements are necessary to support effective risk management and awareness and to support appropriate behaviours and judgements about risk taking. Our risk framework enables us to understand and adapt to the strategic challenges from our operating environment. The diagram below outlines our risk governance framework and the key responsibilities of the Board, the Executive team, Internal Audit and the business units, incorporating the three lines model for how risk is managed. We use it to manage material risk types including financial, non-financial and strategic risks. The specific risks we manage within each of these types are either existing risks, or forward-looking emerging risks that could require action now to minimise their impacts in the future. k s i R i p h s r e d a e l e c n e f e d f o s e n L i • Provides oversight of risk exposures • Sets and communicates • Sets risk appetite and risk taking expectations for risk management Board of directors • Implements business strategy and resolves significant enterprise risk issues Executive team • Provides recommendations to the Board on risk policy, frameworks, risk appetite and risk practices • Implements enterprise risk management in the business units Business (1st line) Oversight functions (2nd line) Owns and manages risk Oversees and sets frameworks and standards Group risk Legal & compliance People & culture Assurance (3rd line) Provides independent and objective assurance and advice of frameworks and controls effectiveness Business unit line management Health & safety Quality & regulatory Finance Internal audit 73 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Environmental and social risks Our enterprise risk management approach includes assessment of our environmental and social risks. Due to the nature of our business and value chain, we do not have any material exposure to environmental or social risks at this time. We have identified material sustainability topics as outlined in the Sustainability data appendix on page 154. Internal audit The Internal Audit function is managed by and within the Group Risk and Assurance team and is accountable to the Board. Internal Audit provides assurance services to management and the Board in relation to the internal controls, risk management framework and governance of Cochlear. It does so through: • performing audits in accordance with an Internal Audit Plan. The Plan is formulated using a risk-based approach and approved annually by the Audit and Risk Committee; • having direct access to the Board through the Audit and Risk Committee, with the right to communicate to it in the absence of management; and • regular reporting to the Executive team and the Audit and Risk Committee on the results of its audits. The Audit and Risk Committee reviews and approves the Internal Audit Plan every six months. It also reviews the hiring and performance of the Vice President Group Risk and Assurance and the internal audit function. This process was followed during the reporting period. 74 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Our business 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 framework can be found in the Corporate Governance Statement, both available on the website. Risk Pandemics Product innovation and competition Description and potential consequences 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. 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. Medical device regulations Product quality 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. 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. 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. Strategies used to mitigate the risk 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. 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. 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. 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. 75 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Risk Market access Credit and currency Description and potential consequences 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. Interruption to product supply Our reliance on suppliers for key materials and services carries inherent Privacy and information security Talent management Geo-political risk 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. 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 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. 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. Strategies used to mitigate the risk 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 and 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 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. 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. 76 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Board of directors Board composition As at 30 June 2023 60% Board gender diversity Female Male 45% Board tenure* 40 % 22% 33% 0-5 years 6-10 years 10+ years * Board tenure chart excludes Managing Director 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, Calix 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 The Observership Program. Former directorships: SCEGGS Darlinghurst Limited, 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 Product and Services Innovation Committees. Background: 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, 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 77 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Yasmin Allen, AM Non-executive Director Appointed to the Board 2 August 2010: Member of the Audit and Risk, People and Culture, Nomination and Product and Services Innovation Committees. 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 Product and Services Innovation Committees. Sir Michael Daniell, KNZM Non-executive Director Appointed to the Board 1 January 2020: Chair of the Product and Services Innovation Committee. Member of the Audit and Risk, Nomination and Medical Science 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. 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 Data#3, 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 In June 2023, Ms Allen was awarded a Member of the Order of Australia in the King’s Birthday Honours for her service to finance and business, and to the not-for-profit sector. Other boards: Chair of Australian Federal Government Future 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 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. 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) 78 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Michael del Prado Non-executive Director Appointed to the Board 1 January 2022: Member of the Medical Science, Nomination and Product and Services Innovation Committees. Andrew Denver Non-executive Director Appointed to the Board 1 February 2007: Member of the Audit and Risk, Medical Science, Product and Services Innovation and Nomination Committees. Christine McLoughlin, AM Non-executive Director Appointed to the Board 1 November 2020: Member of the Audit and Risk, Nomination, People and Culture and Product and Services 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 Background: Extensive experience in the life sciences industry. Former Managing Director of Memtec Limited and President Asia for Pall Corporation. Other boards: Chairman of QBiotics. Director, Vaxxas. Former directorships: Executive Chairman, Universal Biosensors. Chairman, SpeeDx Qualifications: BSc (Hons), MBA, FAICD 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. Other boards: Chairman of the Suncorp Group Limited. Chancellor of the University of Wollongong. Co-founder and Chairman of the Minerva Network. Former directorships: Chairman, Destination NSW. Chairman, Venues NSW. Director, nib Holding Limited and the McGrath Foundation. Qualifications: BA, LLB (Hons), FAICD 79 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Karen Penrose Non-executive Director Appointed to the Board 1 July 2022: Chair of the Audit and Risk Committee. Member of the People and Culture, Nomination and Product and Services Innovation Committees. 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 Product and Services Innovation Committees. Background: Extensive executive career in senior leadership and Chief Financial Officer roles in financial services. An experienced 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. Director, Ramsay Sante (associated with Karen’s directorship of Ramsay Health Care Limited), Rugby Australia and Marshall Investments. Former directorships: Director, Vicinity Centres. Qualifications: BCom, CPA, FAICD Background: Over 20 years’ leadership experience as an academic physician/scientist across research, healthcare and medicine, and tertiary education. Co-Head of the Cancer Genetics Laboratory at the Kolling Institute for Medical Research and Chair of Research, North Sydney Local Health District. Former Dean, The University of Sydney’s Sydney Medical School and Head of Medicine at Sydney’s Royal North Shore Hospital. Other boards: Director, MaynePharma, QBiotics and Ecofibre. Director (former Chairman), Hoc Mai Foundation. 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 and Woolcock Institute of Medical Research. Qualifications: MD, MSc, FRACP, FAAHMS, FAICD 80 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Executive team Executive team composition As at 30 June 2023 27% 73% Executive team gender diversity Female Male 9% 36% Executive team tenure 55% 0-5 years 6-10 years 10+ years 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. Stu was appointed as Chief Financial Officer in February 2021. Stu joined Cochlear in July 2016 as inaugural President, Services. 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 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 and McKinsey. Qualifications: BE (Hons), MBA Qualifications: BEc (Hons), MBA 81 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Jan Janssen Chief Technology Officer Lisa Aubert President, North America Richard Brook President, EMEA Jan joined Cochlear in 2000 and was appointed Senior Vice President Research & Development in 2005. Lisa is responsible for the development and execution of the strategic direction for our North America operations. Jan leads a team of over 550 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. In 2017 Jan was appointed Chief Technology Officer and took on the additional accountability for Business Development. Since 2019 he has also been accountable for Quality and Regulatory Affairs. Jan holds 12 granted patents in the field of implantable hearing technology. Qualifications: MScEE Lisa was appointed as President, Americas Region in April 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 and 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 82 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Anthony Bishop President, Asia Pacific & Latin America Dean Phizacklea Senior Vice President, Global Strategic Marketing Karen O’Driscoll 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 Karen has global responsibility for Cochlear’s information technology strategy and management. She leads a team of more than 350 information technology professionals and is responsible for strengthening business processes and systems to improve efficiency and agility, enabling the business to be more scalable and provide even better solutions for customers. Karen joined Cochlear in February 2023. Prior to Cochlear, Karen was Group Executive for Digital Services for Ventia Ltd and brings over 20 years of experience across pharmaceuticals and infrastructure industries. Qualifications: BSc (Hons), GAICD 83 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 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 Jennifer joined Cochlear in 2008 working in senior HR business partnering roles until her appointment as SVP, Global 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 84 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Financial Statements 85 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Remuneration report Key management personnel (KMP) Executive KMP remuneration received in FY23 (unaudited) Our remuneration strategy and framework Executive KMP remuneration and link to performance Executive KMP statutory remuneration disclosure Executive service agreements Remuneration governance Executive KMP equity disclosures Non-executive Director fees 88 89 90 94 98 99 99 100 105 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). 86 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Letter from the Chair of the People and Culture Committee Dear Shareholders On behalf of the Board, I am pleased to present the FY23 Remuneration report where we outline our remuneration strategy, summarise the performance outcomes for FY23 and detail the associated remuneration outcomes for key management personnel. Our remuneration strategy has been developed to ensure remuneration is fair and competitive in the context of being a globally integrated business, and in FY23 the Board has continued to focus on a governance framework that rewards responsible behaviours, aligns remuneration with regulatory requirements and has regard for the expectations of our customers, shareholders, and the community. We continue to focus efforts on building a stronger organisation to enable us to grow and deliver for our customers over the long term. During the year we made good progress towards shaping our desired culture with a stronger focus on achievement and on enterprise leadership, whilst also preserving those elements of our culture that have brought us success. We also continued to take steps to invest in our talent and made strong progress towards building the strategic capabilities which provide us with a sustainable competitive advantage. We continue to see high levels of engagement, maintained at 80%, and strong progress has been maintained against our gender diversity targets. FY23 performance and reward outcomes The Board is satisfied that the reward outcomes for FY23 reflect the Company’s performance. In FY23 we delivered record revenue and underlying net profit1, strengthened our competitive position, expanded acoustics sales, and continued to execute growth programs to drive long term value creation. Our corporate strategy is clear and is being executed effectively across the globe and our culture and transformation programs continue with strong global support. We have overachieved on our strategic priorities of growing the hearing implant market and creating consistent and sustainable growth. We have also continued to make good progress to maintain our market leadership and build a stronger organisation through our continued investment in culture, capability, and talent. We have further integrated sustainability metrics into our strategic priorities to ensure they are prioritised. This includes minimising our environmental impact. 1 Excluding one off and non-recurring items Performance has exceeded expectations this year and has resulted in the awarding of short-term incentives (STI) above target to the CEO & President and the Executive team under the FY23 STI plan, with an STI payment of 142.4% of target (79.1% of maximum) for the CEO & President. For long-term incentives (LTIs), relative total shareholder return (TSR) against the ASX 100 was above median (at the 55th percentile) and basic earnings per share (EPS) represented a 0.4% compound annual growth rate over the last four years, reflecting the impact of COVID and the 2020 capital raise. This resulted in 26.1% vesting under the FY20-23 LTI plan. Further details on this year’s remuneration outcomes are 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. There were no major changes to our executive reward framework for FY23. However, strong competition for talent in many of the markets in which we operate has continued during FY23 and we expect this to continue for the foreseeable future. We undertake regular reviews of our executive reward framework to ensure it is fit for purpose, with a particular focus on applicability across the regions. For FY24 we have increased the STI quantum for the KMP from a target of 75% to 90% of base salary, excluding the CEO & President, to ensure they are aligned to market. Additionally, we have increased the portion of STI that is deferred into equity for a period of two years to further drive alignment between executives and shareholders and support retention. Also, for the FY24 LTI grant we will use face value as the basis for the allocation of performance rights. We have seen significant growth in the business over the last few years and we will continue to review our executive reward offering to ensure it attracts, motivates, and retains a highly qualified and experienced group of executives employed across diverse geographies. Glen Boreham, AM Chair, People and Culture Committee 87 87 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 1. Key management personnel This report covers key management personnel (KMP) who have authority for planning, directing, and controlling the activities of Cochlear and comprises Non-executive Directors (NEDs) and executive KMP as outlined in the table below. The three Regional Presidents (Lisa Aubert, Anthony Bishop, and Richard Brook) are no longer included as KMP from 1 July 2022 due to structural changes and the global integration of most support functions over time resulting in these roles no longer meeting the criteria of planning, directing, or controlling the activities of Cochlear as a whole. Name Non-executive Directors Alison Deans Yasmin Allen, AM Glen Boreham, AM Sir Michael Daniell, KNZM Michael del Prado Andrew Denver Christine McLoughlin, AM Bruce Robinson, AC Karen Penrose1 Executive KMP Dig Howitt Jan Janssen Stu Sayers Position Chair Non-executive Director Non-executive Director Non-executive Director Non-executive Director Non-executive Director Non-executive Director Non-executive Director Non-executive Director CEO & President (CEO&P) Chief Technology Officer (CTO) Chief Financial Officer (CFO) 1 Karen Penrose was appointed as Non-executive Director (NED) of Cochlear 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. Term as KMP Full year Full year Full year Full year Full year Full year Full year Full year Full year Full year Full year Full year 88 88 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 2. Executive KMP remuneration received in FY23 (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 FY23. Amounts $ Executive KMP D Howitt J Janssen S Sayers Year FY23 FY22 FY23 FY22 FY23 FY22 Fixed remuneration1 Cash STI2 Vested deferred STI3 Vested LTI4 2,034,343 1,952,875 1,006,581 972,990 893,594 871,068 1,866,877 1,362,427 750,611 465,143 699,799 443,685 – 636,243 – 243,241 – – – 412,062 – 85,202 – – Total 3,901,220 4,363,607 1,757,192 1,766,576 1,593,393 1,314,753 1 Fixed remuneration earned in the year (base salary, superannuation, and non-monetary benefits) 2 Cash STI earned and relating to performance during the financial year. For example, FY23 is reported as STI payments which are accrued at year end, and received in August 2023, 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, FY23 is reported as the FY20 deferred STI grant, however in response to the impact of Covid-19 on business performance, no grants were made in FY20. 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). FY23 is reported as the first tranche of the FY20 LTI grant subject to a three-year performance period to 30 June 2022, with a vesting date in August 2022 (0% of awards vested as performance hurdles were not met). 