Revenue

Revenue grew 30% to $452.3 million.

Revenue for cochlear implants increased by 24% to $379.9 million. This was driven by a 19% growth in unit sales to 12,901units, and an improved mix of sales into higher priced countries. Bilateral implants have been discussed for many years but in 2006 we saw a marked increase in interest in this area, particularly in the US.

This year, there was a full year of revenue contribution from the Baha business of $51.7 million compared to an initial four month revenue of $14.8 million recorded last financial year. In local currency, Baha sales grew 30% compared to the same prior corresponding period.

Revenue was improved as global market share increased. Also this year, our two largest regions, Americas and Europe, both grew well above their long-term growth profiles and this more than augmented the lower growth in Asia Pacific.

AIFRS

The Company adopted AIFRS effective from 1 July 2005. A change to reporting under AIFRS does not affect the cash flow generation of Cochlear and hence has not affected commercial decisions. A detailed account of the impact of the transition to AIFRS on Cochlear’s accounts is disclosed in Note 31 to the financial statements.

Core earnings

To assist with understanding of the accounts, Cochlear has also disclosed movements in core earnings to the ASX at the time of its half and full year announcements. A full reconciliation between reported and core earnings has been provided.

The three key differences between reported and core earnings are:

• all research and development is expensed as incurred in core earnings;
• there is no amortisation of acquired intangible assets in core earnings; and
• there is no expensing of share based compensation in core earnings.

There was $0.2 million of development expenditure capitalised this year, as product development had not reached the necessary AIFRS milestones in the year. Amortisation from prior years’ capitalisation was $2.4 million.

Cochlear’s aim is to grow core earnings by more than 20% per annum.

Research and development expense

Research and development costs expensed as incurred increased 27% to $56.7 million due to:

• additional costs of $1.3 million on the Baha product range as we ramped up research expenditure in line with our strategic intent to accelerate the technological advances possible; and
• a further $2.5 million on the joint venture DACS project. This project is important to our mid to long-term growth profile.

Foreign exchange

Over 95% of our sales and more than 50% of our expenses are in foreign currency. To help manage this risk, Cochlear maintains an active hedge book in line with a Board approved Foreign Exchange Policy. Details of the forward exchange contracts totalling $389 million as at 30 June 2006 (2005: $241 million) are included in Note 30 to the financial statements.

Foreign exchange gains of $20.7 million on hedged sales were lower than 2005 ($26.8 million) as the rates secured in prior years in line with policy were lower.

Balance sheet

Cash

Cash usage for the year was $21.0 million. This usage of cash was due to increases in receivables and inventories of $56.8 million as discussed below, debt repayment of $29.8 million and dividend payments to shareholders of $49.1 million. These usages more than offset the cash generated by the growth in revenue and profit.

Working capital

Debtors days were higher at 74 days (2005: 65 days). This is largely a result of having a full year impact in 2006 of going direct in countries with typically longer payment terms. This is in line with our revised targets for going direct. In addition, debtors days in the Americas region increased during the Nucleus Freedom launch period as focus was directed to market penetration. The debtors days are improving but are not yet back to last year’s levels.

Inventories of $76.8 million were higher than the previous year at $49.5 million. Finished goods of Cochlear implants and processors were below target levels at the end of the prior year and inventories are now at target levels of approximately two months forward sales of key products. There has also been a build of inventory for the backwards compatible Nucleus Freedom products ahead of market launch early in F07.

Intangible assets

Intangible assets of $205.2 million (2005: $194.3 million) increased predominantly due to the effect of movements in foreign exchange. Under AIFRS, all intangible assets were tested for impairment and no impairment charges were required.

Ten year performance summary

	2006 AIFRS	2005 AIFRS	2005 previous GAAP	2004 previous GAAP	2003 previous GAAP	2002 previous GAAP	2001 previous GAAP	2000 previous GAAP	1999 previous GAAP	1998 previous GAAP	1997 previous GAAP
Cochlear implant system sales (units)	12,901	10,802	10,802	9,306	9,328	7,845	6,482	4,941	4,128	3,507	3,128
Sales revenue ($million)	452.3	349.0	344.9	282.8	306.1	255.0	220.1	144.2	127.2	91.7	71.9
R&D expenditure ($million)	56.7	44.6	43.8	44.5	37.0	37.7(i)	27.7	20.9(ii)	13.5	11.6	10.6
EBITDA ($million)	127.6	94.2	88.5	54.9	87.9	56.2	49.0	33.0	25.8	19.3	15.9
EBIT ($million)	111.5	82.5	75.1	45.5	80.1	51.5	45.5	30.4	23.1	17.5	14.3
NPAT ($million)	80.0	59.6	54.5	36.8	58.2	40.1	31.2	20.2	16.3	13.3	10.8
Basic EPS (cents)	146.8	110.1	100.5	68.2	110.0	76.6	60.2	39.6	32.3	26.6	21.6
Core earnings ($million)	86.4	60.8	58.3	36.8	58.2	40.1	31.2	20.2	16.3	13.3	10.8
Core basic EPS (cents)	158.4	112.4	107.8	68.2	110.0	76.6	60.2	39.6	32.3	26.6	21.6
DPS (cents)	100.0	80.0	80.0	79.0	77.0	51.0	41.0	30.0	20.0	15.5	12.5
Closing share price ($)	54.63	39.20	39.20	22.72	32.30	34.05	39.00	28.76	12.00	6.27	4.30
Market capitalisation as at 30 June ($million)	2,985	2,123	2,123	1,231	1,714	1,788	2,029	1,469	606	313	215
Number of employees	1,100	982	982	816	814	722	639	543	432	376	350

(i) Excludes $5.2 million acquisition of core technology from Implex AG Hearing Technology.

(ii) Excludes $4.4 million acquisition of core technology from Philips Hearing Implants NV.

Cochlear Limited daily average share price vs All ordinaries index (accumulated total return)