Annual Report (ESEF) • Feb 8, 2022
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Download Source FileUntitled Annual Report 2021 Insights and highlights Our business Corporate information Financial report Back to content Key figures and financial ratios Demant - Annual Report 2021 1 Insights and highlights CEO letter 4 This is Demant 6 Sustainability 10 2021 in brief 13 Highlights in 2021 15 Group financial review 17 Outlook for 2022 24 Medium- to long-term outlook 25 Our business Hearing Healthcare 27 Hearing Aids 30 Hearing Care 33 Hearing Implants 35 Diagnostics 37 Communications 39 EPOS 40 Corporate information Shareholder information 44 Risk management activities 48 Corporate governance 52 Executive Board 55 Board of Directors 56 Financial report Management statement 59 60 Consolidated financial statements 64 Notes to consolidated financial statements 70 Parent financial statements 123 Contents Contents Click on the reports to read more Insights and highlights Our business Corporate information Financial report Back to content Key figures and financial ratios Demant - Annual Report 2021 2 Key figures and financial ratios – year (DKK million) Hearing Healthcare 17,235 13,163 14,946 13,937 13,189 31% -13% 4% 7% 9% 77.0% 73.6% 75.8% 77.4% 76.0% 3,508 1,211 2,085 2,428 2,295 20.4% 9.2% 14.0% 17.4% 17.4% Communications 1,183 1,306 - - - -9% - - - - 48.3% 50.3% - - - -122 102 66 104 43 -10.3% 7.8% - - - Group 18,418 14,469 14,946 13,937 13,189 18,388 14,469 14,946 13,937 13,189 27% -13% 4% 7% 9% 75.2% 71.5% 75.8% 77.7% 76.3% 74.8% 70.4% 75.8% 77.4% 76.0% 4,536 2,578 3,110 2,978 2,742 24.7% 17.8% 20.8% 21.4% 20.8% 3,386 1,313 2,151 2,652 2,504 18.4% 9.1% 14.4% 19.0% 19.0% 3,445 1,530 2,151 2,532 2,338 18.7% 10.6% 14.4% 18.2% 17.7% -202 -194 -240 -164 -111 2,528 1,134 1,467 1,830 1,759 (DKK million) 24,860 21,927 21,798 17,935 16,222 9,150 7,135 8,185 5,835 4,030 7,981 8,279 7,645 7,059 7,433 3,275 2,710 2,149 1,765 2,023 3,275 2,621 2,149 1,683 1,872 542 493 561 409 292 2,525 2,023 1,338 1,185 1,387 3,200 197 946 1,751 1,031 30.7% 14.3% 19.5% 25.7% 24.0% 32.1% 37.8% 35.1% 39.4% 45.8% 2.0 2.8 2.6 2.0 1.5 10.70 4.68 6.00 7.32 6.84 10.75 8.44 5.49 4.76 5.41 31.3 51.4 35.0 25.3 25.4 335.10 240.60 209.80 184.90 173.50 234.82 239.78 243.55 249.14 256.56 77,117 57,718 50,470 45,308 43,864 17,500 16,155 15,352 14,250 13,280 30,588 23,140 27,596 24,811 24,265 35 36 35 33 36 62/38% 60/40% *** *** *** 43/57% 42/58% 41/59% 37/63% *** 40/60% 40/60% 20/80% 20/80% 20/80% Insights and highlights Our business Corporate information Financial report Back to content Key figures and financial ratios Demant - Annual Report 2021 3 24,860 23,579 21,927 22,067 21,798 20,759 9,150 8,573 7,135 8,388 8,185 7,613 7,981 7,796 8,279 7,449 7,645 7,596 1,764 1,511 1,944 766 1,102 1,047 1,764 1,511 1,892 729 1,102 1,047 339 203 251 242 310 251 1,291 1,234 1,534 489 636 702 1,387 1,813 - 197 682 264 31.3% 28.3% 25.7% 3.2% 18.0% 21.0% 32.1% 33.1% 37.8% 33.8% 35.1% 36.6% 2.0 2.1 2.8 3.9 2.6 2.3 5.76 4.94 4.18 0.50 2.87 3.12 5.56 5.19 6.40 2.04 2.62 2.87 58.8 71.5 57.6 349.8 73.1 65.4 335.10 353.00 240.60 174.90 209.80 204.10 234.82 237.66 239.78 239.90 243.55 244.40 77,117 82,569 57,718 41,917 50,470 49,783 17,817 17,184 16,203 16,107 15,660 15,044 Key figures and financial ratios – half-year (DKK million) Hearing Healthcare 8,844 8,391 7,631 5,532 7,596 7,350 14% 55% 2% -27% 3% 5% 77.5% 76.5% 74.5% 72.3% 74.0% 77.6% 1,826 1,682 1,425 -214 1,000 1,085 20.6% 20.0% 18.7% -3.9% 13.2% 14.8% Communications 562 621 760 546 - - -27% 16% - - - - 48.2% 48.3% 52.9% 46.7% - - -78 -44 81 21 38 28 -13.9% -7.1% 10.7% 3.8% - - Group 9,406 9,012 8,391 6,078 7,596 7,350 9,376 9,012 8,391 6,078 7,596 7,350 10% 51% 2% -27% 3% 5% 75.8% 74.5% 72.5% 70.0% 74.0% 77.6% 75.0% 74.5% 72.1% 68.2% 74.0% 77.6% 2,374 2,162 1,949 629 1,528 1,582 25.3% 24.0% 23.2% 10.3% 20.1% 21.5% 1,748 1,638 1,506 -193 1,038 1,113 18.6% 18.2% 17.9% -3.2% 13.7% 15.1% 1,807 1,638 1,416 114 1,038 1,113 19.3% 18.2% 16.9% 1.9% 13.7% 15.1% -100 -102 -106 -88 -121 -119 1,345 1,183 1,013 121 700 767 Insights and highlights Our business Corporate information Financial report Back to content CEO letter Demant - Annual Report 2021 4 Interacting with the world enriches our life, and hearing is essential for our ability to share our thoughts, interact and connect with friends, family and colleagues. In short, to be actively engaged without constraints. In 2021, we once again saw that our pur- pose to create life-changing differences through hearing health is more meaningful than ever. The developments of the past year confirm our belief that the activities of this global hearing healthcare and audio technology Group are essential for people to be present and act in the world. Whether it is about helping people with hearing loss through diagnosis, care and cutting-edge technology or collaborating by means of audio and video solutions. Despite high ambitions from the beginning of the year, we upgraded our expectations of operating profit for the year three times in 2021, ending with a record-high EBIT. We can look back on a year where the Demant Group has proven healthy and where we once again showed that when we pull to- gether, we stand strong as a Group. Let me illustrate our progress through a few highlights from our business areas in 2021. Providing the best care Hearing Care our global network of clin- ics performed very well in 2021, as we continued to develop and train our staff, benefitted from the harmonisation of brands, exploited digital opportunities and expanded our clinic network. Our work to refine Audika Group, which comprises our well-reputed brands Audika, Hidden Hear- ing and HearingLife, and to disseminate personalised hearing care resulted in very strong performances in almost all countries. The good results in Hearing Care were firmly backed by the positive trends result- ing from the French hearing healthcare re- form, which offers a public/private treat- ment setting that has equal focus on qual- ity by offering high-quality hearing aids and on quantity by helping more people. The success of the reform is a testament to the strong model of combining personal- ised care with state-of-the-art technology. High standards for innovation erably by our innovation power in Hearing Aids. For the benefit of our customers and users, we completed the roll-out of premium products, Oticon More, Philips HearLink, Bernafon Alpha and Sonic Radiant, all based on a new technology platform. To- wards the end of the year, we had shipped more than one million premium hearing aids powered by an on-board Deep Neural Network that mimics the way the brain works a major advancement in artificial intelligence in hearing aid technology, I am proud to say. We are now looking forward to expanding and completing the product families, enabling us to help even more people hear better and experience the joy of a rich soundscape. Market leader in Diagnostics Having performed well for many years, our Diagnostics business has seen very positive development in 2021. If we look at the differ- ent areas, particularly balance equipment, hearing aid fitting equipment as well as ser- vice and calibration stood out in 2021 and contributed to the further consolidation of CEO letter 2021 was a great year for Demant. Our employees delivered an extra- ordinary effort to keep activities running at a high pace, leading to excel- lent results. We are in a very strong position and enter 2022 with great confidence in our new ambitious financial and sustainability targets. Insights and highlights Our business Corporate information Financial report Back to content CEO letter Demant - Annual Report 2021 5 our Diagnostics business area as market leader. Committed to high quality Up until the fourth quarter, Hearing Im- plants focused largely on product launches, most prominently the very successful intro- duction of Ponto 5 mini, est bone anchored sound processor, and on proval of our cochlear implants system Neuro in the US. In the second half-year, however, we had to shift focus in our coch- lear implants business, and for the first time ever, the Group performed a volun- tary field corrective action in relation to performance issues in a small subset of cochlear implants. We recalled a number of non-implanted Neuro Zti cochlear implants and by doing ment to only deliver products of the high- est quality. We deeply regret the inconven- ience this has caused our stakeholders and users, but we have done our utmost to han- dle the situation, and after having identi- fied the root cause, we have initiated the implementation of a