89 89 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 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. Our mission We help people hear and be heard. We empower people to connect with others and live a full life. We help 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. Our goal is to deliver value by helping more people to hear, which contributes to building a healthier and more productive society. Our strategy is focused on improving awareness of and access to implantable hearing solutions for people indicated for our products, creating value across five pillars. A healthier and more productive society A lifetime of hearing solutions Thriving people Environmental responsibility Sustained value Our strategy Our strategic priorities determine how we focus our time and resources to create value. Grow the hearing implant market Retain market leadership A stronger organisation Minimise environmental impact Consistent and sustainable growth The performance measures across our incentive plans reflect achievement of both financial and strategic objectives. Financial measures Underlying net profit Sales revenue Compound annual growth rate in basic earnings per share With actual outcomes directly driving executive remuneration. Strategic measures Achievement of strategic priorities and growth initiatives Market measures Relative total shareholder return (TSR) Fixed remuneration 90 Short-term incentive Long-term incentive = Total remuneration 90 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 3.1 Remuneration mix The total remuneration for executive KMP is made up of both fixed and variable remuneration. Variable remuneration is provided through the short-term incentive (STI) and long-term incentive (LTI) plans. The remuneration mix for executive KMP is weighted towards at-risk performance-based remuneration to ensure a strong focus on short, medium and long-term performance. A portion of executive remuneration is delivered in equity (deferred STI and LTI), to align our executives with shareholder interests. The following diagrams set out the maximum and target remuneration mix for executive KMP in FY23. CEO&P Other executive KMPs 3.2 Fixed remuneration Fixed remuneration comprises base salary, superannuation, and non-monetary benefits. 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 People and Culture Committee (P&CC) each year. 91 91 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 3.3 Short-term incentive Purpose Performance measures 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. STI is dependent on meeting financial and strategic performance measures: Performance measure and weighting Performance Gateway Description • Group Performance Gateway (minimum underlying net profit threshold) to drive global alignment. Sales revenue (60%) • • 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 (40%) • Strategic measures recognise that in addition to short-term financial results, several strategic initiatives are required to enable sustained growth over time. Individual contribution • Each executive’s contribution against performance objectives is assessed at an individual level at the end of the performance period. This assessment determines the value of the short-term incentive award. 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 FY23. Opportunity Delivery Cessation of employment CEO&P: target opportunity is 100% of base salary, and maximum (based on exceeding the performance measures and at the discretion of the board) is up to 180% of base salary. 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 determined by dividing the value of one-third of the STI outcome by the value of performance rights determined as a ‘gross contract value’ using the share price following the announcement of full-year results in August each year. Gross contract value uses a Black-Scholes-Merton pricing model and discounts for dividends not paid, share price volatility and the risk free rate of return. There is no discount for the likelihood of service conditions. 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. 92 92 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 3.4 Long-term incentive Purpose To align the remuneration opportunity for the executive team with shareholder value and provide a stimulus for the retention of executives within the Company. Award vehicle LTI is delivered as 50% options and 50% performance rights. Opportunity CEO&P: maximum opportunity is 125% of base salary. Other executive KMP: maximum opportunity is 90% of base salary. Allocation method The number of rights is calculated by dividing the value of the opportunity by the value of the options and performance rights determined as ‘gross contract values’ using the five-day Performance period Exercise period (for options) Performance measures and hurdles volume-weighted average share price following the announcement of full-year results in August each year. Gross contract value uses a Black-Scholes-Merton pricing model and 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. Performance is measured over a four-year performance period. In FY20 the LTI Plan transitioned from a 3- year to a 4-year performance period and executive KMP, excluding the CEO&P, received 2 grants of LTI. The Grant 2 of the FY20 LTI is subject to a four-year performance period vesting in August 2023. There is no retesting of performance hurdles under the LTI plan. Post vesting, options expire 25 months after the vesting date if they have not been exercised. The Board also has 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: • • The proportion of awards that vest for performance is: Relative TSR 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. Basic EPS Performance Less than 50th percentile At the 50th percentile 50th percentile to 75th percentile Above 75th percentile % of instruments that vest Performance (CAGR) % of instruments that vest 0% 40% 40% to 100% (pro-rata) 100% Less than 7.5% 7.5% 7.5% to 12.5% Above 12.5% 0% 50% 50% to 100% (pro-rata) 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. From FY24 onwards, dividends will be attached to 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. 93 93 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 4. Executive KMP remuneration and link to performance 4.1 FY23 STI outcomes STI is based on meeting a Group Performance Gateway of underlying net profit, 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 and P&CC (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 FY23, underlying net profit was above the Group Performance Gateway and sales revenue grew 19% (16% in constant currency). 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. Key performance targets were met for FY23 resulting in an average actual STI of 153.7% of target and 85.4% 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 August 2023, and one-third will be deferred into service rights and subject to service conditions until August 2025. Executive KMP D Howitt J Janssen S Sayers STI target as a % of base salary STI maximum as a % of base salary Actual STI as a % of target Actual STI as a % of maximum STI forfeited as a % of maximum Actual STI ($) 100% 75% 75% 180% 135% 135% 142.4% 156.0% 162.7% 79.1% 86.6% 90.4% 20.9% 13.4% 9.6% 2,800,316 1,125,916 1,049,699 The table below (unaudited) 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. 94 94 Cochlear Limited Annual Report 2023 How we create value Long Term Target Strategic priorities Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information A healthier and more productive society A lifetime of hearing solutions Thriving people Environmental responsibility Sustained value Help at least 8% more people to hear each year with a cochlear or acoustic implant. Develop market-leading technology and deliver a world-class customer experience to recipients and professional customers. Retain employee engagement levels at or above 80%. Net-zero carbon emissions in our operations by 2030 and across our value chain by 2050. Strategic measures (40%) Grow the hearing implant market • Strengthen the referral pathway Retain market leadership • Advance the product and services A stronger organisation • Strengthen and nurture the for adults • Develop the acoustic implant segment • Broaden reimbursement and improve indications pipeline, with annual R&D investment of ~12% of revenue • Deliver our latest sound processor upgrade technology to existing recipients organisational culture • Attract, develop and retain talent • Champion a culture of diversity and inclusion • Support the wellness and safety of • Expand access in emerging markets • Deliver high levels of service for all our teams Minimise environmental impact • Advance the implementation of initiatives to reduce our Scope 1, 2 and 3 carbon emissions • Embed sustainability into product design, development and manufacturing • Deliver a global approach to managing the environmental impacts of packaging and waste FY23 highlights • Helped over 44,000 more people to hear with an implant, up 15% • Progress made in strengthening the referral pathway for adults • New evidence showing hearing intervention may slow cognitive decline • Expanding indications and reimbursement in a number of countries customers • Maintain high standards of product quality, safety and reliability • Strong pipeline of products and services in development from investing over $240m in R&D • Launched the Cochlear™ Nucleus® 8 Sound Processor which is smaller, smarter, and better connected than its predecessor • Delivered latest generation sound processors to over 48,000 cochlear implant recipients, up 19% • Bimodal control in the Nucleus® Smart Appt • Continued focus on shaping our culture through training and leadership development programs delivered through all levels of the organisation. 75% of all people leaders have completed these programs • Reached 96% renewable energy at our manufacturing facilities, using 100% renewable energy in five of our six facilities • Reduced our Scope 1 and 2 emissions by 68% from our FY19 baseline • Employee engagement maintained • Reduced the number of flights at 80% • Continued to exceed gender targets with 43% women in senior manager roles and 40% women on the Board of directors taken per full time employee by 47%, from our FY19 baseline, and our flight related emissions by 91% Sustainable and responsible business practices, targeting growth in sales revenue of around 10% per annum and an 18% net profit margin. Financial measures (60%) Consistent and sustainable growth • Optimise growth investment • Maintain a strong balance sheet • Improve efficiency and agility • Maintain high levels of corporate governance and an ethical and sustainable supply chain • Vigilance around data security and privacy • Delivered record sales revenue, up 19% (16% in CC*) • Underlying net profit** up 10% (14% in CC), the top end of the guidance range • Underlying net profit margin of 17% (pre cloud) • Full year dividends up 10% • Obtained ISO 27001 Information Security certification of our Connected Care products • Commenced on-market share buyback FY23 Scorecard 95 Exceeded Expectations Met Expectations Met Expectations Met Expectations Exceeded Expectations * Constant currency. ** Excluding one-off and non-recurring items. 95 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 4.2 FY20-23 LTI vesting outcomes In FY20 the LTI Plan transitioned from a 3- year to a 4-year performance period and KMP, excluding the CEO&P, received 2 grants of LTI. Grant 1 was for 50% of their annual LTI opportunity, with a 3-year performance period. Grant 2 was for 75% of their annual LTI opportunity with a 4-year performance period. Presented below is the performance outcome for Grant 2 of the FY20 LTI subject to a 4-year performance period to 30 June 2023. Grant 1 of the FY20 LTI was presented in last year’s report. In FY20 the CEO received 100% of his annual LTI opportunity with a 4-year performance period (Grant 2) and did not receive a transitional arrangement (Grant 1). 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. Cochlear’s TSR for the performance period 1 July 2019 to 30 June 2023 was 22.3%, which was ranked at the 55th percentile of the ASX 100 comparator group. This resulted in performance above target, and as a result, 52.2% of the TSR portion of the LTI vested. Cochlear’s basic EPS1 for the performance period 1 July 2019 to 30 June 2023 was 464.1 cents, which is a 0.4% CAGR over the four-year performance period. This resulted in performance below target2 and as a result, 0% of the EPS portion of the LTI vested. 1For the purpose of the FY20-23 LTI, EPS is determined based on underlying net profit 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. 2EPS 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. 96 96 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 4.3 Financial performance history (FY19 to FY23) Sales revenue ($million)2 Earnings/(loss) before interest and tax (EBIT) ($million) Underlying EBIT ($million) Reported EPS Net profit/(loss) after tax (NPAT) ($million) Basic earnings/(loss) per share (EPS) (cents) – reported EPS growth4 Underlying EPS Underlying NPAT ($million)3 EPS (cents)3 EPS growth4 Share price and dividends Total dividend per share ($) Shares bought back and cancelled ($million) Share price as at 30 June ($) FY19 1,446.1 370.1 359.3 276.7 460.9 13.2% 263.8 457.2 11.7% 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 1,493.3 370.2 326.3 323.8 492.6 4.9% 234.0 356.0 (5.6%) 2.55 – 251.67 FY22 1,641.1 400.0 382.7 289.1 439.6 (2.9%) 277.0 421.1 (2.7%) 3.00 – 198.70 FY23 1,955.7 389.5 396.1 300.6 457.0 (1.2%) 305.2 464.1 0.4% 3.30 26.4 229.07 76.3% Relative total shareholder return (TSR) TSR percentile ranking5 81st 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 relate to LTI awards vesting in current and future years. 4 EPS growth for FY19 to FY22 is as reported in prior Remuneration Reports, as it relates to LTI awards that have already vested in prior years. EPS growth for FY19 to FY22 is based on 3-year CAGR and EPS growth for FY23 is based on 26.1% 54th 22.3% 55th 30.6% 72nd 3.6% 42nd 4-year CAGR. EPS growth has been calculated based on the reported basic earnings per share adjusted for restatements for the accounting policy change in relation to cloud computing. 5 TSR percentile ranking for FY19 to FY22 is shown over three financial years to 30 June. TSR percentile ranking for FY23 is shown over four financial years to 30 June 2023. 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 62 to 67 of this Annual Report. 97 97 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 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 Other long- term benefits Share-based payments Salary1 Cash STI Non-monetary benefits2 Superannuation contributions Long service leave Deferred STI3 LTI performance rights4 LTI options4 Total % of performance related remuneration Executive KMP D Howitt J Janssen S Sayers Total FY23 FY22 FY23 FY22 FY23 FY22 FY23 FY22 2,007,343 1,866,877 1,927,769 1,362,427 979,580 750,611 947,884 465,143 867,277 699,799 846,577 443,685 3,854,200 3,317,287 3,722,230 2,271,255 1,709 1,538 1,709 1,538 1,025 923 4,443 3,999 25,292 47,439 23,568 50,872 25,292 (29,683) 23,568 12,897 25,292 16,456 23,568 8,219 826,481 515,383 308,548 183,460 264,637 148,066 700,726 833,498 6,309,365 595,748 493,294 4,970,599 214,348 252,376 2,502,781 185,570 152,856 1,972,916 170,594 199,533 2,244,613 131,525 109,960 1,712,523 75,876 34,212 1,399,666 1,085,668 1,285,407 11,056,759 70,704 71,988 846,909 912,843 756,110 8,656,038 67.00% 59.69% 60.97% 50.03% 59.46% 48.66% 64.11% 55.30% 1 Salary includes annual base salary paid on a fortnightly basis. 2 Non-monetary benefits include insurances for all KMP. 3 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 FY23 amount represents the portion of the FY21, FY22 and FY23 deferred STI expensed in FY23. The FY22 amount represents the portion of the FY21 and FY22 deferred STI expensed in FY22. 4 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. 98 98 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 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 CEO&P: 12 months’ written notice by either party. Other executive KMP: between 12 weeks to 6 months’ written notice by either party (exact period specified in each contract). Post-employment restraints All executive KMP are subject to post-employment restraints for up to 12 months. 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 and 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 99 99 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 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 FY23, the P&CC engaged Guerdon to provide information used as an input to the annual review of executive KMP 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’ 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. 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. 100 100 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 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 FY23 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 Vesting date Expiry date (Options)3 Vested Forfeited Number Maximum value to be expensed ($)1 Number Maximum value to be expensed ($)1 Executive KMP D Howitt J Janssen S Sayers2 FY20 LTI FY21 LTI FY21 deferred STI FY22 LTI FY22 deferred STI FY23 LTI Total FY20 LTI FY20 LTI FY21 LTI FY21 deferred STI FY22 LTI FY22 deferred STI FY23 LTI Total FY21 deferred STI FY22 LTI FY22 deferred STI FY23 LTI Total 23-Oct-19 21-Oct-20 30-Sep-21 20-Oct-21 29-Sep-22 16-Sep-22 23-Oct-19 23-Oct-19 21-Oct-20 30-Sep-21 17-Sep-21 29-Sep-22 16-Sep-22 30-Sep-21 17-Sep-21 29-Sep-22 16-Sep-22 24,041 21,217 – 21,808 - 19,087 86,153 3,237 4,413 5,197 – 7,685 – 6,726 27,258 – 7,636 – 6,010 13,646 – 215,986 – 544,704 – 713,253 1,473,943 – – 52,905 – 191,950 – 251,341 496,196 – 190,726 – 224,585 415,311 4,432 4,782 3,851 5,341 3,257 6,041 – 187,269 – 464,680 227,024 622,295 27,704 1,501,268 534 813 1,171 1,415 1,882 1,112 2,129 9,056 990 1,870 1,060 1,902 5,822 – – 45,858 – 163,739 77,510 219,313 506,420 – 162,695 73,886 195,929 432,510 16-Aug-23 21-Aug-24 16-Aug-23 20-Aug-25 16-Aug-24 18-Aug-26 22-Aug-22 16-Aug-23 21-Aug-24 16-Aug-23 20-Aug-25 16-Aug-24 18-Aug-26 16-Aug-23 20-Aug-25 16-Aug-24 18-Aug-26 16-Mar-24 21-Mar-25 20-Mar-26 18-Sep-28 16-Mar-24 21-Mar-25 20-Mar-26 18-Sep-28 20-Mar-26 18-Sep-28 0.0% 100.0% 1 The options granted in FY23 have an exercise price of $216.33, and an expiry date of 18 September 2028. Fair values (AASB 2) of FY23 options and performance rights under the LTI plan as at the date of grant are as follows: options (EPS growth: $64.39; relative TSR: $54.08) and performance rights (EPS growth: $203.44; relative TSR: $130.71). 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 LTI reported for S 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. 