solution to the issue. Expanding the business Our plans for the Communications busi- ness area revolve around expanding the business in several markets by establish- ing the EPOS brand as a strong premium brand in audio and also by offering video collaboration solutions. Our ambitious plans for EPOS are intact in a long-term perspective, but in a short-term perspec- tive, they have turned out to be more diffi- cult to realise than anticipated, so, on the back of an exceptional 2020, we saw a decline in revenue in 2021, albeit with an increase in the number of orders towards the end of the year. Sustainability progress At Demant, sustainability is embedded in our solutions and culture: Our core com- mitment to society is to help people over- come hearing loss and improve their qual- ity of life through care and innovative solu- tions. Our priority in 2021 has been to con- tinue to implement our sustainability strat- egy and to further develop our two main priorities, diversity and climate action. Sus- tainability is becoming an increasingly in- tegrated part of the way we work, which can be illustrated by the progress we have made with our two main priorities: We aspire to have zero environmental im- pact by 2050, and in 2021, we committed to the Science Based Targets initiative. With this Annual Report, we disclose our ambitious targets to reduce greenhouse gas emissions: By 2030, we must reduce our carbon footprint from own direct and indirect emissions by a minimum of 50% from a 2019 baseline year. We have also taken ambitious steps to assess and dis- close emissions from our entire value chain, which gives us a platform for submission of our targets and for validation of the tar- gets against the Science Based Targets in- itiative in 2022. The promotion of diversity was high on our agenda in 2021. The Demant Group em- ploys a diverse group of people from all parts of the world and with many different backgrounds, and our ability to embrace the strengths that this diversity brings to the table is one of the pillars of our suc- cess. Our key achievement in 2021 was the development of a diversity, equity and inclusion programme, which will along with an inclusion survey form the basis of policy-making and target-setting in the area of diversity in 2022. An aspect of inclusion is to succeed in pro- moting a unique culture, and to that end, we have adopted new ways of organising and leading by introducing global guide- lines on workplace flexibility in 2021. De- veloping and engaging employees is be- coming increasingly important in relation to the recruitment and retention of talent, and also in this area, we keep increasing our focus and activities. Positive outlook We owe our customers, shareholders and employees a very special thank you for their tireless and impressive commitment and support in 2021. Having now entered a new financial year, we continue, despite continuous corona- virus dynamics, to see a resilient hearing healthcare market with intact fundamental market drivers. In 2022, and in the years to come, we expect to see strong growth and market share gains. With an ambition to become world-lead- ing and a purpose to create life-changing differences through hearing health, we promise to keep delivering high-quality and individualised support to our users to enable them to get the maximum benefit of our solutions. Søren Nielsen We owe our customers, shareholders and employees a very special thank you for their tireless and impres- sive commitment and support in 2021. Insights and highlights Our business Corporate information Financial report Back to content This is Demant Demant - Annual Report 2021 6 Demant is a global hearing healthcare and audio technology Group that offers people the possibility to be actively engaged without constraints. We operate in niche markets with a number of major players, intense competition and a high level of in- novation. From this platform, we have added a growing business in premium audio and video solutions. As a Group, we have the scale necessary to compete effectively, and each of our business areas pursues its own strategy in such a way that we ensure a customer- centric approach, while leveraging synergies across the business. Demant thus has a unique position from which to grow and develop. This is Demant Insights and highlights Our business Corporate information Financial report Back to content This is Demant Demant - Annual Report 2021 7 At every touchpoint, Demant is active and engaged Hearing Care • Global network of more than 2,600 clin- ics, providing hearing care to people with hearing loss in more than 20 countries • Performing hearing tests and fitting hearing aids to help users get the right hearing aid for their specific hearing loss • Providing individualised counselling and service as well as care and aftercare to ensure that every user gets the best so- lution and every hearing aid provides maximum benefits for the user Hearing Aids • Covering all ranges of hearing loss from mild to profound • centre of excellence for research in audi- ology and hearing loss and the develop- ment of hearing aids • Manufacturing and distributing hearing aids to hearing clinics, benefitting people in more than 100 countries • Providing local service, support and training of hearing care professionals Hearing Implants • Providing implantable hearing solutions to patients facing the hardest hearing challenges • Helping people hear better by means of cochlear implants and bone anchored hearing systems that can bypass the challenged parts of the inner, outer or middle ear • Performing surgical procedures at hospi- tals or in outpatient settings Diagnostics • Developing, manufacturing and market- ing a wide range of solutions for hearing and balance assessment, including in- struments, consumables, services and installation • Offering products that include audiome- ters, ABR equipment for hearing screen- ing of new-borns, tympanometers, hear- ing aid fitting solutions, balance equip- ment, otoacoustic emission instruments and other solutions used by audiologists, ENT doctors and healthcare professionals Communications • Designing, manufacturing and selling pioneering high-end audio and video so- lutions for business professionals and serious gamers, including headsets, speakerphones, video conferencing de- vices, software and accessories • Building expertise and operating under the EPOS brand in a global market with offices and partners in more than 60 countries Demant - Annual Report 2021 7 Insights and highlights Our business Corporate information Financial report Back to content This is Demant Demant - Annual Report 2021 8 Purpose and strategy To create life-changing differences through hearing health Demant is a global hearing healthcare and technology Group built on a heritage of care, health and innovation since 1904. The Group offers solutions and services to help people connect and communicate with the world around them. In the Demant Group, our roots are in hearing health, and our shared purpose is to create life-changing differences through hearing health. Our purpose is based on our past, present and future. It sums up why Demant exists and our legacy to the world. And it captures that what we deliver to individuals and society matters. Insights and highlights Our business Corporate information Financial report Back to content This is Demant Insights and highlights Our business Corporate information Financial report Back to content This is Demant Demant - Annual Report 2021 9 Strategic ambition: Becoming the world’s leading hearing healthcare company Our ambition is to further expand our posi- tion as a leading global hearing healthcare company with the broadest, deepest and most innovative product and service offer- ings in the industry. Historically and cur- rently, our strategy is to operate multiple businesses that share important synergies in such areas as technology, distribution and global infrastructure. We build on four enablers: a strong organ- isation, focus on people & culture, commit- ment to sustainability and a well-founded operating model, all designed to serve our purpose and enable us to execute our strategy: Organisation All our business areas have dedicated or- ganisations to enable them to service their individual markets, ensure a customer- centric approach and execute their specific strategic initiatives. Each business area is supported by a global shared service set- up to enable the business area to exploit the competitive advantages and econo- mies of scale that derive from being part of a large Group. People & culture Our employees are our most valuable re- source and key to executing our strategy. The people & culture agenda is based on a set of global focus areas and initiatives. We strive to drive strong employee en- gagement, and we believe that world- class leadership is key to attracting and retaining the brightest minds in the indus- try, including leaders that do their utmost to create engagement and an innovative work environment. Furthermore, diversity, equity and inclusion are important drivers for us, not only with a view to attracting talent broadly but also to remaining an open, fair and inclusive Group that nur- tures diversity. Sustainability We are an impact business and contribute positively to society. By contributing directly and indirectly to the sustainable develop- ment goals, we take part in solving global challenges, while ensuring sustainability in our operational practices. Our strategy en- tails a range of sustainability efforts that we elaborate on in the Sustainability sec- tion. Operating model Our operating model is based on a strat- egy to ensure dedicated focus on excelling in the different business areas and equally important to harvest synergies across the Group in innovation, infrastructure and distribution. The operating model supports a strong collaboration culture across busi- ness areas. There is a clear technology overlap between hearing aids and hearing implants and also between hearing aids and headsets, and we exploit the syner- gies, but essentially, Hearing Healthcare and Communications address different markets in different ways and are run as two individual segments. Innovation is the core driver of our operat- ing model, and it is a key objective for Demant to become the leading global hearing healthcare company. Hence, Demant will continue to invest heavily in R&D and focus on harvesting synergies across our R&D functions. In the coming years, we will therefore keep a steady and high cadence when it comes to launching new and innovative products. Insights and highlights Our business Corporate information Financial report Back to content Sustainability Demant - Annual Report 2021 10 Sustainability contribution to a healthy society has always driven our business, and every day, our employees strive to make life-changing differences for millions of people. As a hearing healthcare and technology Group with a broad range of business activities, our Sustainability Strategy must embrace both the similarities and differences between our individual business areas, company brands and geographical locations. Insights and highlights Our business Corporate information Financial report Back to content Sustainability Our Sustainability Strategy at a glance Insights and highlights Our business Corporate information Financial report Back to content Sustainability Demant - Annual Report 2021 11 Sustainability highlights With a new Group Sustainability Strategy in hand, we have strengthened our sustainability performance and continued our work to integrate sustainability considerations in everything we do. Important milestones of the year were the advancements we have made on our two main sustainability priorities: diversity, equity and inclusion and climate impact (see next page). However, the Group made progress in all material areas of our strategy. Facilitated the hearing screening of approx. 20 million children 11 million years with improved quality of life based on the lifetime of fitted hearing aids Above 75,000 hearing implant users living with profound, conductive or single-sided hearing loss had an Oticon Medical implant Supported more than 4 million with headsets for collaborative work and gaming Facilitated the screening and diagnosing of over 200 million people with suspected hearing loss More than 100 bachelor and master projects and 73 PhD studies across different fields Insights and highlights Our business Corporate information Financial report Back to content Sustainability Demant - Annual Report 2021 12 New position on diversity, equity and inclusion Commitment to the Science Based Targets initiative Overview of scope 3 emissions Large donations by William Demant Foundation New Data Ethics Policy To guide our work and form the basis for a new policy and target- setting for diversity, equity and inclusion (DE&I), we launched a global DE&I position, which identi- fies initial activities and focus ar- eas for the policy and programme work ahead. The work includes the development of a DE&I base- line check, DE&I leadership train- ing and initiatives to increase the number of female managers in senior management. Demant joined the Science Based Targets initiative (SBTi), commit- ting the company to set targets in line with what climate science deems necessary to limit global warming to 1.5°C. Based on this scenario and our baseline data, Demant targets minimum 50% reduction of scope 1 and 2 emissions in 2030 with 2019 as the baseline year and net-zero emissions in scope 1, 2 and 3 before 2050. We conducted a thorough materi- ality assessment to identify the categories that are most material for Demant to work on to reduce our scope 3 emissions. The assessment showed that our scope 3 emissions amount to approx. 500,000 tonnes of CO2e a year. Of the 15 categories de- fined by the greenhouse gas (GHG) protocol, our purchased goods and services account for most of our scope 3 emissions. William Demant Foundation granted a total of DKK 124.1 mil- lion to 1,627 projects in 2021 of which amount DKK 71.4 million was allocated to projects to pre- vent and alleviate hearing loss. The remaining amount was allo- cated to cultural, social and hu- manitarian causes and education. William Demant Foundation rein- vests in society by donating to al- truistic causes and by expanding its sustainable investments. Since 1957, the Foundation has donated more than DKK 1 billion. Our new Data Ethics Policy adds an extra layer of protection to by going beyond legal requirements and comprising all types of data beyond personal data. The Data Ethics Policy applies glob- ally, and it is mandatory for management and employees in the companies belonging to the Demant Group to comply with the policy. Sustainability reporting In the context of our annual reporting, Demant publishes a sepa- rate Sustainability R on Progress report to the United Nations Global Compact and as the statutory report to be presented under sections 99a, 99b, 99d and 107d of the Danish Financial Statements Act. It also includes the disclosure requirements of the EU taxonomy for sustainable activities. The full report is available on our website: www.demant.com/about/sustainability DKK MILLION 124.1 Insights and highlights Our business Corporate information Financial report Back to content 2021 in brief Demant - Annual Report 2021 13 2021 in brief Group revenue Revenue by business area Gross margin 75.2% EBIT 3,386 DKK MILLION EBIT MARGIN 18.4% North America 39% Europe 44% Asia 8% Pacific 6% Other 2% Revenue by geographic region FY 2021 Hearing Aids DKK 7,347 MILLION Communications DKK 1,183 MILLION Diagnostics DKK 1,823 MILLION Hearing Implants DKK 512 MILLION Hearing Care DKK 7,553 MILLION Hearing Healthcare DKK 17,235 MILLION FY 2021 DKK 18,418 MILLION 27% growth DKK 9,012 MILLION 48% growth DKK 9,406 MILLION 12% growth 41% 3% 10% 6% 40% H1 H2 Financial results are based on adjusted figures, i.e. figures are shown before net positive one-offs. Insights and highlights Our business Corporate information Financial report Back to content 2021 in brief Demant - Annual Report 2021 14 Hearing Healthcare Communications Hearing Healthcare saw high growth throughout the year, reflecting very strong business performance and low comparative figures. Communications saw a slowdown in revenue compared to the strong 2020, resulting in negative EBIT, but momentum improved towards the end of the year. Earnings per share (Group) Cash flow from operating activities (Group) GROWTH 32% IN LOCAL CURRENCIES GROWTH -9% IN LOCAL CURRENCIES EPS 10.70 DKK CFFO 3.3 DKK BILLION 1.35 DKK BILLION INVESTED IN R&D 18,116 EMPLOYEES EBIT 3,450-3,750 DKK MILLION Outlook for the Group in 2022 ORGANIC GROWTH 5-9% SHARE BUY-BACKS >2.5 DKK BILLION EBIT MARGIN -10.3% EBIT MARGIN 20.4% EBIT -122 DKK MILLION EBIT 3,508 DKK MILLION Insights and highlights Our business Corporate information Financial report Back to content Highlights in 2021 Demant - Annual Report 2021 15 Highlights in 2021 Interacoustics launches Luna, a ground-breaking audiometer built into a headset Bernafon celebrates its 75-year anniversary New Oticon research shows that wearing effective hearing aids