3 No expiry date for deferred STI, as they automatically vest on the vesting date. 101 101 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 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 In FY23, there was no vesting of the deferred STI for executive KMP, as no STI was allocated in FY20, and no vesting of the FY20 LTI, as the performance hurdles were not met. Balance 1 July 2022 Received on exercise of options/rights Purchases and sales Balance 30 June 2023 Executive KMP D Howitt J Janssen S Sayers Rights held during the year 48,786 8,093 2,842 – – – – (1,000) – 48,786 7,093 2,842 Rights are acquired by executive KMP under the deferred STI and LTI plans. During the year: • Granted: FY23 LTI awards were granted in September/October 2022 and FY22 Deferred STI awards were granted in September 2022; and • Vested: no deferred STI was allocated in FY20 and 0% of the FY20 LTI award vested in August 2022. Executive KMP D Howitt J Janssen S Sayers1 Balance 1 July 2022 18,406 5,815 3,875 Deferred STI service rights LTI performance rights Granted Vested Forfeited Granted Vested Forfeited 3,257 1,112 1,060 – – – – – – 6,041 2,129 1,902 – – – – (534) (215) 1 For S Sayers vested and forfeited awards also relate to roles prior to appointment as KMP. 102 Balance 30 June 2023 27,704 8,522 6,622 102 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Options held during the year Options over ordinary shares are acquired by executive KMP under the LTI plan. During the year, FY23 LTI awards were granted in September/October 2022 and 0% of the FY20 LTI award (Grant 1) was vested. All options held at the end of the year are unvested. Balance 1 July 2022 67,066 20,532 12,822 Executive KMP D Howitt J Janssen S Sayers1 LTI options Balance 30 June 2023 Vested and exercisable at 30 June 2023 Granted Vested and exercised Vested and lapsed Forfeited 19,087 6,726 6,010 – – – – – – – (3,237) (1,307) 86,153 24,021 17,525 – – – 1 For S Sayers, vested and forfeited options also relate to roles prior to appointment as KMP. Executive minimum shareholding As at 30 June 2023, 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, which they have confirmed through the executive KMP disclosures for FY23. Ordinary shares held Policy value of Cochlear shares at year end ($)1 % of base salary2 Executive KMP D Howitt J Janssen S Sayers3 48,786 7,093 2,842 10,682,183 1,553,083 622,284 1 In line with the Share Ownership Policy, the value has been calculated as the average daily share price over the previous 12 months ($218.96), as at closing on the ASX up to 30 June 2023, times the number of shares. 2 The % of base salary is calculated as the value of shares divided by the contractual base salary as at 30 June 2023. 3 S Sayers is on track to meet the minimum shareholding requirement of 100% of base salary, as equity vests in future years. 103 543% 161% 72% 103 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 8.3 Potential dilution if options vest and ordinary shares issued (unaudited) The Board encourages employee ownership of Cochlear shares. To restrict dilution of shareholders’ interests, the total employee interests in unvested equity cannot exceed 5% of share capital. At the date of this report, the number of ordinary shares that would be issued if all options were vested (having met the service and performance conditions) and exercised and assuming ordinary shares were issued, is as follows. Number of options Forfeited/ lapsed1 At report date Exercise price per share ($) Exercise period Current net value of outstanding options as at 30 June 2023 ($)2 FY20 LTI FY21 LTI FY22 LTI FY23 LTI Grant date 23-Oct-19 21-Oct-20 17-Sep-21 (Executive KMP) 20-Oct-21 (CEO&P) 16-Sep-22 (Executive KMP) 19-Oct-22 (CEO&P) Issued 57,074 55,729 80,240 67,487 (5,272) 51,802 217.28 Aug-23 to Mar-24 (998) 54,731 206.06 Aug-24 to Mar-25 (11,105) 69,135 232.52 Aug-25 to Mar-26 – 67,487 216.33 Aug-26 to Sep-28 (17,375) 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 2023 (exercise price less the closing share price as at 30 June 2023 of $229.07). 260,530 243,155 Number of equivalent shares at 30 June 2023 Total unvested equity currently accounts for approximately 0.60% of the total number of issued shares, as set out below. Instrument Unvested LTI options Unvested LTI rights Unvested deferred STI rights Service rights Total As % of total issued shares Number of issued shares 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. 104 610,746 1,259,360 – 859,784 2,729,890 243,155 60,164 72,400 20,099 395,818 0.60% 65,671,649 104 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 9. Non-executive Director fees NEDs are paid from an aggregate annual fee pool of $3,500,000 for FY23 (approved at the 2022 Annual General Meeting). Total remuneration paid during the year was $2,825,555, which is within the fee pool limit (represented 80.7% 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 and base Member fees by 3%, effective 1 July 2022. 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 FY22 and FY23. Amounts $1 Cochlear Board Committees2 Audit and Risk People and Culture Technology and Innovation Medical Science FY22 FY23 Chair 534,103 50,000 40,000 40,000 30,000 Member 176,720 25,000 20,000 20,000 15,000 Chair 550,126 50,000 40,000 40,000 30,000 Member 182,022 25,000 20,000 20,000 15,000 Nomination No fee 1 Superannuation contributions have been made in accordance with Australian superannuation legislation at a rate of 10.5% up to the Australian Government’s prescribed maximum contributions limit. Fees are presented exclusive No fee No fee No fee 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. Currently 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 FY23, one NED based in the United States received a travel allowance of $50,000 to reflect five trips to Australia to attend Board meetings. 105 105 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 9.2 NED statutory remuneration The table below presents the total remuneration for NEDs. Amounts $ Non-executive Directors A Deans (Chair) Y Allen, AM G Boreham, AM M Daniell, KNZM M del Prado1 A Denver C McLoughlin, AM2 B Robinson, AC K Penrose Year FY23 FY22 FY23 FY22 FY23 FY22 FY23 FY22 FY23 FY22 FY23 FY22 FY23 FY22 FY23 FY22 FY23 FY22 Short-term benefits Post-employment benefits Total Fees Travel allowance Superannuation (Restated1) 552,242 495,341 263,837 266,720 268,049 261,720 263,030 246,547 240,737 114,654 242,953 236,720 272,591 235,797 252,991 246,720 244,510 – – – – – – – – – 50,000 10,000 – – – – – – – – 25,292 23,568 25,292 23,568 25,292 23,568 25,292 22,946 – – 24,375 22,710 – 22,979 24,860 23,171 24,212 – 577,534 518,909 289,129 290,288 293,341 285,288 288,322 269,493 290,737 124,654 267,328 259,430 272,591 258,776 277,851 269,891 268,722 – Total 2,825,555 2,276,729 1 M 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 $22,875 was paid over the period from 2,578,065 2,093,796 197,490 172,933 50,000 10,000 FY23 FY22 1 July 2022 to 30 June 2023 as fees in lieu of superannuation guarantee payments which would have been received. For FY22, an equivalent amount of $10,423 paid in lieu of superannuation guarantee has been restated and included in fees. 2 Effective 1 July 2022, C McLoughlin has opted out of receiving superannuation guarantee payments in accordance with the Superannuation Guarantee (Administration) Act 1992 (Cth). An equivalent amount of $24,619 was paid over the period from 1 July 2022 to 30 June 2023 as fees. 106 106 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 9.3 Minimum shareholding requirement for NEDs NEDs are required to hold shares equivalent to the fees (including both Board and committee fees) received in the previous 12 months. The share ownership requirement must be satisfied within three years of appointment to the Board. As at 30 June 2023, all NEDs are compliant with the Share Ownership Policy, which allows three years to build their shareholdings. The table below presents Cochlear Limited shareholdings for each NED, which they have confirmed through the NED disclosures for FY23. Balance 1 July 2022 Purchases Sales Balance 30 June 2023 Policy value of shares as at 30 June 2023 ($)1 % of fees2 Date of appointment as a NED Non-executive Directors A Deans Y Allen, AM G Boreham, AM M Daniell, KNZM M del Prado3 A Denver C McLoughlin, AM B Robinson, AC K Penrose4 4,000 3,714 3,014 1,214 – 4,214 1,650 1,083 177 500 – – 200 582 – 250 102 778 – – – – – – – – – 4,500 3,714 3,014 1,414 582 4,214 1,900 1,185 955 985,320 813,217 659,945 309,609 127,435 922,697 416,024 259,468 209,107 179% 329% 247% 118% 59% 381% 168% 103% 77% 1 January 2022 1 July 2022 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 ($218.96), as at closing on the ASX up to 30 June 2023, times the number of shares. 2 The shareholding requirement has been calculated using annualised contractual policy fees based on Board and Committee membership as at 30 June 2023 (excluding superannuation). 3 M 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. 4 K Penrose was appointed to the Board on 1 July 2022 and in accordance with the policy has until 1 July 2025 to build her shareholding. 107 107 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Financial report Director’s report Auditor’s independence declaration Income statement Statement of comprehensive income Balance sheet Statement of changes in equity Statement of cash flows Notes to the financial statements Directors’ declaration Independent auditor’s report 109 112 113 113 114 115 117 118 149 150 108 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 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 2023, 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), Y Allen, AM, G Boreham, AM, Sir M Daniell, KNZM, M del Prado, A Denver, D Howitt, 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 directors of the Company during the financial year were: Board of Directors Audit and Risk Committee People and Culture Committee1 Medical Science Committee Nomination Committee Product and Services Innovation Committee2 d e d n e t t A l d e H 12 12 12 12 A Deans Y Allen, AM G Boreham, AM 12 12 Sir M Daniell, KNZM 12 12 M del Prado A Denver D Howitt 12 12 12 12 12 12 C McLoughlin, AM 12 12 K Penrose 12 12 Prof B Robinson, AC 12 11 d e d n e t t A – 4 4 4 – 4 – 4 4 – d e d n e t t A – 4 5 – – – – 5 2 5 d e d n e t t A – – – 3 3 3 3 – – 3 l d e H 2 2 2 2 2 2 – 2 2 2 d e d n e t t A 2 2 2 2 2 2 – 2 2 2 l d e H – – – 3 3 3 3 – – 3 l d e H – 5 5 – – – – 5 2 5 l d e H – 4 4 4 – 4 – 4 4 – l d e H – 3 3 3 3 3 3 3 3 3 d e d n e t t A – 2 3 3 3 3 3 3 3 3 1. Karen Penrose was appointed as a Member of People and Culture Committee from 17 February 2023. 2 Formerly known as the Technology and Innovation Committee. The Chair of the Board attends committee meetings by invitation as a matter of course. Often directors also attend meetings of committees of which they are not a member. These attendances are not reflected in the table above. 109 109 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Principal activities Non-audit services 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 62 to 67 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 2023 ordinary 1.55 102.0 35% Franked 14 April 2023 Final 2022 ordinary 1.45 95.4 40% Franked 17 October 2022 Total amount 3.00 197.4 Since the end of the financial year, the directors declared the following dividend: Final 2023 ordinary 1.75 114.9 70% Franked 11 October 2023 Total amount 1.75 114.9 The financial effect of the 2023 final dividend will be recognised in the subsequent financial year as it was declared after 30 June 2023. 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. 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 and 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 and 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. 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: Consolidated 2023 $ 2022 $ Audit and assurance services Auditors of the Company - KPMG: – audit and review of consolidated financial reports 1,552,259 1,435,765 – audit and review of subsidiary financial reports – other assurance services Total audit and assurance services Other services Auditors of the Company - KPMG: – taxation compliance and advisory services – other advisory services Total other services 642,016 18,715 614,887 17,824 2,212,990 2,068,476 1,334,339 98,407 977,589 68,824 1,432,746 1,046,413 110 110 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information State of affairs Events subsequent to the reporting date 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 2023 for the Cochlear Limited Board, the CEO & President and other key management personnel, and changes for the financial year ending 30 June 2024, are included in the Remuneration report on pages 86 to 107 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 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 2023, refer above. Lead auditor’s independence declaration The lead auditor’s independence declaration is set out on page 112 and forms part of the Directors’ report for the financial year ended 30 June 2023. 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. • costs and expenses of successfully defending legal proceedings in which relief under the Corporations Act 2001 is granted to the relevant officer. Dated at Sydney this 15th day of August 2023. Signed in accordance with a resolution of the directors: 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. Director Director 111 111 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 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 2023 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, 15 August 2023 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. 112 112 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Income statement FOR THE YEAR ENDED 30 JUNE 2023 Revenue Cost of sales Gross profit Selling, marketing and general expenses Research and development expenses Administration expenses Other income Other expenses Share of losses on equity-accounted investments Results from operating activities Finance income – interest Finance expense – interest Net finance income/(expense) Profit before income tax Income tax expense Net profit Basic earnings per share (cents) Diluted earnings per share (cents) Statement of comprehensive income Note 2.2 2.3 2023 $m 1,936.1 (488.0) 2022 $m 1,648.3 (411.0) 1,448.1 1,237.3 (606.5) (244.9) (203.9) 13.5 (16.6) (0.2) 389.5 16.5 (9.4) 7.1 396.6 (96.0) 300.6 457.0 456.1 (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 2.4 2.3 5.5 3.1 2.5 2.5 Net profit Other comprehensive income/(loss) Items that will not be reclassified subsequently to the income statement: Defined benefit plan actuarial (loss)/gain 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, net of tax Total comprehensive income 2023 $m 300.6 2022 $m 289.1 (3.1) (20.0) 5.1 (83.8) (23.1) (78.7) 7.3 (16.3) (6.2) (16.9) 13.7 (5.0) 4.7 (28.1) (18.4) 282.2 (106.8) 182.3 The notes on pages 118 to 148 are an integral part of these consolidated financial statements. 113 113 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Balance sheet AS AT 30 JUNE 2023 Assets Cash and cash equivalents Trade and other receivables Forward exchange contracts Inventories Current tax assets Prepayments Total current assets Trade and other receivables Forward exchange contracts Property, plant and equipment Intangible assets Investments Other financial assets Equity-accounted investments Deferred tax assets Right of use assets Total non-current assets Total assets 114 Note 2.7(a) 6.4(b) 5.1 3.2 5.2 5.3 5.5 5.5 5.5 3.2 5.8 2023 $m 555.5 437.5 3.7 311.5 20.0 33.3 2022 $m 629.3 348.5 8.4 270.2 41.9 28.7 Liabilities Trade and other payables Forward exchange contracts Loans and borrowings Current tax liabilities Employee benefit liabilities Provisions 1,361.5 1,327.0 Deferred revenue 0.9 1.6 276.7 444.1 93.8 90.8 3.5 125.3 170.5 – 2.4 260.2 392.5 119.1 68.8 – 116.1 179.0 1,207.2 2,568.7 1,138.1 2,465.1 Lease liabilities Total current liabilities Trade and other payables Forward exchange contracts Employee benefit liabilities Provisions Deferred tax liabilities Deferred revenue Lease liabilities Total non-current liabilities Total liabilities Net assets Equity Share capital Reserves Retained earnings Total equity Note 6.3 3.2 4.2 5.6 6.4(c) 4.2 5.6 3.2 6.4(c) 2023 $m 270.4 20.6 – 17.5 146.4 22.3 61.6 39.2 578.0 – 6.4 9.7 35.1 18.3 9.8 162.6 241.9 819.9 2022 $m 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 1,748.8 1,685.7 1,250.3 1,276.6 (56.9) 555.4 (46.2) 455.3 1,748.8 1,685.7 The notes on pages 118 to 148 are an integral part of these consolidated financial statements. 114 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Statement of changes in equity FOR THE YEAR ENDED 30 JUNE 2023 $m 2023 Balance at 1 July 2022 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 Shares issued Treasury shares acquired Shares cancelled Share-based payment transactions Deferred tax recognised in equity Dividends to shareholders Balance at 30 June 2023 The notes on pages 118 to 148 are an integral part of these consolidated financial statements. 115 Issued capital Treasury share reserve Translation reserve Hedging reserve Fair value reserve Share-based payment reserve Retained earnings Total equity (63.6) (12.8) (46.0) 76.2 455.3 1,685.7 1,276.6 – – – – – – – – 0.1 – (26.4) – – – – – – – – – – – – – (40.3) 26.4 – – – – – – 7.3 – – 7.3 7.3 – – – – – – – – – – (16.3) 13.7 (2.6) (2.6) – – – – – – – – (20.0) – – – (20.0) (20.0) – – – – – – 1,250.3 (13.9) (56.3) (15.4) (66.0) – – – – – – – – – – – 15.9 2.6 – 94.7 300.6 300.6 (3.1) – – – – (3.1) 297.5 – – – – – (3.1) (20.0) 7.3 (16.3) 13.7 (18.4) 282.2 0.1 (40.3) – 15.9 2.6 (197.4) (197.4) 555.4 1,748.8 115 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Statement of changes in equity FOR THE YEAR ENDED 30 JUNE 2023 $m 2022 Balance at 1 July 2021 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 The notes on pages 118 to 148 are an integral part of these consolidated financial statements. Issued capital 1,276.6 – – – – – – – – – – – – 1,276.6 Treasury share reserve Translation reserve Hedging reserve Fair value reserve Share-based payment reserve Retained earnings Total equity – – – – – – – – – – – – – – (57.4) 9.1 37.8 68.4 355.1 1,689.6 – – – (6.2) – – (6.2) (6.2) – – – – (63.6) – – – – (16.9) (5.0) – – (83.8) – – – (21.9) (83.8) (21.9) (83.8) – – – – – – – – – – – – – – – – 289.1 289.1 5.1 – – – – 5.1 (83.8) (6.2) (16.9) (5.0) 5.1 (106.8) 294.2 182.3 (1.1) 10.8 (1.9) – – – (1.1) 10.8 (1.9) – (194.0) (194.0) (12.8) (46.0) 76.2 455.3 1,685.7 116 116 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Statement of cash flows FOR THE YEAR ENDED 30 JUNE 2023 Cash flows from operating activities Cash receipts from customers Cash paid to suppliers and employees Grant and other income received Interest received Interest paid Income taxes paid Net cash provided by operating activities Cash flows from investing activities Acquisition of leasehold improvements, plant and equipment and land and buildings Acquisition of IT systems Acquisition of other intangible assets Acquisition of investments and other financial assets Net cash (used in)/provided by investing activities Cash flows from financing activities Repayments of borrowings Payments of lease liability principal Outlay from exercise of share options and performance rights Payments for share buyback Dividends paid Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at 1 July Effect of exchange rate fluctuations on cash held Cash and cash equivalents at 30 June The notes on pages 118 to 148 are an integral part of these consolidated financial statements. 117 Note 2.4 3.1 2.7(b) 5.2 5.3 5.3 5.5 2.6 2023 $m 1,859.6 (1,438.5) 13.5 16.5 (9.4) (79.3) 362.4 (50.0) (22.5) (23.4) (29.8) (125.7) (41.3) (31.4) (10.7) (29.6) (197.4) (310.4) (73.7) 629.3 (0.1) 555.5 2022 $m 1,611.8 (1,215.0) 12.0 2.4 (8.6) (26.1) 376.5 (44.5) (6.3) (26.4) (61.7) (138.9) – (25.6) (1.1) – (194.0) (220.7) 16.9 609.6 2.8 629.3 117 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Notes to the financial statements (d) Foreign currency Foreign currency transactions FOR THE YEAR ENDED 30 JUNE 2023 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 2023 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 15 August 2023. (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. 118 Transactions in foreign currencies are translated to the respective functional currencies of entities at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the foreign exchange rate ruling at that date. Non-monetary assets and liabilities denominated in foreign currencies that are stated at historical cost are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to the functional currency at the foreign exchange rates ruling at the date the fair value was determined. Foreign exchange differences arising on translation are recognised in the Income statement within other income and other expenses. Financial statements of foreign operations The assets and liabilities of foreign operations are translated to the Company’s functional currency at foreign exchange rates ruling at the reporting date. The revenues and expenses of foreign operations are translated to the Company’s functional currency at rates approximating the foreign exchange rates ruling at the dates of transactions. Foreign currency differences arising from translation of controlled entities are recognised in the foreign currency translation reserve (translation reserve) in equity. When a foreign operation is disposed of, in part or in full, the relevant amount of its translation reserve is transferred to the Income statement and reported as part of the gain or loss on disposal. Foreign exchange gains and losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely in the foreseeable future, are considered to form part of a net investment in a foreign operation and are recognised in other comprehensive income and presented in the translation reserve. (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 and Risk Committee the development, selection and disclosure of Cochlear’s critical accounting policies and estimates and the application of these policies and estimates. 118 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 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: 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. 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 the Group 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 Cochlear 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 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. 2. Performance for the year 2.1 Operating segments Cochlear’s three reportable segments, determined on a geographical basis, are the strategic business units of Cochlear. Segment results, assets and liabilities include items directly attributable to a segment, as well as those that can be allocated on a reasonable basis. Unallocated items comprise corporate and other net expenses and corporate and manufacturing assets and liabilities. Performance is measured based on segment earnings before interest and income tax (EBIT) as included in the internal management reports that are reviewed by Cochlear’s Chief Executive Officer and President, who is also the chief operating decision maker. Information about reportable segments Intra-group balances and transactions, and any unrealised income and expenses arising from intra- group transactions, are eliminated in preparing the consolidated financial statements. Revenues Special purpose entities Cochlear has established special purpose entities (SPEs) for investment purposes. A SPE is consolidated if Cochlear concludes that it controls the SPE. SPEs controlled by Cochlear were established under terms that impose strict limitations on decision-making powers of the SPE’s management. (g) Goods and services tax (GST) Revenues, expenses and assets are recognised net of the amount of GST. Where the amount of GST incurred is not recoverable from the taxation authority, the GST is recognised as part of the cost of acquisition of the asset or as part of the expense. Cochlear implants Services (sound processor upgrades and other) Total cochlear implants Acoustics Sales revenue Foreign exchange (loss)/gain on hedged sales Revenue 119 2023 $m 1,131.4 584.4 1,715.8 239.9 1,955.7 (19.6) 1,936.1 2022 $m 935.2 503.9 1,439.1 202.0 1,641.1 7.2 1,648.3 119 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Americas EMEA1 Asia Pacific Corporate and other net expenses Total 2023 Americas EMEA Asia Pacific Corporate and manufacturing Total $m 978.3 523.8 $m 639.4 292.5 $m 338.0 104.9 $m (19.6)2 (531.7) $m 1,936.1 389.5 Assets and liabilities Assets Liabilities Acquisition of non-current assets $m 392.9 199.7 2.1 $m 357.9 122.1 6.7 $m 213.7 68.5 1.0 $m $m 1,604.2 2,568.7 819.9 429.6 129.6 139.4 2022 Americas EMEA Asia Pacific Corporate and manufacturing Total Assets and liabilities Assets Liabilities Acquisition of non-current assets $m 350.8 172.7 2.3 $m 281.2 93.3 2.4 $m 228.9 57.0 3.9 $m $m 1,604.2 2,465.1 779.4 456.4 130.3 138.9 Cochlear Limited is domiciled in Australia and earns less than 5% of its sales revenue from external customers in Australia. Cochlear Limited has $385.1 million (2022: $333.0 million) of non-current assets (excluding financial instruments and deferred tax) in Australia, including Australian based manufacturing facilities. 2023 Profit or loss Revenue EBIT Net finance income Profit before income tax Depreciation and amortisation Write-down in value of inventories Equity accounted losses 13.0 1.9 – 7.3 1.4 – 5.7 0.3 – 54.9 1.7 0.2 2022 Profit or loss Revenue EBIT Americas EMEA1 Asia Pacific Corporate and other net expenses $m 779.7 414.4 $m 578.5 274.4 $m 282.9 92.0 $m 7.22 (380.8) Net finance expense Profit before income tax Depreciation and amortisation Write-down in value of inventories Equity accounted losses 1 Europe, Middle East and Africa. 2 Foreign exchange (loss)/gain on hedged sales 11.2 0.7 – 6.8 1.1 – 5.8 0.3 – 49.2 11.1 – 7.1 396.6 80.9 5.3 0.2 Total $m 1,648.3 400.0 (6.2) 393.8 73.0 13.2 – 120 120 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 2.2 Revenue 2.3 Expenses 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 Cochlear’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 (loss)/gain on hedged sales Revenue from sale of goods Rendering of services Total revenue 2023 $m 1,921.0 (19.6) 1,901.4 34.7 2022 $m 1,608.5 7.2 1,615.7 32.6 1,936.1 1,648.3 (a) Cost of sales Carrying amount of inventories recognised as an expense Write-down in value of inventories Note Other Total cost of sales (b) Other expenses Net foreign exchange loss Fair value change in investments through profit or loss 5.5 Total other expenses 2.4 Other income 2023 $m 476.1 5.3 6.6 2022 $m 392.8 13.1 5.1 488.0 411.0 10.2 6.4 16.6 – – – 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 Fair value change in investments through profit or loss Release of contingent consideration Net foreign exchange gain Other income Total other income Note 5.5 2023 2022 $m 2.2 – – – 11.3 13.5 $m 2.7 17.3 1.7 0.1 9.3 31.1 121 121 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 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: 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: 2023 2022 2023 Net profit attributable to equity holders of the parent entity $300,559,000 $289,104,000 Weighted average number of ordinary shares (basic): Issued ordinary shares at 1 July (number) Effect of options, performance shares and performance rights exercised (number) Effect of shares issued under Employee Share Plan (number) Effect of shares cancelled from share buy-back (number) Effect of shares purchased and held as treasury stock 65,775,339 65,744,078 4,803 238 (16,378) (1,559) 26,291 70 – – Weighted average number of ordinary shares (basic) at 30 June 65,762,443 65,770,439 Basic earnings per share (cents) 457.0 439.6 Interim 2023 ordinary Final 2022 ordinary Total amount 2022 Interim 2022 ordinary Final 2021 ordinary Total amount 1.55 1.45 3.00 1.55 1.40 2.95 102.0 35% Franked 14 April 2023 95.4 40% Franked 17 October 2022 197.4 102.0 92.0 194.0 0% Franked 21 April 2022 0% Franked 18 October 2021 Dollars per share Total amount $m Franked Date of payment Diluted earnings per share Subsequent event 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: 2023 2022 Net profit attributable to equity holders of the parent entity $300,559,000 $289,104,000 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) 65,762,443 65,770,439 134,410 207 65,896,853 65,770,646 456.1 439.6 At 30 June 2023, 136,622 options (2022: 180,048) were excluded from the diluted weighted average number of ordinary shares calculation because their effect would have been antidilutive. 122 Since the end of the financial year, the directors declared the following dividend: Final 2023 ordinary Total amount 1.75 1.75 114.9 70% Franked 11 October 2023 114.9 The financial effect of the 2023 final dividend will be recognised in the subsequent financial year as it was declared after 30 June 2023. 122 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Dividend franking account (b) Reconciliation of net profit to net cash provided by operating activities Total franking account balance at 30% 2023 $m 7.4 2022 $m – Net profit The above amount represents the balance of the franking account as at 30 June, after taking into account adjustments for: Add item classified as investing activities: Loss on disposal of property, plant and equipment •• •• •• 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. 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 2.84% (2022: 0.39%) per annum. 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 2023 $m 300.6 0.8 80.9 – 6.4 15.9 0.2 2022 $m 289.1 0.6 73.0 (1.7) (17.3) 10.8 – 404.8 354.5 (89.0) (41.3) (4.6) (14.8) 37.7 24.2 46.1 1.5 8.9 (11.1) 362.4 (52.2) (54.1) (7.5) 45.0 29.1 29.6 8.0 5.5 15.7 2.9 376.5 123 123 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 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 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 Total income tax expense recognised in the Income statement 2023 $m 110.8 (2.2) 108.6 (9.5) (2.3) (11.8) (0.8) (12.6) 96.0 2022 $m 50.4 6.7 57.1 (14.3) 61.2 46.9 0.7 47.6 104.7 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% (2022: 30%) (Less)/add adjustments for: Research and development allowances Net non-deductible/(non-assessable) items Effect of tax rates in foreign jurisdictions Other adjustment for prior years Income tax expense on profit before income tax 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 2023 $m 396.6 119.0 2022 $m 393.8 118.1 (21.1) (16.5) 5.6 (4.5) 99.0 (3.0) 96.0 2023 $m (3.0) (1.1) (2.6) (6.7) 0.3 (4.6) 97.3 7.4 104.7 2022 $m (34.1) (9.4) 1.9 (41.6) 124 124 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Consolidated Entity – Numerical reconciliation between income tax expense and cash taxes paid Income tax expense on profit before income tax Timing differences recognised in deferred tax Net (utilisation)/benefit of tax losses recognised in deferred tax Current year tax instalments (payable)/receivable next year Prior year tax instalments received this year Cash taxes paid per statement of cash flows 2023 $m 96.0 9.5 2.3 (4.5) (24.0) 79.3 2022 $m 104.7 14.3 (61.2) 21.1 (52.8) 26.1 Cochlear Limited’s Australian tax consolidated group – Numerical reconciliation between profit before income tax and income tax expense 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. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse. 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 at each reporting date and are reduced if it is no longer probable that the related tax benefit will be realised. 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% (2022: 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 Adjustment for prior years Income tax expense on profit before income tax 125 2023 $m 272.2 23.1 295.3 88.6 2022 $m 336.9 95.5 432.4 129.7 (20.0) (15.8) 5.9 0.7 (6.9) 68.3 (4.0) 64.3 2.8 2.3 (28.7) 90.3 0.7 91.0 125 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Movement in deferred tax balances 2023 Property, plant and equipment Intangible assets Inventories Provisions Deferred revenue Forward exchange contracts Tax losses and offsets carried forward Other Deferred tax assets/(liabilities) before set-off Set-off of tax Net tax assets/(liabilities) 2022 Property, plant and equipment Intangible assets Inventories Provisions Deferred revenue Forward exchange contracts Tax losses and offsets carried forward Other Deferred tax assets/(liabilities) before set-off Set-off of tax Net tax assets/(liabilities) 126 Opening balance Recognised in the Income statement 1.5 7.2 53.6 33.4 5.4 5.5 – (12.9) 93.7 1.3 (18.1) (4.2) 3.2 2.2 – 2.3 25.1 11.8 Opening balance Recognised in the Income statement 0.7 3.6 39.0 28.8 4.8 (3.9) 61.2 (32.8) 101.4 0.8 3.6 14.6 4.6 0.6 – (61.2) (9.9) (46.9) Recognised in other comprehensive income – – – – – 1.1 – 3.0 4.1 Recognised in other comprehensive income – – – – – 9.4 – 34.1 43.5 Recognised in equity Closing balance Deferred tax assets Deferred tax liabilities – – – – – – – (2.6) (2.6) 2.8 (10.9) 49.4 36.6 7.6 6.6 2.3 12.6 107.0 5.7 2.2 49.4 36.6 7.6 6.6 2.3 27.2 137.6 (12.3) 125.3 (2.9) (13.1) – – – – – (14.6) (30.6) 12.3 (18.3) Recognised in equity Closing balance Deferred tax assets Deferred tax liabilities – – – – – – – (4.3) (4.3) 1.5 7.2 53.6 33.4 5.4 5.5 – (12.9) 93.7 4.9 10.3 53.6 33.6 5.4 5.6 – 17.2 130.6 (14.5) 116.1 (3.4) (3.1) – (0.2) – (0.1) – (30.1) (36.9) 14.5 (22.4) 126 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Unrecognised deferred tax liabilities At 30 June 2023, a deferred tax liability of $2.5 million (2022: $49.4 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. Future tax developments The Organisation for Economic Co-operation and Development’s (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) addresses the tax challenges arising from the digitalisation of the global economy. The BEPS Pillar Two model rules seek to apply a 15% global minimum tax to individual jurisdictions across the globe and is expected to apply to the Group from 1 July 2024. As at 30 June 2023 the Group has operations in the United Kingdom which has substantively enacted the Pillar Two legislation and it is anticipated that Australia will be substantively enacting this legislation before 1 July 2024 (with the relevant provisions rules being effective for income years on or after 1 January 2024). Cochlear has operations globally which may give rise to an exposure to top-up taxes and is in the process of evaluating the cash tax implications of the Pillar Two global minimum tax rules. Cochlear has applied the mandatory temporary exception under AASB 2023-2 Amendments to Australian Accounting Standards – International Tax Reform – Pillar Two Model Rules issued by the Australian Accounting Standards Board in June 2023. The amendments provide a temporary mandatory exception from deferred tax accounting for the Pillar Two global minimum top-up tax. The mandatory exception applies retrospectively. The retrospective application has had no impact on Cochlear’s financial statements as no new legislation implementing the top-up tax was enacted or substantively enacted at the end of the comparative period in any jurisdiction in which the Cochlear operates and no related deferred taxes were recognised at that date. Current tax assets and liabilities The current tax assets for the Consolidated Entity of $20.0 million (2022: $41.9 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 $17.5 million (2022: $15.2 million) represent the amount of income taxes payable in respect of current and prior financial years. 4. Employee benefits 4.1 Employee expenses Salaries and wages Contributions to superannuation plans Increase in leave liabilities Equity settled share-based payment transactions Total employee expenses 1 Restated 4.2 Employee benefit liabilities Wages, salaries and annual leave 2023 $m 624.2 42.6 5.2 15.9 687.9 20221 $m 534.2 37.4 5.0 10.8 587.4 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 Cochlear has defined benefit plans that cover, in aggregate, 81 employees in two countries (2022: 84 employees). Cochlear contributed cash of $1.9 million (2022: $1.5 million) to defined benefit plans in the year ended 30 June 2023 and expects to contribute $1.9 million in the year ending 30 June 2024. 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. 127 127 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 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. 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 2023 $m 15.7 43.9 86.8 146.4 6.8 2.9 9.7 2022 $m 14.7 40.1 46.8 101.6 6.3 0.1 6.4 156.1 108.0 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 2023, 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 October 20201 September 20212 October 20211 October 20213 October 20221 September 20222 October 20223 Exercise price of options $217.28 $206.06 N/A Number of options 51,802 54,731 – $232.52 69,135 N/A – $216.33 67,487 N/A N/A – – Total 1 Options and performance rights offered under long-term incentives. 2 Performance rights offered under deferred short-term incentives. 3 Services rights offered under the CEIP. 243,155 Number of performance rights 9,546 12,332 38,513 16,929 3,281 21,357 33,887 6,598 142,443 Contractual life 5 years 5 years 2 years 5 years 2 years 7 years 2 years 2 years 4.3 Share-based payments Since 1 July 2013, the Company has granted 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. 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. 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 over four years against the ASX 100 with a minimum TSR at the 50th percentile assigned to 40% of grant 128 128 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 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: 19 October 2022 (4 years) 29 September 2022 20 October 2021 (4 years) 30 September 2021 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) TSR-based conditions $54.08 $130.71 $214.85 $216.33 29.81% 4 - 7 Expected dividend yield Risk free interest rate2 3.28% 1 Measure captures the characteristics of fluctuations in the share price. 2 Based on government bonds. 1.37% EPS performance- based conditions $64.39 $203.44 $214.85 $216.33 29.81% 4 - 7 1.37% 3.28% Deferred STI service-based conditions Rights service-based conditions TSR-based conditions N/A $209.11 $214.85 N/A 26.68% 2 1.37% 3.28% N/A $209.11 $214.85 N/A 26.68% 2 1.37% 3.28% $45.46 $125.69 $226.85 $232.52 30.87% 4 - 5 0.51% 0.30% EPS performance- based Deferred STI service-based conditions Rights service-based conditions conditions $54.45 $222.32 $226.85 $232.52 30.87% 4 - 5 0.51% 0.30% N/A $224.60 $226.85 N/A 38.06% 2 0.51% 0.30% N/A $224.60 $226.85 N/A 38.06% 2 0.51% 0.30% 129 129 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information The number, and weighted average exercise prices of, options are as follows: 4.4 Key management personnel Weighted average exercise price Number of options Weighted average exercise price Number of options 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: Outstanding at 1 July Forfeited Exercised Granted Outstanding at 30 June Exercisable at 30 June 2023 219.76 219.61 – 216.33 218.82 $217.28 2023 204,279 (28,611) – 67,487 243,155 51,802 2022 $209.03 $205.88 $202.84 $232.52 $219.76 $217.28 2022 208,331 (70,634) (13,658) 80,240 204,279 24,231 No options were exercised in 2023 (2022: 13,658 options were exercised). The weighted average market share price on the ASX at date of exercise was Nil (2022: $237.25). The weighted average remaining contractual life of options outstanding at the end of the year is three years (2022: three years). ShareWave Employee Share Plan Since 2021, Cochlear launched ShareWave, replacing the previous 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 service conditions and the employee retaining the purchased shares up to the vesting date of the matching benefit. 