could reduce stress EPOS teams up with Aston Martin Cognizant Formula One Team Oticon More sparks US success within Veterans Affairs Oticon Medical receives FDA pre-market approval of the Neuro cochlear implant system EPOS takes the first steps into the video collaboration space with EXPAND Vision 3T Hearing Aids reduces plastic waste by 11.5 tonnes Demant signs pledge to increase gender diversity Read more at demant.com/investor-relations/annual-report-2021 Audika: At the forefront of digital innovation within digital marketing and modern learning Insights and highlights Our business Corporate information Financial report Back to content Highlights in 2021 Demant - Annual Report 2021 16 Visual reinforcement helps screen difficult-to-test children EPOS launches gaming headset series H6PRO – the hero product in the portfolio Demant expands production capacity in the North American region with new factory New device ensures CI users’ access to 3T MRI scans William Demant Foundation donates DKK 3.5 million to UNICEF to fight coronavirus Oticon MyMusic captures CES 2022 Innovation Award Oticon Medical launches new processor for Bone Anchored Hearing Systems Oticon Medical introduces one-step drilling procedure for Bone Anchored Hearing Systems Demant commits to setting ambitious climate targets through the Science Based Targets initiative Audika continues to expand the business through acquisitions Read more at demant.com/investor-relations/annual-report-2021 Insights and highlights Our business Corporate information Financial report Back to content Group financial review Demant - Annual Report 2021 17 Group financial review FY 17,235 1,183 18,418 14,469 27% -30 18,388 14,469 27% -3,962 -612 -4,574 -4,129 11% -60 -4,634 -4,276 8% 13,273 571 13,844 10,340 34% -90 13,754 10,193 35% 77.0% 48.3% 75.2% 71.5% - 74.8% 70.4% -1,153 -197 -1,350 -1,261 7% - -1,350 -1,261 7% -7,837 -464 -8,301 -6,978 19% 60 -8,241 -7,067 17% -895 -32 -927 -840 10% -10 -937 -840 12% 120 - 120 52 131% - 120 505 -76% - - - - - 99 99 - - 3,508 -122 3,386 1,313 158% 59 3,445 1,530 125.2% 20.4% -10.3% 18.4% 9.1% - 18.7% 10.6% - Insights and highlights Our business Corporate information Financial report Back to content Group financial review Demant - Annual Report 2021 18 H1 (DKK million) 8,391 621 9,012 6,078 48% - 9,012 6,078 48% -1,973 -321 -2,294 -1,823 26% - -2,294 -1,932 19% 6,418 300 6,718 4,255 58% - 6,718 4,146 62% 76.5% 48.3% 74.5% 70.0% 74.5% 68.2% -564 -91 -655 -618 6% - -655 -618 6% -3,807 -233 -4,040 -3,455 17% - -4,040 -3,492 16% -422 -20 -442 -388 14% - -442 -388 14% 57 - 57 13 338% - 57 466 -88% - - - - - - - - - 1,682 -44 1,638 -193 - - 1,638 114 1337% 20.0% -7.1% 18.2% -3.2% 18.2% 1.9% - H2 (DKK million) 8,844 562 9,406 8,391 12% -30 9,376 8,391 12% -1,989 -291 -2,280 -2,306 -1% -60 -2,340 -2,344 -0% 6,855 271 7,126 6,085 17% -90 7,036 6,047 16% 77.5% 48.2% 75.8% 72.5% 75.0% 72.1% -589 -106 -695 -643 8% - -695 -643 8% -4,030 -231 -4,261 -3,523 21% 60 -4,201 -3,575 18% -473 -12 -485 -452 7% -10 -495 -452 10% 63 - 63 39 62% - 63 39 62% - - - - - 99 99 - - 1,826 -78 1,748 1,506 16% 59 1,807 1,416 28% 20.6% -13.9% 18.6% 17.9% 19.3% 16.9% - Insights and highlights Our business Corporate information Financial report Back to content Group financial review Demant - Annual Report 2021 19 Introduction Unless otherwise indicated, the commen- tary below on our financial results is based on adjusted figures, i.e. 2021 and 2020 figures are shown before one-offs. For detailed financial reviews of our Hearing Healthcare and Communications segments, please refer to page 27 and 39, respectively. Revenue After seeing strong growth in H1 driven primarily by Hearing Healthcare due to strong market recovery, strong performance and low comparative figures, growth natu- rally moderated in H2 from the high level at the beginning of the year. Revenue for H2 amounted to DKK 9,406 million, corre- sponding to a growth rate of 11% in local currencies. Organic growth was 10% and growth from acquisitions was 1%. Ex- change rates (FX) had an impact of 1%, including exchange rate hedging, and total reported growth for H2 was 12%. For the full year, Group revenue amounted to DKK 18,418 million, corresponding to a growth rate of 28% in local currencies. Organic growth was 27%, which is within the updated organic growth guidance of 26-30% for 2021. Acquisitive growth was 1%. Exchange rates had an impact on rev- enue of -1%, and total reported growth for the period was 27%. In terms of geography, revenue in Europe continued to see growth in H2, albeit at a lower growth rate than in H1. The growth rate in H1 was driven particularly by a low comparative base and the significant posi- tive impact of increased hearing aid reim- bursement in France. During H2, we saw continuous improvement in many commer- cial markets, whereas the public channels remained a drag on growth. In North America, we saw the strongest growth in H2, primarily due to market share gains in Hearing Aids and Diagnostics. Our Asia and Other countries regions also de- livered solid growth throughout H2, HEARING HEALTHCARE 17,235 DKK MILLION (+31%) COMMUNICATIONS 1,183 DKK MILLION (-9%) GROUP REVENUE 18,418 DKK MILLION (+27%) Growth rates by business segment 55% 14% 31% 2% 1% 1% 57% 15% 32% -5% 1% -1% 52% 16% 31% 16% -27% -9% 0% 0% 0% 16% -27% -9% -2% 1% 0% 14% -26% -9% 51% 10% 27% 2% 1% 1% 53% 11% 28% -5% 1% -1% 48% 12% 27% Insights and highlights Our business Corporate information Financial report Back to content Group financial review Demant - Annual Report 2021 20 whereas our Pacific region was impacted by lockdowns at the beginning of H2. Gross profit 17% to DKK 7,126 million in H2, corresponding to a gross margin of 75.8%. This is an in- crease of 3.3 percentage points compared to H2 2020 driven by continuously good performance in Hearing Healthcare, which delivered efficiency improvements. The gross margin in Communications declined due to the slowdown in revenue and a high comparative base from H2 2020. Relative to H1, our gross margin increased by 1.3 percentage points driven by strong perfor- mance in Hearing Healthcare. Both our business segments saw an increased impact of the current supply chain dynam- ics, which we estimate had a negative im- pact on the gross margin for the Group of approx. 0.5 percentage point in H2. amounted to DKK 13,844 million, corre- sponding to a gross margin of 75.2%, or an increase of 3.7 percentage points. The increase is primarily related to improved performance in Hearing Healthcare and a low comparative base in 2020 due to coronavirus. Operating expenses (OPEX) Through 2021, we have gradually scaled up OPEX spending, as the hearing health- care market has further normalised. In H2, OPEX growth was 15% in local currencies compared to 2020. In organic terms, OPEX increased by 14% in H2, which first and foremost reflects significant coronavirus- related cost savings in the comparative period, including government support schemes, and a gain from the reversal of part of a provision for bad debt. Distribu- tion costs were the primary driver, but we also continued to increase spending on R&D and administrative activities. Acquisitions added slightly to distribution costs as we continued our strategic acqui- sitions in Hearing Care. As previously communicated, we realised temporary savings of approx. DKK 150- 200 million in H1 due to the coronavirus pandemic, but our cost base was largely normalised at the beginning of H2. For the full year, OPEX increased by 17% in local currencies of which 15 percentage points were organic growth and 2 percent- age points relate to acquisitions. Five-year OPEX (DKK million) 7,741 8,386 9,392 9,079 10,578 0 2,500 5,000 7,500 10,000 12,500 2017 2018 2019 2020 2021 Revenue by geographic region (DKK million) 4,074 3,850 6% 6% 5% 3,768 3,082 22% 21% 20% 541 526 3% 0% 0% 811 738 10% 10% 10% 212 195 9% 6% 5% 9,406 8,391 12% 11% 10% Operating expenses (OPEX) by function (DKK million) 695 643 8% 8% 8% 4,261 3,523 21% 18% 16% 485 452 7% 6% 6% 5,441 4,618 18% 15% 14% Revenue by geographic region H2 2021 Europe 43% North America 40% Pacific 6% Asia 9% Other countries 2% Insights and highlights Our business Corporate information Financial report Back to content Group financial review Demant - Annual Report 2021 21 Operating profit (EBIT) EBIT for H2 amounted to DKK 1,748 mil- lion. Hearing Healthcare contributed DKK 1,826 million and Communications DKK -78 million. Compared to H2 2020, growth in EBIT was 16%. The resulting EBIT mar- gin for H2 was 18.6%, which is an increase of 0.7 percentage point. The EBIT margin was negatively