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 2023, the Company issued 1,195 shares under the plan (2022: 1,075 shares). The plan ceased in effect following the launch of ShareWave with the current year being the last plan to vest. Non-Executive directors A Deans (Chair), YA Allen, AM, G Boreham, AM, Sir M Daniell, KNZM, M del Prado, A Denver, C McLoughlin, AM, K Penrose and Prof B Robinson, AC. Executive KMP D Howitt, J Janssen and S Sayers. Former Executive KMP L Aubert, A Bishop, R Brook The three Regional Presidents (Lisa Aubert, Anthony Bishop, and Richard Brook) are no longer included as KMP from 1 July 2022 due to structural changes and the global integration of most support functions over time resulting in these roles no longer meeting the criteria of planning, directing, or controlling the activities of Cochlear as a whole. Key management personnel disclosures The KMP compensation is included in employee expenses as follows: Short-term employee $ 9,715,096 12,387,271 Post- employment $ 273,366 432,680 Other long- term benefits $ 34,212 82,478 Share-based payments $ 3,755,925 4,009,601 End of service $ – 298,694 Total $ 13,778,599 17,210,724 2023 20221 1 Includes former executive KMPs who were not KMPs during FY23. 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 86 to 107. The KMP have not received any loans from Cochlear and there have been no other related party transactions with any of Cochlear’s KMP. 130 130 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 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. 2023 2022 Raw materials Work in progress Finished goods Total inventories $m 126.4 99.9 $m 37.5 25.2 $m 147.6 145.1 $m 311.5 270.2 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. 131 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. Leasehold improvements 2022 $m 2023 $m Plant and equipment 2023 $m 2022 $m Land and buildings Total 2023 $m 2022 $m 2023 $m 2022 $m At cost 77.6 70.9 388.6 347.4 73.9 75.5 540.1 493.8 Accumulated depreciation Net book value (44.7) (38.3) (215.1) (192.7) (3.6) (2.6) (263.4) (233.6) 32.9 32.6 173.5 154.7 70.3 72.9 276.7 260.2 Reconciliations of the carrying amounts are: Opening balance 32.6 34.0 154.7 133.5 72.9 72.0 260.2 239.5 Additions Disposals 5.8 – 3.4 – 45.2 (0.7) 41.1 0.3 (0.6) – – – 51.3 (0.7) 44.5 (0.6) Depreciation (6.4) (6.2) (24.7) (22.5) (1.1) (1.1) (32.2) (29.8) Effect of movements in foreign exchange Net book value 0.9 1.4 (1.0) 3.2 (1.8) 2.0 (1.9) 6.6 32.9 32.6 173.5 154.7 70.3 72.9 276.7 260.2 131 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 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 systems IT systems 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 intangible assets, comprising acquired technology, patents and licences, customer Other 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 systems 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. 132 Intangible assets with indefinite useful life Intangible assets with finite useful life Intangible assets Goodwill IT systems Acquired technology, patents and licences Other intangible assets Total $m $m $m $m $m 256.1 – 256.1 136.3 (89.7) 206.8 (86.8) 48.1 (26.7) 647.3 (203.2) 46.6 120.0 21.4 444.1 2023 At cost Accumulated amortisation and impairment losses Net book value Reconciliations of the carrying amounts are: Opening balance 257.1 Additions Amortisation Effect of movements in foreign exchange Net book value 2022 At cost Accumulated amortisation and impairment losses Net book value – – (1.0) 256.1 33.0 22.5 (9.0) 0.1 79.2 46.4 (5.4) (0.2) 23.2 1.4 (4.0) 0.8 392.5 70.3 (18.4) (0.3) 46.6 120.0 21.4 444.1 257.1 113.5 163.5 50.5 584.6 – (80.5) (84.3) (27.3) (192.1) 257.1 33.0 79.2 23.2 392.5 267.3 Reconciliations of the carrying amounts are: Opening balance Additions Amortisation Effect of movements in foreign exchange Net book value (10.2) 257.1 – – 37.1 5.2 (8.5) (0.8) 33.0 58.5 24.1 (3.0) (0.4) 79.2 22.6 3.4 (3.8) 1.0 23.2 385.5 32.7 (15.3) (10.4) 392.5 132 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 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 the higher of its value in use and its fair value less costs of disposal. An asset that does not generate independent cash flows and its individual value in use cannot be estimated is tested for impairment as part of a cash-generating unit (CGU). An impairment loss is recognised in the Income statement when the carrying amount of an asset or CGU exceeds its recoverable amount. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. An impairment loss in respect of goodwill is not reversed. Impairment tests for CGUs Cochlear allocates goodwill and other intangible assets to CGUs based on the expected benefits that each CGU will receive from use of those assets. The aggregate carrying amounts of goodwill allocated to each group of CGUs are: 2023 2022 Americas EMEA Asia Pacific $m 176.9 178.1 $m 69.8 69.5 $m 9.4 9.5 Total $m 256.1 257.1 The recoverable amount of each CGU is based on value-in-use calculations. 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. 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. Revenue is based on near-term forecasts and Cochlear’s expectation of medium and long-term growth rates. Cost of sales, R&D investment and net margin are based on long-term expectations. Year 1 cash flows are based on Cochlear’s budget for the year ending 30 June 2024, which is aligned with Cochlear’s outlook statement. 133 Cash flows for year six onwards are extrapolated using a terminal growth rate of 3.0% (2022: 3.0%) per annum which is consistent with long-term growth rates. The pre-tax discount rate for each CGU is as follows: Americas 9.4% (2022: 7.0%), EMEA 9.3% (2022: 7.1%) and Asia Pacific 9.7% (2022: 7.5%). 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. Based on long-term growth rates. Terminal value growth rate The recoverable amount of each CGU including allocated 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. 5.4 Proposed acquisition of Oticon Medical In April 2022, Cochlear agreed to acquire Oticon Medical, the hearing implants business of Demant A/S, a Danish Company. The proposed transaction which was subject to regulatory approval included the acquisition of both Demant’s cochlear implant and bone conduction implants businesses. In June 2023, the UK Competition and Markets Authority (CMA) published its final report in relation to the proposed acquisition which prohibited the acquisition of the bone conduction implants business due to competition concerns. The CMA did not raise competition concerns in relation to the cochlear implant business which is permitted to proceed, subject to the CMA’s approval of the terms of all agreements related to the transfer of the cochlear implant business to Cochlear. Cochlear and Demant are pursuing a transfer of Oticon Medical’s cochlear implant business at a zero headline purchase price ("CI Carve Out Transaction”). The CI Carve Out Transaction remains conditional on satisfaction of customary closing conditions and receipt of approvals from the CMA, Australian Competition and Consumer Commission and the European Commission. If the CI Carve Out Transaction does not complete because the necessary competition approvals have not been obtained, Cochlear has agreed to make a payment of $27.5 million 12 months after Cochlear and Demant have ceased pursuing the CI Carve Out Transaction, provided that Demant does not attempt to dispose of, or dispose of the cochlear implant business (or any part) to any third party during this 12-month period. This amount is treated as a contingent liability for accounting purposes. 133 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 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, EpiMinder, Seer Medical and Precisis. 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. 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. Balance at 1 July 2022 Additions Fair value loss in investments measured at fair value through profit or loss Fair value through other comprehensive income (before tax) Share of losses on equity-accounted investments Balance at 30 June 2023 Investments Other financial assets Equity- accounted investments $m 119.1 4.1 (6.4) (23.0) – 93.8 $m 68.8 22.0 – – – 90.8 $m – 3.7 – – (0.2) 3.5 At 30 June 2023, $103.8 million (2022: $88.2 million) of Investments and Other financial assets are measured at fair value through profit or loss. The remaining $80.8 million (2022: $99.7 million) is measured at fair value through other comprehensive income including Nyxoah $59.2 million (2022: $68.2 million) and Seer Medical $19.6 million (2022: $28.7 million). Valuation of Level 3 investments and other financial assets Cochlear’s strategic investments in Saluda Medical, EpiMinder, Seer Medical and Precisis are classified as Level 3 financial instruments. Level 3 in the fair value hierarchy uses unobservable inputs when measuring fair value (refer to section 6.4 for further details). 134 At 30 June 2023, Saluda Medical and EpiMinder were valued using a Market comparison technique. For these investments, the fair values are based on the latest market price per latest fundraising values and using the price per share from the latest financing round which are considered unobservable inputs. The estimated fair value would increase (decrease) if the prices per the latest financing round were higher (lower). Seer Medical and Precisis were valued using a discounted cash flow. The valuation model considers the present value of the net cash flows expected to be generated by the investees and uses growth rate and discount rate assumptions which are considered unobservable inputs. The estimated fair value would increase (decrease) if growth rates were higher (lower) and discount rates were lower (higher). The following table summarises the movement in Level 3 investments during the period: Balance at 1 July 2022 Additions Fair value loss in investments measured at fair value through profit or loss Fair value through other comprehensive income (before tax) Balance at 30 June 2023 Investments $m 50.6 – (6.4) (9.9) 34.3 Other financial assets $m 68.8 22.0 – – 90.8 At 30 June 2023, $103.8 million (2022: $88.2 million) of Level 3 Investments and Other financial assets are measured at fair value through profit or loss and $21.3 million (2022: $31.2 million) measured at fair value through other comprehensive income. A 10% increase/(decrease) in the fair value of level 3 valuations would have a $10.4 million gain/(loss) on P&L and $2.1 million gain/(loss) on OCI. Equity-Accounted Investments During the period, Cochlear invested $17.9 million in Precisis AG in ordinary shares ($3.7 million) and convertible notes ($14.2 million). The additional investment resulted in Cochlear’s ownership interest, on an as converted and undiluted basis, exceeding 20% with the interest held in shares (4.3%) being classified as an associate from December 2022. Cochlear has recognised a loss of $0.2 million which represents Cochlear’s proportionate share of Precisis AG’s net loss since being classified as an associate. 134 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 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. 2023 Warranties Legal and insurance Product recall Make good lease costs Opening balance Provision made Provision used Effect of movements in foreign exchange Total provisions Represented by: Current Non-current Total provisions Warranties $m 37.5 25.9 (23.0) 0.3 40.7 16.1 24.6 40.7 $m 7.0 – (1.2) – 5.8 5.5 0.3 5.8 $m 7.4 – (0.1) – 7.3 0.7 6.6 7.3 $m 4.0 0.2 (0.8) 0.2 3.6 – 3.6 3.6 Total $m 55.9 26.1 (25.1) 0.5 57.4 22.3 35.1 57.4 A provision for warranty claims is recognised in relation to sales made prior to the reporting date, based on historical claim rates and respective product populations. Warranty periods on hardware products extend from 2 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 has a present obligation and can reliably estimate future costs related to these proceedings, including legal fees, a provision is recognised. 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. 135 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 2023. 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 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 and in Note 5.4 Proposed acquisition of Oticon Medical. 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. The outcome of these discussions are not expected to result in a significant adverse outcome for Cochlear. Claims made by the University of Pittsburgh in September 2021 and previously disclosed as a contingent liability have been discontinued. 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. 135 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 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. 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. The lease liability includes the lease of Cochlear Global Headquarters in Sydney, Australia until 2035. Regulatory actions Cochlear operates in multiple overseas jurisdictions and is currently, and/or is likely from time to time to be, subject to payment claims and tax, customs and regulatory reviews, audits and investigations by governments, authorities and regulators. 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, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date less any lease incentives received. 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 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 2023, lease interest was $6.7 million (2022: $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 $38.5 million for the year ended 30 June 2023 (2022: $32.2 million). The following table shows movements in the right of use assets during the year: Balance at 1 July 2022 Additions Remeasurement Depreciation expense Effect of movements in foreign exchange Balance at 30 June 2023 Land and buildings $m 169.6 12.5 2.1 (25.9) 1.8 160.1 Other assets $m 9.4 5.3 – (4.4) 0.1 10.4 Total $m 179.0 17.8 2.1 (30.3) 1.9 170.5 136 136 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 6. Capital and financial structure 6.1 Capital management 6.2 Capital and reserves Share capital 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. 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 performance rights Shares cancelled from share buy-back On issue 30 June – fully paid Total number of issued shares 2023 2022 65,775,339 65,744,078 450 1,195 4,665 (110,000) 65,671,649 236 1,075 29,950 – 65,775,339 For the FY20-22 LTI plan, 0% vested based on the performance over 3 years period (FY20-FY22), as result of it, nil shares were purchased under the plan in 2023 financial year (2022: 16,766 shares), and 450 shares were issued to employees under the Employee Share Plan (2022: 236 shares). The on-market share buy-back commenced on 8 March 2023. For the financial year ended 30 June 2023, 110,000 shares were cancelled out of the 124,000 shares bought back on market. 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. 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. 137 137 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 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. Treasury shares reserve The reserve comprises the cost of the Cochlear Limited’s shares held by the Group. When shares recognised as equity are repurchased, the amount of the consideration paid, including directly attributable costs, are recognised as a deduction from equity. Repurchased shares are classified as treasury shares and are presented in the treasury share reserve. When treasury shares are cancelled, the consideration paid is transferred to share capital. When treasury shares are issued to employees to satisfy vesting of employee share plans the consideration paid is transferred to the share-based payment reserve. At 30 June 2023, the Group held 58,658 of Cochlear Limited’s shares (2022: nil) 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. As at 30 June 2023, Cochlear has no borrowings. Debt establishment costs are capitalised and an amount of $1.5 million (2022: $1.0 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 Total borrowings Net cash Gearing ratio Total borrowings Total equity Gearing ratio1 1 Gearing ratio = Total borrowings/Total equity. Financing arrangements 2023 $m 555.5 555.5 – – 555.5 2023 $m – 1,748.8 0.0% 2022 $m 629.3 629.3 (42.6) (42.6) 586.7 2022 $m 42.6 1,685.7 2.5% Multi-option bank facilities Other credit facilities Unsecured bank loan Bank guarantees2 $m $m Unsecured bank overdrafts $m Unsecured bank loan Bank guarantees2 $m $m 2023 Utilised at reporting date1 Not utilised at reporting date Total facilities 2022 Utilised at reporting date1 Not utilised at reporting date – 350.0 350.0 42.6 300.0 15.0 5.0 20.0 6.0 9.0 – 3.0 3.0 – 2.9 – – – – 4.8 9.1 3.7 12.8 6.4 2.9 Total facilities 1 Excludes the amount of $1.5 million (2022: $1.0 million) in relation to unamortised loan establishment fees. 2 Bank guarantees include standby letters of credit. 342.6 15.0 2.9 4.8 9.3 138 138 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Multi-option bank facilities – Unsecured bank loan 6.4 Financial risk management During the year ended 30 June 2023, Cochlear restructured its bank loan facilities as follows: Facility type <1 year term $m 1-2 year term $m 2-3 year term $m 3-4 year term $m 4-5 year term $m 5-6 year term $m Total facilities $m 6-7 year term $m Committed debt including guarantees – – – 100.0 150.0 100.0 20.0 370.0 All facilities are unsecured and have interlocking guarantees provided by certain controlled entities. Interest on the facilities is variable and charged at prevailing market rates. Other credit facilities Unsecured bank overdrafts Certain unsecured bank overdrafts are payable on demand and are subject to annual review. Interest on unsecured bank overdrafts is variable and is charged at prevailing market rates. Bank guarantees/Standby letters of credit The activities of Cochlear are exposed to a variety of risks, including market risk (comprising currency, interest rate and equity price 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 Standard. 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 and Risk Committee on a regular basis. The Audit and Risk Committee oversees how management monitors compliance with Cochlear’s Risk Management Standard, 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 Management Policy. As at 30 June 2023, Cochlear had additional facilities denominated in USD, Euros (EUR), Sterling (GBP), Indian rupees and New Zealand dollars totaling AUD 12.8 million (2022: AUD 9.3 million). Currency risk 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 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 Management Policy. Risk resulting from the translation of assets and liabilities of foreign operations into Cochlear’s reporting currency is not hedged. 139 139 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Cochlear’s exposure to foreign currency risk in relation to non-derivative financial instruments at 30 June 2023 was as follows, based upon notional amounts: Amounts in foreign currency/millions 2023 Trade receivables Trade payables CHF CNY EUR GBP JPY SEK USD 1.0 41.1 70.6 4.0 1,098.7 0.6 110.4 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. (1.2) (44.4) (28.3) (7.7) (60.4) (64.9) (25.7) In the year ended 30 June 2023, all cash flow hedges were effective at the reporting date. Balance sheet exposure (0.2) (3.3) 42.3 (3.7) 1,038.3 (64.3) 84.7 2022 Trade receivables 0.5 18.3 49.4 3.1 1,126.4 5.9 101.7 Unsecured bank loan – – – – – (300.0) – Trade payables (1.3) (57.4) (23.1) (5.8) (79.1) (108.2) (25.1) Balance sheet exposure (0.8) (39.1) 26.3 (2.7) 1,047.3 (402.3) 76.6 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 2023, 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. 140 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: Amounts In AUD 2023 Buy CHF Sell EUR Sell GBP Sell JPY Buy SEK Sell USD Total 2022 Buy CHF Sell EUR Sell GBP Sell JPY Buy SEK Sell USD Total Weighted average rate <1 year $m 1-2 years $m 0.611 0.625 0.554 85.643 7.095 0.690 0.664 0.627 0.548 82.331 6.629 0.732 (31.5) 112.7 29.5 17.9 (36.6) 313.3 405.3 (21.8) 131.9 20.1 18.4 (40.0) 258.6 367.2 – 82.4 18.5 9.3 – 154.8 265.0 – 61.1 9.1 8.5 – 159.6 238.3 140 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Currency risk – Sensitivity analysis (b) Credit risk An analysis based on a 10% strengthening of foreign currencies would have increased Cochlear’s profit for the year ended 30 June 2023 after tax by approximately AUD 10.8 million (2022: increased profit by AUD 9.5 million) and decreased Cochlear’s equity by AUD 65.7 million (2022: decrease by AUD 58.8 million). A 10% weakening of the foreign currencies would have decreased Cochlear’s profit for the year ended 30 June 2023 after tax by approximately AUD 9.8 million (2022: decreased profit by AUD 9.9 million) and increased equity by AUD 26.4 million (2022: increase by AUD 25.2 million). This analysis assumes that all other variables remain constant and ignores any impact from the translation of foreign operations. The following significant exchange rates applied to Cochlear during the year: AUD 1 = CHF CNY EUR GBP JPY SEK USD Interest rate risk Average rate Reporting date spot rate 2023 0.632 4.698 0.644 0.558 92.632 7.110 0.675 2022 0.674 4.685 0.643 0.546 85.242 6.696 0.724 2023 0.595 4.798 0.609 0.524 95.900 7.181 0.662 2022 0.657 4.607 0.658 0.567 94.010 7.037 0.688 Interest rate risk is managed through the management of net debt, interest expense and cost of finance. Cochlear is exposed to movements in the Australian interest rates in relation to corporate debt, leases and cash. At the reporting date, the interest rate profile of Cochlear’s interest-bearing financial instruments is financial assets of $555.5 million (2022: $629.3 million) and financial liabilities of $0.0 million (2022: $42.6 million). Interest rate risk – Sensitivity analysis At 30 June 2023, Cochlear was in a net financial asset position. A one percent increase in interest rates would have increased Cochlear’s profit after income tax and equity by approximately $3.0 million (2022: increased profit by $3.9 million). A one percent decrease in interest rates would have decreased Cochlear’s profit after income tax and equity by approximately $2.1 million (2022: reduced profit by $0.8 million). 141 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. In determining concentrations of credit risk, management assesses the characteristics of customers which include governments, government-supported universities, clinics, major hospital chains and distributors. Concentrations of credit risk are determined by assessing different geographical locations of customers and the political and economic environments they are subject to, which may affect the timely recovery of certain receivables. The timing of government tenders and distributor sales directly impacts the concentration risk and management may obtain a letter of credit to minimize the risk. At 30 June 2023 the carrying amount of the receivable from Cochlear's most significant customer was $23.9 million ($25.4 million). The maximum exposure to credit risk for trade receivables at the reporting date by geographic region was: 2023 2022 Americas EMEA Asia Pacific $m 129.8 109.5 $m 178.7 129.4 $m 79.9 69.5 Total $m 388.4 308.4 Depending on the region, Cochlear’s credit terms are generally 30 days; however, there are certain jurisdictions where it is customary practice for customers to make payment beyond 270 days. Although Cochlear discloses the balance as overdue, it is not indicative of a higher-than-normal credit risk as payments are typically received by Cochlear within the extended timeframes. 141 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information The group uses an allowance matrix to measure Lifetime Expected Credit Losses of trade receivables from individual customers. Loss rates are calculated using a 'roll rate' method based on the probability of a receivable progressing through successive stages of ageing to write-off. Roll rates are calculated separately for exposures in different segments based on the following credit risk characteristics - geographic region, political and economic environments, and whether receivables are covered by a letter of credit. The movement in the allowance for impairment loss during the current year comprises of $1.4 million in allowance utilised and a further $0.4 million net remeasurement. The ageing of Cochlear’s trade receivables and allowance for impairment loss, are as follows: Trade receivables Allowance for impairment losses 2023 $m 309.8 44.8 28.8 9.8 10.4 403.6 49.1 452.7 2022 $m 246.8 36.8 15.8 19.9 6.1 325.4 40.1 365.5 2023 $m (3.7) (1.5) (2.6) (2.5) (4.9) (15.2) – (15.2) 2022 $m (2.6) (0.7) (1.5) (6.1) (6.1) (17.0) – (17.0) Trade receivables net of allowance for impairment losses 2022 $m 2023 $m 306.1 43.3 26.2 7.3 5.5 388.4 49.1 437.5 244.2 36.1 14.3 13.8 – 308.4 40.1 348.5 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 Other receivables – current Trade and other receivables Credit risk management – Cash deposits, term deposits and forward exchange contracts The majority of Cochlear’s cash deposits and all forward exchange contracts are only executed with leading financial institutions whose credit rating is at least ‘A’ on the Standard & Poor’s rating index. (c) Liquidity risk Liquidity risk is the risk that Cochlear will not be able to meet its financial obligations as they fall due. Cochlear manages liquidity risk by ensuring, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due. Non-derivative liabilities Contractual maturities of non-derivative financial liabilities, including estimated interest payments and excluding the impact of netting agreements, are as follows: Effective interest rate Per annum Carrying amount Contractual cash flows <1 year 1-2 years 2-5 years >5 years $m $m $m $m $m $m 2023 SEK floating rate loan1 3.23 % Trade and other payables Lease liability – – Total 2022 SEK floating rate loan 1.66% Trade and other payables Lease liability Total – – – 270.4 201.8 472.2 42.6 232.7 211.3 486.6 – – 270.4 270.4 – – – – – – 233.9 35.9 31.9 68.7 97.4 504.3 306.3 31.9 68.7 97.4 43.1 43.1 – 232.7 232.4 0.3 – – – – 247.6 35.4 31.8 69.7 110.7 523.4 310.9 32.1 69.7 110.7 1. The SEK loan was fully repaid in May 2023 and therefore there was an effective interest rate on the drawn balance for 11 months. It is not expected that the cash flows included in the maturity analysis could occur significantly earlier or at significantly different amounts. 142 142 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Derivative assets and liabilities Valuation of financial assets and liabilities The following table indicates the periods in which the cash flows associated with Cochlear’s derivatives are expected to occur: 2023 Assets Liabilities Total 2022 Assets Liabilities Total Carrying amount $m Contractual cash flows $m <1 year 1-2 years $m $m 5.3 (27.0) (21.7) 10.8 (28.8) (18.0) 5.4 (28.3) (22.9) 10.8 (29.8) (19.0) 3.7 (21.2) (17.5) 8.4 (22.8) (14.4) 1.7 (7.1) (5.4) 2.4 (7.0) (4.6) 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. 143 For financial assets and liabilities measured and carried at fair value, Cochlear uses the following levels to categorise the valuation methods used: •• •• 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 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; •• 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. 7. Other notes 7.1 Auditors’ remuneration Audit and assurance services Auditors of the Company - KPMG: 2023 $ 2022 $ – audit and review of consolidated financial reports 1,552,259 1,435,765 – audit and review of subsidiary financial reports – other assurance services Total audit and assurance services Other services Auditors of the Company - KPMG: – taxation compliance and advisory services – other advisory services Total other services 7.2 Commitments Capital expenditure commitments 642,016 18,715 614,887 17,824 2,212,990 2,068,476 1,334,339 98,407 977,589 68,824 1,432,746 1,046,413 As at 30 June 2023, Cochlear entered into contracts to purchase property, plant and equipment for $21.1 million (2022: $22.1 million). 143 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 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 2023 2022 % % Country of incorporation/ formation Company Cochlear Limited Controlled entities Cochlear AG Cochlear Americas Cochlear Arabia Regional Headquarter LLC (i) Cochlear Austria GmbH Cochlear Benelux NV Cochlear Bone Anchored Solutions AB Cochlear Boulder LLC (ii) 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 Cochlear Korea Limited Cochlear Labs Pty Limited Cochlear Latinoamerica S.A. Cochlear Malaysia Sdn. Bhd. 144 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Australia Switzerland USA Saudi Arabia Austria Belgium Sweden USA Brazil Canada USA Colombia Germany Australia Germany UK Australia France Australia Australia Australia Australia Italy Korea Australia Panama Malaysia Interest held 2023 2022 % Cochlear Manufacturing Corporation Cochlear Medical Device (Beijing) Co., Ltd Cochlear Medical Device (Chengdu) Co Ltd Cochlear Medical Device 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 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Cochlear Verwaltungs GmbH Cochlear (HK) Limited Cochlear (Thailand) Limited Cochlear (UK) Limited (ii) Medical Insurance Pte Limited Nihon Cochlear Co Limited Sichuan Keli ShuangChuang Technology Co Ltd Sycle, LLC Sycle.Net Technologies (Canada) 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 51 100 100 (i) Incorporated on 30 June 2022. (ii) Dormant. Country of incorporation/ formation 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 144 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 7.4 Parent entity disclosure Parent entity capital commitments for acquisition of plant and equipment At, and throughout the financial year ended, 30 June 2023, the parent company of Cochlear was Cochlear Limited. As at 30 June 2023, the parent entity entered into contracts to purchase plant and equipment for $19.6 million (2022: $16.8 million). 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 Treasury share reserve Hedging reserve Share-based payment reserve Profit reserve Accumulated losses Total equity 2023 $m 238.8 (2.3) 236.5 1,275.5 2,045.3 358.4 480.4 1,250.3 (3.2) (15.3) 94.7 349.0 (110.6) 1,564.9 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) 1,537.4 Dividends will be paid from the profit reserve of Cochlear Limited, as the parent of the Consolidated Entity. 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 5.4 Proposed acquisition of Oticon Medical and Note 5.7 Contingent liabilities. 145 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. 145 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 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 2023 and 30 June 2022: Statement of comprehensive income Income statement Revenue Cost of sales Gross profit Selling, marketing and general expenses Research and development expenses Administration expenses Other income Other expenses 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 2023 $m 1,247.8 (447.5) 800.3 (86.3) (149.8) (200.2) 39.0 (117.9) (0.2) 284.9 20.3 (9.8) 10.5 295.4 (64.4) 231.0 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 Net profit 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 at beginning of year Net profit Dividends recognised Defined benefit plan actuarial loss Retained earnings at end of year 2023 $m 231.0 (19.1) (0.1) (16.3) 13.7 209.2 263.9 231.0 (197.4) (0.3) 297.2 2022 $m 341.7 (83.8) (0.1) (16.9) (5.0) 235.9 116.2 341.7 (194.0) – 263.9 146 146 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 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 Equity-accounted investments Loans and borrowings – internal Investments in subsidiaries Deferred tax assets Right of use assets Total non-current assets Total assets 147 2023 $m 455.9 595.8 3.6 191.2 9.5 23.3 2022 $m 542.7 614.5 8.0 150.3 34.0 18.4 1,279.3 1,367.9 1.6 129.9 153.6 93.6 90.8 3.5 83.6 502.6 49.0 94.9 1,203.1 2,482.4 2.4 118.8 102.6 119.0 68.8 – 122.3 436.0 44.8 104.9 1,119.6 2,487.5 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 liabilities Total current liabilities Forward exchange contracts Loans and borrowings – internal Employee benefit liabilities Provisions Deferred tax liabilities Lease liabilities Total non-current liabilities Total liabilities Net assets Equity Share capital Reserves Retained earnings Total equity 2023 $m 209.0 20.6 – 190.5 1.5 73.7 18.3 21.5 15.2 550.3 6.4 243.4 3.7 12.6 17.1 99.5 382.7 933.0 1,549.4 1,250.3 1.9 297.2 1,549.4 2022 $m 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 1,549.4 147 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 7.6 New standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations are effective for financial years beginning on or after 1 July 2022 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. 7.7 Events subsequent to the reporting date Other than the matter noted below, there has not arisen in the interval between the reporting date and the date of this Financial report, any item, transaction or event of a material and unusual nature likely, in the opinion of the directors of the Company, to significantly affect the operations of Cochlear, the results of those operations, or the state of affairs of Cochlear in future financial years: Dividends For dividends declared after 30 June 2023, see Note 2.6. 148 148 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 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) ii) giving a true and fair view of the Consolidated Entity’s financial position as at 30 June 2023 and of its performance for the financial year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001; and 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 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. b) c) 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 2023. 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 15th day of August 2023. Director Director 149 149 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information To the shareholders of Cochlear Limited Report on the audit of the Financial Report Opinion We have audited the Financial Report of Cochlear Limited (the Company). In our opinion, the accompanying Financial Report of the Company is in accordance with the Corporations Act 2001, including: • giving a true and fair view of the Consolidated Entity’s financial position as of 30 June 2023 and of its financial performance for the year ended on that date; and • complying with Australian Accounting Standards and the Corporations Regulations 2001. The Financial Report comprises: • Balance Sheet as of 30 June 2023 • 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 • 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 these requirements. 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. Key Audit Matters The Key Audit Matters we identified are: • Recoverability of trade receivables • 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 $388.4 million Refer to Note 6.4(b) Financial risk management, credit risk The key audit matter How the matter was addressed in our audit Recoverability of trade receivables was considered a key audit matter due to: • The varying characteristics of customers which include governments, government- supported universities, clinics, major hospital chains and distributors; • 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; Our procedures included: • Testing key controls within the credit control process including: • management review and approval of new customer credit limits within the Consolidated Entity’s credit limit policies; • the system configuration for enforcing credit limits; • management’s review of trade receivables ageing and trade receivables past due for identification of receivables with greater credit risk to be included in the expected credit loss model; • 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 and for certain customers by selecting a sample of significant overdue customer balances with indicators of credit deterioration. We: 150 150 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information • The inherent subjectivity • involved in the Consolidated Entity making forward- looking judgements in relation to the recovery of credit risk exposures; and • The use of an expected credit loss model required by AASB 9 Financial Instruments. 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. compared management’s assumptions to 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; • evaluated other evidence including customer correspondence; and • questioned the Consolidated Entity’s knowledge of future conditions which may impact expected customer receipts and checked consistency of the results to the procedures performed above. • Challenging the Consolidated Entity’s expected credit loss modelling for customers without a specific risk by comparing assumptions to historical patterns of credit losses and evaluating those assumptions against changes in general economic conditions in significant locations. • 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 $40.7 million Refer to Note 5.6 Provisions The key audit matter How the matter was addressed in our audit The warranty provision was considered a key audit matter due to: • The high estimation uncertainty inherent in the key assumptions applied by the Consolidated Entity to determine the warranty provision; 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; • 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 • The calculation is largely manually developed and therefore is at greater risk of error. The key assumptions used in the Consolidated Entity’s determination of the warranty provision are: • The forecast claim rates of the multiple products in the portfolio; • The ratio of repairing to replacing failed products; • The forecast repair cost; and • The forecast replacement cost which is based on standard forecasts of manufacturing costs. Challenging these key assumptions required greater involvement by our senior team members. Given the dependence on manually developed calculations, we involved our data analytics specialists to supplement our senior team members in addressing this key audit matter. • 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; • Assessing the integrity of the model for the warranty provision. This included checking the accuracy of the formulas within the model using data analytic techniques; • Comparing the forecast claim rates of a sample of products to actual warranty claims for that product or actual warranty claims of previous generations of similar products; • Comparing the forecast proportion of claims that can be repaired and associated repair costs to historical repair performance; • Comparing the forecast replacement cost to actual manufacturing costs and challenging forward-looking assumptions used in the model; • Enquiring of management responsible for product design and quality attributes and the product repair function regarding product reliability and repairability, especially in relation to recently launched products, to challenge the forward-looking assumptions used in the model; • 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. 