affected by a slowdown in our Communications business from around mid-March, which carried into H2, and by our voluntary field corrective action in Hearing Implants in October 2021. However, very strong performance in the remaining part of Hearing Healthcare, in- cluding material tailwind from the hearing healthcare reform in France and an improv- ing gross margin despite supply chain headwinds, substantially outweighed these negative impacts, and the Group delivered the strongest EBIT in any half- year in the history of the company. EBIT for the full year amounted to DKK 3,386 million, corresponding to an EBIT margin of 18.4%. In 2021, we recognised certain one-off items with a combined net positive impact on EBIT of DKK 59 million. These items all relate entirely to H2 and comprise the fol- lowing elements: • A gain of DKK 99 million related to the divestment of our 75% ownership of FrontRow Calypso LLC. The divestment had a positive effect of DKK 161 million on the cash flow. The gain from this di- vestment is recognised in Other operat- ing income. • A net negative effect of DKK -100 mil- lion from the voluntary field corrective action in our Hearing Implants business. The adjustments are recognised with DKK -30 million in revenue, DKK -60 million in production costs and DKK -10 million in administrative expenses but had no cash flow effect in 2021. • A positive impact of DKK 60 million from the reversal of part of a provision for ad- ditional bad debt recognised in H1 2020, which is no longer deemed appropriate. Originally, the provision amounted to DKK 150 million, but DKK 50 million was reversed in H2 2020, and DKK 40 million has been realised. The reversal is recog- nised in distribution costs and has no cashflow effect. after one-offs amounted to DKK 1,807 mil- lion in H2 and to DKK 3,445 million for the full year. As a consequence of our acquisition strat- egy, we realised certain fair value adjust- ments of non-controlling interests in step acquisitions, of contingent considerations etc. These totalled a net positive fair value adjustment of DKK 64 million (DKK 17 mil- lion in 2020, excluding the effect of the consolidation of EPOS). Please refer to Note 6.1 for more details. Financial items Reported net financial items for H2 amounted to DKK -100 million, or a de- crease of DKK 6 million on the same period in 2020. For the full year, net financial items amounted to DKK -202 million, or an in- crease of DKK 8 million on 2020. Profit for the year H2 amounted to DKK 1,707 million, or an increase of 30% compared to the same period in 2020. Tax amounted to DKK 362 million, resulting in an effective tax rate of 21.2%, which was positively impacted by certain R&D tax credits. For the full year, profit before tax amounted to DKK 3,243 million, or an increase of 143% on 2020, while tax amounted to DKK 715 million. The resulting effective tax rate was 22.0%, which is slightly below our guidance of 23%. This is a significant increase of 6.4 percentage points from 2020, which reflects that in 2020, the Group was exempt from paying tax on the positive one-off fair value adjustment related to the consolidation of EPOS. Reported net profit for H2 was DKK 1,345 million, or an increase of 33% on H2 2020, resulting in earnings per share (EPS) of DKK 5.76, which is an increase of 38% from DKK 4.18 in H2 2020. For the full year, net profit was DKK 2,528 million, or an increase of 123%, resulting in EPS of DKK 10.70. As outlined earlier, growth rates in net profit and EPS were driven by low comparative figures, continued recovery after the coronavirus pandemic and strong business performance. At the annual general meeting, the Board of Directors will propose that the entire profit for the year be retained and trans- Earnings per share (EPS) (DKK per share) 6.84 7.32 6.00 4.68 10.70 0.00 2.00 4.00 6.00 8.00 10.00 12.00 2017 2018 2019 2020 2021 Adjusted full-year EBIT (DKK million) * EBIT for 2019 was negatively impacted by DKK 550 million as a result of the IT incident. Adjusted half-year EBIT (DKK million) * EBIT for H2 2019 was negatively impacted by DKK 550 million as a result of the IT incident. 2,504 2,652 2,151 1,313 3,386 0 750 1,500 2,250 3,000 3,750 2017 2018 2019 2020 2021 1,113 1,038 -193 1,506 1,638 1,748 -500 0 500 1,000 1,500 2,000 H1 2019 H2 2019 H1 2020 H2 2020 H1 2021 H2 2021 Insights and highlights Our business Corporate information Financial report Back to content Group financial review Demant - Annual Report 2021 22 Cash flow statement In H2 2021 operating activities (CFFO) declined by 7% to DKK 1,764 million, and we saw an in- crease in net working capital, as revenue continued to grow in H2. CFFO for the full year amounted to DKK 3,275 million, cor- responding to an increase of 25% com- pared to 2020. One-offs did not have any effect on CFFO in 2021. In H2, our net investments in tangible and intangible assets (CAPEX) amounted to DKK 432 million, which is an increase of 27% on H2 2020. The increase is mainly related to timing. For 2021 as a whole, CAPEX increased by 3% to DKK 706 mil- lion and ended slightly below 4% of reve- nue, which we view as the medium- to long-term level. Net investments in other non-current assets, which comprise customer loans, amounted to DKK 41 million in H2, a minor increase compared to DKK 18 million in H2 2020. For the full year, net investments in other non-current assets amounted to DKK 44 million. Our net investments to- talled DKK 750 million in 2021. Free cash flow before acquisitions and divestments decreased by 16% to DKK 1,291 million in H2 but increased by 25% to DKK 2,525 million for the year as a whole. Cash flow relating to acquisitions and di- vestments increased by 40% to DKK 141 million in H2. This includes the divestment of FrontRow Calypso LLC, which benefit- ted our cash flow by DKK 161 million. Ad- justed for this, cash flow related to acquisi- tions and divestments increased by 199% to DKK 302 million, as the comparative pe- riod saw a temporary pause in transactions during the coronavirus pandemic. This level has now normalised. For the full year, cash flow relating to ac- quisitions and divestments amounted to DKK 547 million, an increase of 39%. Ad- justed for the divestment of FrontRow Calypso LLC, cash flow from acquisitions and divestments increased by 80% due to the temporary pause in M&A activities in 2020. Share buy-backs amounted to DKK 1,387 million in H2 and DKK 3,200 million for 2021 as a whole. Other financing activities amounted to DKK 179 million in H2, which mainly stems from changes in short-term bank facilities. The net cash flow in H2 was DKK -58 million. For the full year, the net cash flow was DKK 199 million. CFFO (DKK million) CAPEX (DKK million) 1,872 1,683 2,149 2,621 3,275 0 750 1,500 2,250 3,000 3,750 2017 2018 2019 2020 2021 418 598 756 667 706 0% 2% 4% 6% 0 200 400 600 800 2017 2018 2019 2020 2021 CAPEX CAPEX % of sales Cash flow by main items (DKK million) 1,764 1,944 3,275 2,673 -9% 23% - -52 - -52 n.a n.a 1,764 1,892 3,275 2,621 -7% 25% -473 -358 -750 -598 32% 25% 1,291 1,534 2,525 2,023 -16% 25% -141 -101 -547 -394 40% 39% -1,387 - -3,200 -197 n.a 1524% 179 -1,381 1,421 -1,238 n.a n.a -58 52 199 194 n.a 3% Insights and highlights Our business Corporate information Financial report Back to content Group financial review Demant - Annual Report 2021 23 Balance sheet As of 31 December 2021 assets amounted to DKK 24,860 million, which is an increase of 5% compared to 30 June 2021. The increase is primarily due to an increase in goodwill, mostly related to acquisitions, and higher inventories. The increase in total assets relative to sales remained largely unchanged in H2 com- pared to H1. Relative to the end of 2020, total assets increased by 13%, partly driven by acqui- sitive growth of 4%, primarily in the form of goodwill. Organic growth in total assets was 6%, driven mainly by higher invento- ries and receivables, which increased con- currently with the . Ex- change rate effects were 3%. Reflecting continued tight working capital capital was DKK 3,025 million at the end of 2021, an increase of 5% since 30 June 2021. Relative to the end of 2020, our net working capital increased by 23%. The higher net working capital levels reflect the increased activity level. Please refer to Note 9.1 for our definition of net working capital. In 2021, our net interest-bearing debt (NIBD) increased by 7% in H2 and by 28% for the full year and amounted to DKK 9,150 million at 31 December 2021. De- spite the increase during 2021, our current gearing (NIBD/EBITDA) was 2.0, which is at the lower end of our gearing target of 2.0-2.5. The significant decrease in our gearing from 2.8 in 2020 is driven by strong development in our profits. The increase in net interest-bearing debt can mainly be attributed to short- to medium- term financing. Total equity increased by 2% in H2 to DKK 7,981 million of which DKK 4 million is at- tributable to non-controlling interests and DKK 7,977 million to the shareholders of Demant A/S. The increase was mainly a result of the profit and positive customary currency translation adjust- ments of subsidiaries reported as other comprehensive income, which more than offset share buy-backs during the period. Positively impacted by strong profit and currency translation but offset by increased share buy-backs, equity for the full year decreased by 4%. Share buy- balance sheet totalled 9,763,327 shares bought at an average price of DKK 321.97, totalling DKK 3,143 million. The difference between this amount and the DKK 3,200 statement relates to shares bought back as part of a voluntary share salary ar- rangement offered to most Danish em- ployees. These shares are expensed as OPEX in the income statement and amounted to DKK 57 million in 2021. Employees As of 31 December 2021, the Group had 18,116 employees (2,171 in Denmark) compared to 17.556 (2,069 in Denmark) as of 30 June 2021, an increase of 3% of which 2 percentage points were organic. The total number of employees increased by 9% for the full year relative to the 16,591 employees (2,016 in Denmark) at the end of 2020. The increase relates to staffing at our production sites and to acquisitions. Events after the balance sheet date There have been no events that materially change the assessment of this Annual Report 2021 from the balance sheet date and up to today. Balance sheet by main items (DKK million) 2,079 2,024 1,847 3% 13% 14,895 14,064 13,393 6% 11% 2,366 2,088 1,968 13% 20% 3,203 3,140 2,808 2% 14% 1,172 1,221 952 -4% 23% 1,145 1,042 959 10% 19% 24,860 23,579 21,927 5% 13% 7,981 7,796 8,279 2% -4% 2,121 2,077 1,893 2% 12% 4,296 4,728 4,837 -9% -11% 808 753 802 7% 1% 9,654 8,225 6,116 17% 58% 24,860 23,579 21,927 5% 13% Insights and highlights Our business Corporate information Financial report Back to content Outlook for 2022 Demant - Annual Report 2021 24 Our outlook for 2022 is summarised in the table above. In the following sections, we provide commentary on recent develop- ments in our markets as well as on the key expectations on which the outlook is based. Recent developments In 2021, the hearing healthcare market saw strong recovery, albeit with large dif- ferences between regions and between the three market segments that we address: hearing aids, hearing implants and diag- nostic solutions. At the very end of the year, however, we saw a slight softening of demand in some markets due to rapid increases in infection rates, and in some areas, coronavirus also made it difficult to fully staff hearing aid clinics. At the beginning of 2022, we have seen impacts of coronavirus in some markets, but we consider these impacts to be temporary and underlying market fundamentals to be intact. The market for audio and video solutions for enterprises and gaming saw mixed developments in 2021, but we consider demand to have largely normalised at the beginning of 2022. In the first part of the year, the market may, however, be nega- tively impacted by the current global sup- ply chain dynamics. Outlook expectations Given these recent developments, our out- look for 2022 is clearly subject to greater uncertainty than usually. Below, we high- light the key expectations on which our outlook is based: • The hearing healthcare market to nor- malise, resulting in unit growth in the hearing aid market of 4-6% and addi- tional growth due to the release of some pent-up demand, albeit with significant differences between individual markets and channels. Such differences will not least be driven by different comparative bases going into the year. Due to changes in geography and channel mixes, we expect ASP growth in the hearing aid market to be slightly more negative in 2022 than the normal 1-2% annual decline. • Growth in the French hearing aid mar- ket to be negative in 2022 following the extraordinary demand in 2021, which enue by DKK 300 million and EBIT by DKK 150 million. We do not expect this benefit to recur. • The market for enterprise and gaming headsets and video solutions to grow in line with the estimated structural growth level of around 12%. • Both segments, Hearing Healthcare and Communications, to gain market share in 2022, but Communications to realise double-digit negative organic revenue growth in Q1 2022 due to very high comparative figures. • The supply chain situation to remain dy- namic throughout the year and to result in higher-than-normal component costs and freight charges with an impact that is roughly similar to the impact in 2021 but with no material disruption to sales activities. • see no bene- fit from temporary cost savings in 2022, which we estimate amounted to DKK 150-200 million in H1 2021. • Sales of new cochlear implants to be resumed in Q3 2022 and to be gradu- ally ramped up. • Communications to realise a slightly negative EBIT in 2022. Outlook for 2022 Metric Outlook for 2022 Organic growth 5-9% Acquisitive growth 1% based on revenue from acquisitions completed as of 7 February 2022 FX growth 2% based on exchange rates as of 7 February 2022 and including the impact of exchange rate hedging EBIT DKK 3,450-3,750 million Effective tax rate 22-23% Gearing Gearing in line with medium- to long-term target of 2.0-2.5 (NIBD relative to EBITDA) Share buy-backs At least DKK 2.5 billion Insights and highlights Our business Corporate information Financial report Back to content Medium- to long-term outlook Demant - Annual Report 2021 25 At Demant, a key objective is to continue our long-standing track record of growing our business. Thus, our ambition is to fur- ther expand our position as a leading global hearing healthcare company by offering the broadest, deepest and most innovative portfolios of products and ser- vices, while succeeding in the highly at- tractive and fast-growing market for premium audio and video solutions. Our markets At their core, the two markets that we address today, hearing healthcare and audio and video solutions for enterprises and gaming, both benefit from strong structural drivers of demand: As regards our Hearing Healthcare segment, the market is first and foremost driven by favourable demographic trends, including the increasing size of the ageing population and the increasing average life expectancy. At the same time, penetration rates are increasing in several emerging markets, as awareness of hearing defi- ciencies grows, hearing healthcare infra- structures improve and purchasing power increases. The coronavirus pandemic has naturally impacted the market in 2020 and 2021, but we believe that the structural growth drivers are intact and that the market could even see tailwind from the release of some pent-up demand in the coming years. With regard to our Communications seg- ment, the market for audio and video solu- tions for enterprises is driven by the secu- lar trend of increasing virtual collaboration and digital communication. The corona- virus pandemic has significantly acceler- ated the adoption of virtual collaboration tools, and we expect continuous growth headsets are concerned, the key driver is increasing focus on home entertainment, including gaming, and the increasing extent to which gaming involves live com- munication between players. Our ambitions In Hearing Healthcare, we aim to gain market share in organic terms in all our business areas in the medium to long term. This translates into an organic growth rate of at least 5% p.a. In Communications, we aim to grow reve- nue in organic terms at least in line with the market growth rate, implying an organic growth rate of at least 12% p.a. For the Group, we aim to deliver organic growth of 6-8% p.a., which is in line with our historical performance. Additionally, we expect to add 1-2% p.a. to growth from bolt-on acquisitions, primarily in our Hearing Care business. Consequently, we 7-10% p.a. in local currencies. We aim to increase EBIT margins in each of our business areas. In Hearing Aids, Hearing Care and Diagnostics, we expect the potential for improvement to be incre- mental as we further grow these busi- nesses, whereas the potential is trans- formative in Hearing Implants and Com- munications, which were both loss-making in 2021. For the Group, the EBIT margin is subject to changes in our business mix. We expect to invest