151 151 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information 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 control to enable the preparation of a Financial Report that gives a true and fair view and is free from material misstatement, whether due to fraud or error; and assessing the Consolidated Entity’s 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 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. 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: https://www.auasb.gov.au/admin/file/content102/c3/ar1_2020.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 2023, 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 86 to 107 of the Directors’ report for the year ended 30 June 2023. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Auditor’s responsibilities for the audit of the Financial Report KPMG 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. Julian McPherson, Partner Sydney, 15 August 2023 152 152 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Additional information 153 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Sustainability data Sustainability approach Progress against our targets Climate-related metrics Our people GRI content index 155 157 158 159 160 154 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Sustainability approach Sustainability is embedded in our business strategy, recognising the importance of social, environmental and governance outcomes for our long-term success. Our approach Sustainability governance Sustainability governance framework Our sustainability approach is integrated with business strategy. It reinforces our focus on creating positive social impact at individual and societal levels, while minimising our environmental impact. It helps guide our strategic priorities, manage risk and improve performance. Our approach is informed by our materiality assessment and business priorities as well as the Global Reporting Initiative (GRI) framework, the United Nations Sustainable Development Goals (SDGs) and the United Nations Global Compact (UNGC) Principles. We have been signatory of the UNGC since 2022 and support the Ten Principles in the areas of human rights, labour, environment and anti-corruption. The Board is responsible for overseeing the approval and integration of sustainability initiatives into business strategy and operations and approving sustainability policies and goals. The Audit and Risk Committee assists the Board to discharge its responsibilities in monitoring sustainability performance and overseeing the implementation of sustainability initiatives and commitments and reviewing the assessment, management and response to these risks and opportunities. The Executive team has responsibility for the implementation of sustainability strategy, integrating sustainability into business strategy and operations and reporting progress to the Audit and Risk Committee. The global sustainability team reports to the Chief Financial Officer and is responsible for defining our sustainability framework, supporting all parts of the business to deliver on the framework, leading or coordinating key sustainability- related activities and developing external reporting. Group risk and assurance is responsible for maintaining the enterprise risk framework which includes sustainability and climate-related risks. All employees and contractors are responsible for compliance with policy and procedure controls to manage risk. Board Oversight of sustainability and initiatives Audit and Risk Committee Monitor and review sustainability performance and initiatives Executive team Implementation of sustainability strategy Global sustainability team Driving sustainability activities across the business 155 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Sustainability approach Materiality Our material topics focus on the positive social impact our solutions deliver to society and reflect our business strategic priorities. We regularly assess the most significant sustainability topics for our business and our stakeholders, and our materiality process is aligned to the GRI Standards. Our materiality assessment, conducted in 2022, was informed by a market scan of key sustainability trends, benchmarking against industry peers and stakeholder engagement. This year we focused on better understanding the perspective of implant recipients by undertaking surveys in several key markets. Our contribution to the United Nations Sustainable Development Goals The United Nations Sustainable Development Goals (SDGs) are a set of 17 universal goals adopted by all United Nations Member States in 2015. The goals are a global call to action on sustainable development that aim to end poverty, protect the planet and ensure all people enjoy healthy lives, peace and prosperity by 2030. They are applicable to all countries at all stages of development and are predicated on all sectors of society being involved in their achievement. The World Health Organization’s first World Report on Hearing highlights the relevance of action on hearing care to achieving SDGs. We support the objectives of the SDGs and recognise their relevance to our business. We believe that our greatest contributions relate to SDGs 3: good health and wellbeing, 4: quality education, 5: gender equality, 8: decent work and economic growth, 9: industry, innovation, infrastructure, 10: reduced inequalities and 13: climate action. This year we continued to address our priority SDGs which are also reflected in our material topics. Material topics Information about how we are addressing the topic Product quality, safety and reliability A lifetime of hearing solutions Access and affordability A healthier and more productive society Health outcomes and socioeconomic enablement A healthier and more productive society Data privacy and cyber security Sustained value Awareness and education A healthier and more productive society A lifetime of hearing solutions Customer-centric approach A lifetime of hearing solutions Research and innovation A lifetime of hearing solutions Energy, emissions and climate resilience Environmental responsibility Employee value proposition Thriving people Ethical and sustainable supply chain Sustained value Diversity, equity and inclusion Thriving people SDGs 3, 9 3, 4, 8, 10 3, 4, 8, 10 8, 9 3, 9 3, 9 3, 9, 13 13 4, 5, 9 8, 9, 10 5, 8 156 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Progress against our targets The following table outlines our progress towards the targets defined in our 2022 Sustainability Report, reinforcing our strong positive social impact and the commitment to minimising our environmental footprint. During FY23 we have achieved several targets and reviewed remaining targets to ensure they remain relevant and appropriate. While several targets will remain unchanged, others have been revised to reflect the further integration of sustainability into the business strategy. Targets A healthier and more productive society Help over 40,000 people hear with one of our cochlear or acoustic implants. A lifetime of hearing solutions FY23 progress Helped over 44,000 people hear. We are investing in initiatives to develop a standard clinical pathway for adults. Target an annual R&D investment of approximately 12% of sales revenue. Invested over $240m in R&D, 13% of sales revenue. Thriving people Maintain or exceed employee engagement score of 80%. Achieve 40% of female representation in senior management role (2 levels below the CEO & President) by FY24. Maintain fair remuneration for equivalent work including annual review to ensure gender pay equity. Environmental responsibility Net-zero emissions in our operations (Scope 1 and 2) by 2030. Sustained value Review the Global Code of Conduct and deliver training to all employees in FY23. Review Supplier Code of Conduct in FY23 Implement Reflect Reconciliation Action Plan (RAP) and begin developing next RAP in FY23. Status Ongoing On going Achieved Ongoing Achieved Achieved On track Achieved Achieved Employee engagement scored maintained at 80%, with survey inputs incorporated in our culture work. Women in senior management roles increased to 43%, up 2 points from last year. Achieved We continuously monitor remuneration and reward practices to ensure fairness and equity in our talent management activities and identify opportunities for further improvement. Transitioned 5 of our 6 manufacturing sites to renewable energy and identifying opportunities to move to 100% renewable energy at the remaining site. Expanded renewable energy use at our non-manufacturing locations. Published the reviewed Global Code of Conduct and delivered training to all employees in FY23. Published the reviewed Supplier Code of Conduct. Implemented the Reflect RAP and initiated the development of the Innovate RAP. Achieved 157 25% reduction in our absolute Scope 1 and Scope 2 emissions by 2025. Reduced Scope 1 and 2 emissions by 68% in relation to the FY19 baseline. 50% reduction in business flight emissions by 2025. Reduced business flight emissions by 91% in relation to the FY19 baseline. Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Climate-related metrics Scope 1 • Gasoline and natural gas for our fleet and operations. Scope 2 • Purchased electricity for our manufacturing and other facilities. Scope 3 • We are reporting on business flights only. • We are currently undertaking a complete Scope 3 inventory and will report on the relevant emission categories during FY24. GHG emissions1 Total Scope 12 Total Scope 23 Total Scope 1 & 2 Unit tCO2e tCO2e tCO2e Emission intensity per unit KgCO2e/unit Emission intensity per mAUD KgCO2e/ % Change from FY19 (Baseline) 124% -76% -68% -79% -78% FY23 916 2,401 3,316 14 2 FY22 251 8,693 8,945 41 5 FY21 474 11,793 12,267 68 8 FY20 559 9,115 9,674 66 8 FY19 409 9,825 10,234 66 8 Total Scope 3 (business flights)4 Total Scope 1 to 3 revenue tCO2e -91% 1,641 1,046 186 4,774 18,630 tCO2e -83% 4,957 9,991 12,454 14,448 28,864 Energy Unit Direct purchased electricity MWh Direct purchased natural gas + petrol Total direct purchased energy MWh MWh Energy intensity per unit MWh/unit Energy intensity per mAUD MWh/revenue % Change from FY19 (Baseline) 29% -62% 8% -7% 6% FY23 23,158 5,433 FY22 22,943 2,066 FY21 22,857 1,904 FY20 15,638 1,201 FY19 17,806 5,371 28,591 25,009 24,761 16,839 23,177 0.12 15 0.11 14 0.13 15 0.11 13 0.11 13 1. GHG emissions measured using the Greenhouse Gas (GHG) Protocol as a guiding framework. 2. Scope 1 emissions calculated based on the volume of fuel consumed and emission factors considered most relevant to each region where consumption occurred. 3. Scope 2 emissions calculated based on the electricity consumption and emission factors considered most relevant to each region where consumption occurred. Estimates have been made for certain facilities where actual data was not available, representing less than 1% of the total Scope 2 emissions. 4. Scope 3 emissions related to business flights only. Travel data obtained from travel management companies. Emissions provided by travel management companies or calculated based on the relevant emission factors applied to the distance travelled. Total includes 1,641 tCO2e carbon offsets. 158 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Our people Our workforce Engagement FY23 FY22 Engagement Female Male Female Male Employee turnover % Number % Number % Number % Number Engagement score 43% 49% 55% 53% 168 457 1,882 2,507 57% 51% 45% 47% 227 475 1,564 2,266 41% 157 59% 225 48% 55% 52% 406 1,763 2,326 52% 45% 48% 444 1,451 2,120 Total hours of employee formal training Safety and wellbeing FY23 8.2% 80% 28.5 Employees by category Senior manager Management Operational Total Employees by type and gender Permanent Temporary Full-time Part-time Total FY23 FY22 Female Male Female Male % Number % Number % Number % Number 53% 57% 51% 78% 53% 2,508 83 2,392 199 2,591 47% 43% 49% 22% 47% 2,267 63 2,275 55 2,330 52% 63% 51% 83% 53% 2,327 94 2,229 192 2,421 48% 37% 49% 17% 47% 2,120 56 2,137 39 2,176 Gender diversity in leadership Women on the Board Women in senior management FY23 40% 43% FY22 33% 41% FY22 11.1% 80% 24.3 FY19 156 1.9 1 Severity rate Injury Frequency TRIFR1 LTIFR2 FY23 263 3.3 2.3 FY22 281 2.5 1.6 FY21 295 2.7 1.5 FY20 192 3.2 1.7 1 Total Recordable Injury Frequency Rate (TRIFR) measures how frequently recordable injuries are occurring. 2 Total Lost Time Injury Frequency Rate (LTIFR) refers to the number of lost time injuries occurring in a workplace per 1 million hours worked. 159 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information GRI Content Index Cochlear Limited has reported the information cited in this GRI content index for the period from 01 July 2022 to 30 June 2023 with reference to the GRI Standards. GRI used: GRI 1: Foundation 2021. No sector guidelines apply. GRI Disclosures GRI 2: General Disclosures 2021 2-1 Organizational details Location About Cochlear - page 3 2-2 Entities included in the organization’s sustainability reporting About this report - page 1 2-3 Reporting period, frequency and contact point About this report - page 1 2-4 Restatements of information Climate-related metrics – page 158 - Total Scope 1 to 3 emissions in FY21 presented in the 2022 Sustainability Report was adjusted to reflect the correct amount. Safety and wellbeing - page 159 - Severity rate, TRIFR and LTIFR in FY22 presented in the 2022 Sustainability Report was adjusted to reflect the correct rates. 2-5 External assurance Report on the audit of Financial Report - page 150 The sustainability data was internally reviewed and not submitted to external assurance. The content of this report is approved by the executive team. 2-6 Activities, value chain and other business relationships Responsible supply chain - page 59 2-7 Employees 2-8 Workers who are not employees 2-9 Governance structure and composition Our workforce - page 159 Our workforce - page 159 Governance - pages 69 - 72 2-10 Nomination and selection of the highest governance body 2023 Corporate Governance Statement 2-11 Chair of the highest governance body 2-12 Role of the highest governance body in overseeing the management of impacts Board of directors - pages 77 - 80 Sustainability governance - page 155 2-13 Delegation of responsibility for managing impacts Sustainability governance - page 155 Board skills matrix - page 72 2-14 Role of the highest governance body in sustainability reporting Sustainability governance - page 155 2-15 Conflicts of interest 2-16 Communication of critical concerns Cochlear Global Code of Conduct Cochlear Global Code of Conduct 2-17 Collective knowledge of the highest governance body 2023 Corporate Governance Statement 2-18 Evaluation of the performance of the highest governance body 2023 Corporate Governance Statement 2-19 Remuneration policies Remuneration report - page 86 SDGs UNGC 16 16 16 16 16 16 16 16 16 16 16 16 16 16 16 8 1, 7 1, 7, 10 1, 7 10 10 1, 7, 10 160 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Location SDGs UNGC GRI Disclosures GRI 2: General Disclosures 2021 2-20 Process to determine remuneration 2-21 Annual total compensation ratio Remuneration report - page 86 Information currently not disclosed. 2-22 Statement on sustainable development strategy Year in review – pages 9 – 16 2-23 Policy commitments 2-24 Embedding policy commitments Our pathway to net-zero emissions - page 52 Cochlear Global Code of Conduct 2022 Cochlear Modern Slavery Statement Cochlear Global Code of Conduct 2-25 Processes to remediate negative impacts Managing our climate-related sustainability risks - page 53 2-26 Mechanisms for seeking advice and raising concerns Cochlear Global Code of Conduct 2-27 Compliance with laws and regulations Creating value responsibly - pages 59 - 61 Environmental management - page 54 Sustainability approach - page 155 Cochlear Global Code of Conduct 2-28 Membership associations Sustainability approach - page 155 All SDGs 2-29 Approach to stakeholder engagement Materiality - page 156 2-30 Collective bargaining agreements Cochlear Global Code of Conduct GRI 3: Material Topics 2021 3-1 Process to determine material topics 3-2 List of material topics 3-3 Management of material topics GRI 201: Economic Performance 2016 Materiality - page 156 Materiality - page 156 Sustainability approach - page 155 Materiality - page 156 201-1 Direct economic value generated and distributed Cochlear at a glance - page 4 201-2 Financial implications and other risks and opportunities due to climate change Financial statements - pages 108 - 152 Cochlear at a glance - page 4 Financial statements - pages 108 – 152 201-3 Defined benefit plan obligations and other retirement plans Defined benefit plans - page 127 201-4 Financial assistance received from government Other income - page 121 16 8 17 17 1, 2, 7, 8, 10 3, 8, 10 13 16 16 8 16 16 16 16 16 16 16 1, 7 1, 7, 8, 10 7, 8, 9 10 1, 2, 8 3 1, 2, 7, 8 7, 8, 9 161 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information GRI Disclosures GRI 205: Anti-corruption 2016 Location 205-2 Communication and training about anti-corruption policies and procedures Creating value sustainably - page 59 SDGs UNGC 3, 16 10 GRI 207: Tax 2019 207-1 Approach to tax GRI 302: Energy 2016 Tax transparency - page 60 1, 10, 17 302-1 Energy consumption within the organization Climate-related metrics - page 158 302-2 Energy consumption outside of the organization Climate-related metrics - page 158 302-3 Energy intensity 302-4 Reduction of energy consumption 303-5 Water consumption GRI 305: Emissions 2016 305-1 Direct (Scope 1) GHG emissions 305-2 Energy indirect (Scope 2) GHG emissions 305-3 Other indirect (Scope 3) GHG emissions 305-4 GHG emissions intensity 305-5 Reduction of GHG emissions GRI 306: Waste 2020 Climate-related metrics - page 158 Climate-related metrics - page 158 Resource efficiency - page 54 Climate-related metrics - page 158 Climate-related metrics - page 158 Climate-related metrics - page 158 Climate-related metrics - page 158 Climate-related metrics - page 158 306-2 Management of significant waste-related impacts Resource efficiency - page 54 GRI 308: Supplier Environmental Assessment 2016 308-1 New suppliers that were screened using environmental criteria Responsible supply chain - page 59 308-2 Negative environmental impacts in the supply chain