around 4% of the assets, and we will continue to prioritise value-adding acquisitions. We target a gearing of 2.0-2.5, and subject to this, we will return any excess free cash flow after acquisitions to our shareholders in the form of share buy-backs. Medium- to long-term outlook Metric Medium- to long-term outlook Revenue growth 7-10% p.a. in local currencies with organic growth of 6-8% p.a. and acquisitive growth of 1-2% p.a. EBIT margin We aim to increase EBIT margins in each of our business areas over time. For the Group as a whole, the EBIT margin is subject to changes in business mix as well as to acquisitions and exchange rate effects CAPEX revenue in tangible and intangible assets (excluding customer loans and acquisitions) Gearing We target a gearing of 2.0-2.5 (NIBD/EBITDA) Capital allocation Subject to our gearing target, we will return any excess free cash flow after acquisitions to shareholders in the form of share buy-backs Estimated value growth rate and market size by business area Hearing Healthcare ~4% USD 24 BILLION Communications ~12% USD 6 BILLION Hearing Aids 2-4% USD 6 BILLION Hearing Care 2-4% USD 15 BILLION Hearing Implants 10-15% USD 2.0 BILLION Diagnostics 3-5% USD 0.5 BILLION Insights and highlights Our business Corporate information Financial report Back to content Medium- to long-term outlook Demant - Annual Report 2021 26 Our business Hearing Healthcare Hearing Aids Hearing Care Hearing Implants Diagnostics Communications EPOS Insights and highlights Our business Corporate information Financial report Back to content Demant - Annual Report 2021 26 Insights and highlights Our business Corporate information Financial report Back to content Hearing Healthcare Demant - Annual Report 2021 27 Financial review Hearing Healthcare GROWTH 32% IN LOCAL CURRENCIES REVENUE 17,235 DKK MILLION Income statement (DKK million) 8,391 5,532 52% 8,844 7,631 16% 17,235 13,163 31% -1,973 -1,532 29% -1,989 -1,948 2% -3,962 -3,480 14% 6,418 4,000 60% 6,855 5,683 21% 13,273 9,683 37% 76.5% 72.3% 77.5% 74.5% 77.0% 73.6% -564 -540 4% -589 -552 7% -1,153 -1,092 6% -3,807 -3,311 15% -4,030 -3,310 22% -7,837 -6,621 18% -422 -376 12% -473 -435 9% -895 -811 10% 57 13 338% 63 39 62% 120 52 131% 1,682 -214 n.a 1,826 1,425 28% 3,508 1,211 190% 20.0% -3.9% 20.6% 18.7% 20.4% 9.2% Revenue by business area (DKK million) 4,416 2,937 50% 4,564 3,886 17% 8,980 6,823 32% -871 -465 87% -762 -657 16% -1,633 -1,122 46% 3,737 2,154 73% 3,816 3,310 15% 7,553 5,464 38% 266 246 8% 246 277 -11% 512 523 -2% 843 660 28% 980 815 20% 1,823 1,475 24% 8,391 5,532 52% 8,844 7,631 16% 17,235 13,163 31% Insights and highlights Our business Corporate information Financial report Back to content Hearing Healthcare Demant - Annual Report 2021 27 Insights and highlights Our business Corporate information Financial report Back to content Hearing Healthcare Demant - Annual Report 2021 28 Revenue For H2 2021, revenue in our Hearing Healthcare segment amounted to DKK 8,844 million, corresponding to a growth rate of 15% in local currencies with or- ganic growth of 14% and acquisitive growth of 1%. Exchange rates had a positive impact of 1%, and total reported growth for the period was 16%. For the full year, growth in Hearing Healthcare was 32% in local currencies with organic growth of 31% and acquisitive growth of 1%. Exchange rates impacted reported growth by -1%. As such, reported growth in Hearing Healthcare was 31% in 2021. After a strong start to H1, we saw further normalisation in Hearing Healthcare in H2. In both periods, France contributed very significantly to growth, predominantly in Hearing Care, due to the new hearing healthcare reform. Besides growth in the structural demand for hearing aids in France, we estimate that the increased reimbursement also resulted in extraordi- nary revenue of around DKK 200 million in H1 and DKK 100 million in H2, which will not recur in 2022. Growth in local currencies in Hearing Aids amounted to 18% in H2 with strong per- formance in sales to independent hearing care professionals and chains, particularly in the US. Sales to government systems, including the NHS and VA, improved grad- ually during 2021, but volumes have not yet normalised to pre-pandemic levels. In Hearing Care, we saw strong perfor- mance in a number of European markets, especially in France. Revenue grew by 13% in local currencies in H2, including acquisitive growth of 4%. Revenue in Hearing Implants posted or- ganic growth of -13% in H2. In connection with our voluntary field corrective action in October 2021, we halted sales of new cochlear implants, which impacted growth negatively in the last three months of 2021. In H2, Diagnostics realised a very strong growth rate of 18% in local currencies, which was significantly above the market growth rate. This was driven by both our service and our instruments business. Gross profit Gross profit increased by 1% to DKK 6,855 million in H2, resulting in a gross margin of 77.5%, or an increase of 3.0 percentage points compared to 2020. The gross mar- gin expansion was primarily driven by the higher activity level, resulting in efficiency improvements. These improvements, which were primarily driven by Hearing Aids and Diagnostics, more than outweighed the headwinds from supply chain dynamics. Growth rates 55% 19% 34% 0% -1% 0% 55% 18% 34% -5% -1% -2% 50% 17% 32% 72% 10% 34% 5% 4% 4% 78% 13% 38% -4% 2% 0% 74% 15% 38% 11% -13% -2% 0% 0% 0% 12% -13% -2% -3% 2% -1% 8% -11% -2% 34% 17% 25% 1% 1% 1% 35% 18% 25% -7% 2% -2% 28% 20% 24% 55% 14% 31% 2% 1% 1% 57% 15% 32% -5% 1% -1% 52% 16% 31% Insights and highlights Our business Corporate information Financial report Back to content Hearing Healthcare Demant - Annual Report 2021 29 Operating expenses (OPEX) OPEX amounted to DKK 5,091 million in H2, corresponding to an increase in local currencies of 17%. The increase in OPEX can be attributed to increased activity levels but also to significant coronavirus- related cost savings in the comparative period, including support from government support schemes, and a gain from the re- versal of part of a provision for bad debt. The increase in OPEX was mainly driven by Hearing Care where strong revenue growth was accompanied by increased distribution costs. This also includes the impact of further acquisitions made by Hearing Care. R&D costs and administra- tive expenses also increased in H2, albeit to a lesser extent. Following temporary cost savings in H1 of DKK 150-200 million related to corona- virus, our cost base had largely normalised at the beginning of H2. OPEX increased by 17% in local currencies and reached DKK 9,884 million for the full year. Full-year OPEX (DKK million) Operating profit (EBIT) EBIT in H2 amounted to DKK 1,826 million, corresponding to a growth rate of 28% compared to the same period in 2020. The resulting EBIT margin was 20.6%, or an in- crease of 1.9 percentage points. The in- crease in EBIT margin was first and fore- most driven by strong performance in Hearing Care, which saw very strong tail- wind from the hearing healthcare reform in France. Specifically, we estimate that the reform had an extraordinary positive impact on EBIT in Hearing Healthcare of DKK 100 million in H1 and DKK 50 million in H2, which will not recur in 2022. Our Hearing Aids business area also per- formed very well thanks to excellent trac- tion with launches of new flagship hearing aids, and in addition, Diagnostics delivered strong profitability improvements thanks to operating leverage following significant revenue growth. However, Hearing Im- plants had a negative impact on EBIT a development that was exacerbated by the temporary halt in sales of cochlear im- plants due to the voluntary field corrective action. For the full year, EBIT reached DKK 3,508 million, corresponding to an EBIT margin of 20.4%. Half-year EBIT (DKK million) Reported EBIT for H2 2019 was negatively impacted by an estimated DKK 550 million as a result of the IT incident. Full-year EBIT (DKK million) Reported EBIT for 2019 was negatively impacted by an estimated DKK 550 million as a result of the IT incident. 