and actions taken Responsible supply chain - page 59 GRI 401: Employment 2016 401-1 New employee hires and employee turnover Engagement - page 159 GRI 403: Occupational Health and Safety 2018 403-1 Occupational health and safety management system Supporting the wellness and safety of our teams - page 49 403-3 Occupational health services Supporting the wellness and safety of our teams - page 49 403-4 Worker participation, consultation, and communication on occupational health and safety Supporting the wellness and safety of our teams - page 49 403-5 Worker training on occupational health and safety Supporting the wellness and safety of our teams - page 49 13 13 13 13 12 13 13 13 13 13 12 8, 9, 10, 13 8, 9, 10, 13 3, 8 3, 8 3, 8 3, 8 3, 8 7, 8, 9 8, 9 7, 8, 9 8, 9 8, 9 8, 9 8, 9 8, 9 8, 9 8, 9 8, 9 8 8 162 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Location SDGs UNGC GRI Disclosures GRI 403: Occupational Health and Safety 2018 403-6 Promotion of worker health 403-7 Prevention and mitigation of occupational health and safety impacts directly linked by business relationships 403-8 Workers covered by an occupational health and safety management system 403-9 Work-related injuries 403-10 Work-related ill health GRI 404: Training and Education 2016 Supporting the wellness and safety of our teams - page 49 Supporting the wellness and safety of our teams - page 49 Supporting the wellness and safety of our teams - page 49 Safety and wellbeing - page 159 Safety and wellbeing - page 159 404-1 Average hours of training per year per employee Engagement - page 159 404-2 Programs for upgrading employee skills and transition assistance programs GRI 405: Diversity and Equal Opportunity 2016 Attracting, developing and retaining talent - page 48 405-1 Diversity of governance bodies and employees Championing a culture of diversity and inclusion - page 46 GRI 408: Child Labor 2016 408-1 Operations and suppliers at significant risk for incidents of child labor Responsible Supply Chain - 59 Cochlear Global Code of Conduct GRI 409: Forced or Compulsory Labor 2016 409-1 Operations and suppliers at significant risk for incidents of forced or compulsory labor Responsible Supply Chain - 59 Cochlear Global Code of Conduct GRI 411: Rights of Indigenous Peoples 2016 411-1 Incidents of violations involving rights of indigenous peoples Reconciliation Action Plan GRI 413: Local Communities 2016 413-1 Operations with local community engagement, impact assessments, and development programs Cochlear Foundation GRI 414: Supplier Social Assessment 2016 414-1 New suppliers that were screened using social criteria Responsible Supply Chain - 59 414-2 Negative social impacts in the supply chain and actions taken Responsible Supply Chain - 59 3, 8 3, 8 3, 8 3, 8 3, 8 8 8 5 8 8 1, 8, 10 3, 4, 8, 10 6 5 4 1 8, 9, 10, 13 8, 9, 10, 13 1, 3, 4, 5 1, 3, 4, 5 163 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information GRI Disclosures GRI 415: Public Policy 2016 415-1 Political contributions GRI 416: Customer Health and Safety 2016 416-1 Assessment of the health and safety impacts of product and service categories GRI 417: Marketing and Labeling 2016 Location SDGs UNGC Public policy engagement - page 61 3, 16 10 Leading on product quality and reliability - page 40 417-1 Requirements for product and service information and labeling Leading on product quality and reliability - page 40 In addition, our Quality Management System is intended to be compliant with the following quality management standards, regulations and directives: • EN ISO 13485:2016 • ISO 13485:2016 • CFR Title 21 Part 820 (US) • Medical Device Regulation (EU) 2017/745 : 2017 • Active Implantable Medical Device Directive 90/385/EEC • Therapeutic Good Act 1989 • Therapeutic Goods (Medical Device) Regulations 2002 (Australia) • Canadian Medical Device Regulation (SOR/98-282) • MHLW Ministerial Ordinance no. 169 (Japan) • Medical Device Act (South Korea) • Good Manufacturing Practices RDC National Health Surveillance Agency (ANVISA) • 665/2022 (Brazil) • NMPA (2014) China No. 64 Order of Good Manufacturing Practice for Medical Devices. GRI 418: Customer Privacy 2016 418-1 Substantiated complaints concerning breaches of customer privacy and losses of customer data Cyber security - page 59 Data privacy - page 60 3, 9, 12 3, 9, 12 16 164 Cochlear Limited Annual Report 2023 Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information References FY23 highlights – page 8 1. Cochlear estimates based on the published economic model findings of Neve et al 2021. Dollar amount relates to all recipients implanted with a cochlear implant in FY23 across the developed markets. Year in review – pages 9-16 1. Cochlear estimates based on the published economic model findings of Neve et al 2021. Dollar amount relates to all recipients implanted with a cochlear implant in FY23 across the developed markets. 2. Lin FR et al. Hearing intervention versus health education control to reduce cognitive decline in older adults with hearing loss in the USA (ACHIEVE): a multicentre, randomised controlled trial. The Lancet. [ePub ahead of print] DOI: https://doi.org/10.1016/S0140- 6736(23)01406-X. Available at https://www.thelancet.com/ journals/lancet/article/PIIS0140-6736(23)01406-X/fulltext 3. https://www.cms.gov/medicare-coverage-database/view/ ncacal-decision-memo.aspx?proposed=N&ncaid=306 4. Cochlear estimate for cochlear and acoustic implants 5. Cochlear Limited. D1190805 Processor Size Comparison. 2022, May. # Comparison made using the Compact Battery Module for Nucleus 8 Sound Processor and the Compact Rechargeable Battery for Nucleus 7 Sound Processor 6. a. Cochlear Limited. D1864200 SCAN 2 Design Description. 2022, Apr. b. Mauger SJ, Warren C, Knight M, Goorevich M, Nel E. Clinical evaluation of the Nucleus 6 cochlear implant system: performance improvements with SmartSound iQ. International Journal Of Audiology. 2014, Aug; 53(8): 564-576. [Sponsored by Cochlear] c. Mauger S, Jones M, Nel E, Del Dot J. Clinical outcomes with the Kanso ™ off-the-ear cochlear implant sound processor. International Journal Of Audiology. 2017, Jan 9; 1-10. [Sponsored by Cochlear] d. Wolfe J, Neumann S, Marsh M, Schafer E, Lianos L, Gilden J, O’Neill L, Arkis P, Menapace C, Nel E, Jones M. Benefits of Adaptive Signal Processing in a Commercially Available Cochlear Implant Sound Processor. Otol Neurotol. 2015 Aug;36(7):1181-90. [Sponsored by Cochlear] e. Cochlear Limited. D1631375 Nucleus 8 Sound Processor Product Definition. F. Wolfe J, et al. Evaluation of a wireless audio streaming accessory to improve mobile telephone performance of cochlear implant users. International Journal of Audiology. 2016;55(2):75-82. G. Wolfe J, et al. Improving hearing performance for cochlear implant recipients with use of a digital, wireless, remote-microphone, audio-streaming accessory. J Am Acad Audiol. 2015 Jun;26(6):532-9. H. Warren C, Nel E, and Boyd P. Controlled comparative clinical trial of hearing benefit outcomes for users of the Cochlear™ Nucleus ® Sound Processor with mobile connectivity. Cochlear Implants International (2019 Feb); 20(3)19. i. Cochlear Limited. D1964109 Clinical Investigation Report CLTD5804 – Feb 2022. ¥ When the technology becomes available for the Cochlear Nucleus 8 Sound Processor, a firmware update to your sound processor will allow you to connect to Bluetooth LE Audio compatible devices. † ForwardFocus is a clinician-enabled feature that can be user-controlled or automated. 7. https://www.red-dot.org/project/cochlear-nucleus-8-sound- processor-63928 Growth opportunity – pages 20-21 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. a. Mohr et al., 2000. b. CPI Inflation Calculator (http://www.in2013dollars.com). c. Estimated from Mohr et al., 2000. 4. The Ear Foundation (2018). Spend2Save Report (2nd Edition). 5. WHO 2021 World Report on Hearing (https://www.who.int/ activities/highlighting-priorities-for-ear-and-hearing-care). 6. Lin FR et al. Hearing intervention versus health education control to reduce cognitive decline in older adults with hearing loss in the USA (ACHIEVE): a multicentre, randomised controlled trial. The Lancet. [ePub ahead of print] DOI: https://doi.org/10.1016/S0140- 6736(23)01406-X. Available at https://www.thelancet.com/ journals/lancet/article/PIIS0140-6736(23)01406-X/fulltext 7. Fact 5. Deafness and hearing loss. World Health Organization [Internet]. [cited July 2018]. Available from: http://www.who.int/ features/factfiles/deafness/en/. 8. 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. 9. a. 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. b. 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. c. Barnett S. A hearing problem. American Family Physician [serial on the Internet]. (2002, Sep 1), [cited July 3, 2018]; 66(5): 911. 10. a. 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. b. 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. 11. a. 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. b. Nachtegaal J, Festen J, Kramer S. Hearing ability in working life and its relationship with sick leave and self-reported work 165 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information productivity. Ear And Hearing [serial on the Internet]. (2012, Jan), [cited July 3, 2018]; 33(1): 94-103. c. 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. Key market segments – pages 22-23 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. A healthier and more productive society – pages 26-32 1. Market penetration estimate based on Cochlear sourced data. 2. Fact 5. Deafness and hearing loss. World Health Organization [Internet]. [cited July 2018]. Available from: http://www.who.int/ features/factfiles/deafness/en/. 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. Hearing Loss and Incident Dementia, Arch Neurol. 2011;68(2):214- 220. doi:10.1001/archneurol.2010.362, https://www.ncbi.nlm.nih. gov/pmc/articles/PMC3277836/ 5. http://www.achievestudy.org/ 6. Lin FR et al. Hearing intervention versus health education control to reduce cognitive decline in older adults with hearing loss in the USA (ACHIEVE): a multicentre, randomised controlled trial. The Lancet. [ePub ahead of print] DOI: https://doi.org/10.1016/S0140- 6736(23)01406-X. Available at https://www.thelancet.com/ journals/lancet/article/PIIS0140-6736(23)01406-X/fulltext 7. Tordrup et al 2022. Global return on investment and cost- 18. https://www.infanthearing.org/nhstc/docs/Year%202019%20 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 8. 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 9. 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). 10. The Ear Foundation (2018). Spend2Save Report (2nd Edition). 11. Neve et al 2021 12. WHO 2021 World Report on Hearing (https://www.who.int/ activities/highlighting-priorities-for-ear-and-hearing-care), page 98. 13. Cost-benefit analysis of First Voice’s early intervention program: Deloitte Access Economics 2017 p2. 14. WHO 2021 World Report on Hearing (https://www.who.int/ activities/highlighting-priorities-for-ear-and-hearing-care), page 49. 15. Monteiro et al 2012. 16. Monteiro et al 2012. JCIH%20Position%20Statement.pdf A lifetime of hearing solutions – pages 33-42 1. a. Related to the implant when used in accordance with product labelling. b. Profile Plus. As of 30 December 2022, no complaints in relation to the device when undergoing MRI have been received. 2. Cochlear Limited. D1619303 Software History Timeline. Data on file. 3. Dillon H, James A, Ginis J. Client Oriented Scale of Improvement (COSI) and its relationship to several other measures of benefit and satisfaction provided by hearing aids. J Am Acad Audiol. 1997, Feb (1)8:2743. 2. 4. International Standard ISO 5841-2. Implants for Surgery — Cardiac Pacemakers — Part 2: Reporting of Clinical Performance of Populations of Pulse Generators or Leads. Geneva (Switzerland): International Organization for Standardization. 5. European Consensus Statement on Cochlear Implant Failures and Explantations. Otol Neurotol. 2005 Nov;26(6):1097-9. 6. ANSI/AAMI CI86. Cochlear implant systems: Requirements for safety, functional verification, (2017). Arlington, VA: American National Standards Institute. 17. a. Livingston G, Sommerlad A, Orgeta V, Costafreda S, Huntley 7. Based on implant generations released within a comparable period with 5+ years of CSP data. Sustained value – pages 55-61 1. https://supplynation.org.au/wp-content/uploads/2018/08/ Sleeping-Giant-Report.pdf 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. b. 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. c. 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. d. Barnett S. A hearing problem. American Family Physician [serial on the Internet]. (2002, Sep 1), [cited July 3, 2018]; 66(5): 911. 166 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Notes .................................................................................................................................................................................... .................................................................................................................................................................................... .................................................................................................................................................................................... .................................................................................................................................................................................... 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.................................................................................................................................................................................... .................................................................................................................................................................................... 167 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Shareholder information The shareholder information presented is applicable as at 28 July 2023. Twenty largest shareholders Substantial shareholders Investor BlackRock Inc State Street Corporation ABP (Algemen Burgerlijk PSF) Pinnacle Investment Management Group Limited Total Number of ordinary shares 4,477,869 3,863,824 3,541,229 3,299,003 15,181,925 % 6.82 5.88 5.39 5.02 23.12 Distribution of shareholders Number of shares held 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 40,227 2,472 102 64 19 42,884 10.06 7.22 1.06 2.12 79.54 100.00 All shares above are fully paid ordinary shares, each carrying one voting right. Non-marketable parcels: 245 shareholders held less than a marketable parcel of ordinary shares, based on the closing market price on 28 July 2023 of $239.07. Unquoted equity securities As at 28 July 2023, there were 243,155 options and 152,650 rights over unissued ordinary shares. On market buy-back On 15 February 2023, Cochlear announced its intention to buy-back up to $75 million of its fully paid ordinary shares. A total of $29.6 million was spent up to 30 June 2023. Securities purchased on-market 44,658 ordinary shares were purchased on-market under or for the purposes of an employee incentive scheme, with the average price paid per security being $239.81. Shareholder 1 2 3 4 5 6 7 8 9 10 11 12 13 HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Pty Limited Citicorp Nominees Pty Limited National Nominees Limited BNP Paribas Noms Pty Ltd BNP Paribas Nominees Pty Ltd HSBC Custody Nominees (Australia) Limited HSBC Custody Nominees (Australia) Limited- GSCO ECA Australian Foundation Investment Company Limited Netwealth Investments Limited BNP Paribas Nominees Pty Ltd Hub24 Custodial Serv Ltd Citicorp Nominees Pty Limited HSBC Custody Nominees (Australia) Limited 14 Mr Christopher Graham Roberts Custodial Services Limited HSBC Custody Nominees (Australia) Limited - A/C 2 BNP Paribas Nominees Pty Ltd ACF Clearstream HSBC Custody Nominees (Australia) Limited Cochlear Incentive Plan Pty Ltd BNP Paribas Nominees Pty Ltd 15 16 17 18 19 20 Total Number of ordinary shares 29,384,578 % of issued capital 44.75 9,404,348 6,098,155 2,009,236 1,644,075 792,246 451,702 396,188 324,174 305,565 256,551 253,816 176,502 172,387 152,756 133,789 115,215 109,229 101,003 61,520 14.32 9.29 3.06 2.50 1.21 0.69 0.60 0.49 0.47 0.39 0.39 0.27 0.26 0.23 0.20 0.18 0.17 0.15 0.09 52,343,035 79.71 The 20 largest shareholders held 79.71% of the ordinary shares of the Company. 168 Cochlear Limited Annual Report 2023Contents Our company Review of FY23 Strategy and value creation Financial Governance performance and risk Financial statements Additional information Directory Cochlear headquarters 1 University Avenue Macquarie University NSW 2109 Australia Telephone: +612 9428 6555 Fax: +612 9428 6353 Website: www.cochlear.com Shareholder enquiries Calendar of events* Annual general meeting 19 September 2023 Record date for final dividend 11 October 2023 17 October 2023 Payment date for final dividend Annual general meeting 16 February 2024 HY24 results announced 22 March 2024 15 April 2024 Record date for interim dividend Payment date for interim dividend The annual general meeting of Cochlear Limited will be held on 17 October 2023 at 10.00am. Further details will be provided in the Notice of Meeting, which will be provided to shareholders in mid-September 2023. The Notice of Meeting will also be available on the ASX Company Announcements Platform and the website, www.cochlear.com. Access to shareholding information is available to investors through Cochlear’s share registry Computershare. 15 August 2024 FY24 results announced * Indicative dates only and subject to change. Company secretary Ray Jarman 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 Auditor KPMG Level 38, Tower Three, International Towers Sydney 300 Barangaroo Avenue Sydney, NSW, 2000 Telephone: +612 9335 7000 Website: www.kpmg.com.au 169 Cochlear Limited Annual Report 2023 Hear now. And always Cochlear is dedicated to helping people with moderate to profound hearing loss experience a world full of hearing. As the global leader in implantable hearing solutions, we have provided more than 700,000 devices and helped 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 next generation technologies. We collaborate with leading clinical, research and support networks to advance hearing science and improve care. 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 6353 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 follow the directions for use. Not all products are available in all countries. Please contact your local Cochlear representative for product information. ACE, Advance Off-Stylet, AOS, Ardium, AutoNRT, Autosensitivity, Baha, Baha SoftWear, BCDrive, Beam, Bring Back the Beat, Button, Carina, Cochlear, Sound, DermaLock, Freedom, Hear now. And always, Hugfit, Human Design, Hybrid, Invisible Hearing, Kanso, LowPro, MET, MP3000, myCochlear, mySmartSound, NRT, Nucleus, Osia, Outcome Focused Fitting, Off-Stylet, Piezo Power, Profile, Slimline, SmartSound, Softip, SoundArc, True Wireless, the elliptical logo, Vistafix, Whisper, WindShield and Xidium are either trademarks or registered trademarks of the Cochlear group of companies. , Cochlear SoftWear, Contour, , Contour Advance, Custom , コクレア コントゥア 코클리어 科利耳 , © Cochlear Limited 2023. D2121224 V1 2023-08 

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