7,741 8,386 9,392 8,524 9,884 1,000 4,000 7,000 10,000 13,000 2017 2018 2019 2020 2021 1,085 1,000 -214 1,425 1,682 1,826 -500 250 1,000 1,750 H1 19 H2 19 H1 20 H2 20 H1 21 H2 21 2,295 2,428 2,085 1,211 3,508 0 750 1,500 2,250 3,000 3,750 2017 2018 2019 2020 2021 OPEX by function (DKK million) 589 552 7% 7% 7% 4,029 3,310 22% 20% 18% 473 435 9% 8% 8% 5,091 4,297 18% 17% 15% Insights and highlights Our business Corporate information Financial report Back to content Hearing Aids Demant - Annual Report 2021 30 Core SDG impact Based on the estimated lifetime of the total number of hearing aids fitted by the Group in 2021, we facilitated 11 million years with improved quality of life. The Eriksholm Research Centre found that wearing effective hearing aids could reduce stress. Key 2021 sustainability results We eliminated 11.5 tonnes of plastic from our production of hearing aid filter containers and started reusing plastic waste from other accessories to pro- duce new elements. Hearing Aids REVENUE 8,980 DKK MILLION GROWTH 34% IN LOCAL CURRENCIES Insights and highlights Our business Corporate information Financial report Back to content Hearing Aids Oticon BrainHearing TM test in anechoic chamber Demant - Annual Report 2021 30 Insights and highlights Our business Corporate information Financial report Back to content Hearing Aids Demant - Annual Report 2021 31 Market developments Based on available market statistics, cov- ering slightly less than two-thirds of the market, and on our own assumptions, we estimate that the global hearing aid mar- ket saw unit growth of around 13% in Q4 and around 27% in 2021 as a whole. Com- pared to pre-pandemic levels in 2019, we estimate that unit growth was around 9% in Q4 and around 8% for the full year. As expected, recovery in government channels and in some emerging markets lagged be- hind the recovery in commercial channels in developed markets. Looking only at the latter and even when excluding France, which saw extraordinary growth due to the hearing healthcare reform we esti- mate that unit growth rates in both Q4 and in 2021 as a whole were in line with the structural growth of 4-6% per year compared to 2019 levels. This includes large differences between individual mar- kets and channels where growth in some was below normal and in others above normal due to support from pent-up demand. Compared to the same period in 2019, growth in Europe in Q4 was first and foremost driven by very strong growth in France due to the hearing healthcare reform, which significantly boosted unit sales of fully reimbursed products. In the UK, market growth was more or less nor- malised with very strong growth in the commercial market and positive growth in sales to the NHS following the gradual recovery of this channel during 2021. Compared to 2019, growth in Germany was solid in Q4, but the German market generally recovered at a slow pace and remained below normal levels in 2021. Driven mostly by the US commercial mar- ket and compared to 2019, the market saw solid unit growth rates in North America in Q4, albeit a slight deceleration compared to Q3. Unit sales to VA were slightly above pre-pandemic levels in Q4. Growth in Can- ada was solid. Looking beyond North America and Europe, we estimate that unit growth in Australia was flattish in Q4 compared to 2019 with limited recovery from lockdowns in Q3. We estimate that both Japan and South Korea saw solid growth in Q4 compared to 2019, whereas growth in China was weaker and still impacted by coronavirus. Several other emerging markets remained impacted by coronavirus. In mid-October, the US Food and Drug Ad- ministration (FDA) issued a long-awaited proposed rule to establish a new over-the- counter (OTC) category of hearing aids in the US, which will be finalised by the FDA in 2022. Once effective, adults aged 18 and older with perceived mild to moderate hearing loss will be able to purchase OTC hearing aids online or at retail outlets without a medical exam or fitting by a hearing care professional. As previously communicated, the content of the proposed rule does not change our fundamental be- lief in the importance of providing a combi- nation of personal counselling, individual fitting, life-long service and highly ad- vanced technology, but the new category may supplement the existing market well. During 2021, there were also political dis- cussions in the US to expand Medicare to also cover hearing aids, which could po- tentially impact the US hearing aid market either positively or negatively. So far, the outcome of these discussions remains unclear. Business update In 2021, total revenue in Hearing Aids amounted to DKK 8,980 million, corre- sponding to a growth rate of 34% in local currencies. This growth, which consisted almost exclusively of organic growth and only of a minor negative impact from Hearing Aids (DKK million) 4,416 4,564 8,980 55% 19% 34% 0% -1% 0% 55% 18% 34% -5% -1% -2% 50% 17% 32% Estimated market unit growth in 2021 vs 2020 by region 10% 130% 12% 14% 30% 9% 182% 18% 16% 35% 12% 156% 17% 15% 34% -7% 522% 52% 22% 51% 0% 64% 11% 8% 16% 6% 116% 14% 13% 27% Estimated market unit growth in 2021 vs 2019 by region -1% 16% 13% 14% 11% 9% 16% 13% 8% 11% 12% 22% 17% 9% 15% -7% 3% -1% 4% 0% -6% 7% 5% 3% 2% 0% 13% 10% 9% 8% Insights and highlights Our business Corporate information Financial report Back to content Hearing Aids Demant - Annual Report 2021 32 acquisitions, was thus materially above the estimated market growth rate. Internal revenue from sales to our Hearing Care business accounted for 18% of total reve- nue. Our commentary below focuses on total revenue, including revenue from sales through our own retail clinics, and thus en- compasses our total wholesale activities. However, internal revenue is eliminated from the reported revenue for our Hearing Healthcare segment and thus for the Group. Our Hearing Aids business performed strongly in 2021 thanks to a combination of market recovery, following the severe impacts of coronavirus and a highly suc- cessful launch of new flagship hearing aids in all brands: Oticon, Philips HearLink, Bernafon and Sonic. The pace of recovery varied significantly between individual channels and regions, but we saw market share gains in many markets. Particularly, sales to independent hearing care profes- sionals were strong not least in the im- portant US market driven by the success of Oticon More. Sales to Hearing Care were positively impacted by the strong perfor- mance of this business, particularly in France. Unit and ASP growth 50% 17% 31% 4% 1% 2% 55% 18% 34% In H2, growth was 18% in local currencies of which organic growth contributed 19% and acquisitive growth -1%. The decelera- tion in organic growth relative to H1 is en- tirely attributable to higher comparative figures, and our product portfolio contin- ued to enjoy strong momentum in H2 sup- ported by the launch of non-rechargeable miniRITE form factors. Growth in H2 was mostly driven by unit growth but was also supported by ASP growth due to our strong performance in the US, which more than offset increased sales of low-priced units to the NHS. In terms of geographies, North America was the key growth driver in H2 and in 2021 as a whole. This was mostly due to strong development in sales to independ- ent hearing care professionals in the US but also to growth in sales to large chains and to VA. Following the introduction of Oticon More in May 2021, we succeeded in increasing our market share with VA, which stood at 15.2% in December 2021. Sales in Canada were negatively impacted by coronavirus-related restrictions in the first part of the year but recovered in the latter part of H2. In Europe, we saw strong growth driven by France where demand was boosted by the new hearing healthcare reform, partic- ularly in H1. In H2, we also saw strong growth in the UK where sales to the NHS recovered somewhat after several quar- ters of subdued sales. The recovery in Germany was relatively slow throughout most of the year. Sales in the Pacific region recovered well in H1 but slowed down in H2, as new local lockdowns related to coronavirus took ef- fect at the beginning of the period. In Asia, sales in Japan and China were slow to re- cover due to continued restrictions for most of the year, whereas sales in South Korea saw positive development. Our Other countries region, which mostly comprises emerging markets, remained impacted by coronavirus, and as expected, recovery in this region was slow. Product update Within a few weeks, we will start the roll-out of our latest and industry-leading hearing aid platform in new miniBTE form factors in all four hearing aid brands. At the same time, all brands will expand the platform to the mid-priced product catego- ries in all the currently available form fac- tors. Furthermore, Oticon will expand its latest Polaris platform to a new family of paediatric products called Oticon Play PX. Thanks to a new software update, all brands will also start offering two-way audio streaming for iOS devices and thus enable hands-free phone calls. This solu- tion will be available in all hearing aids based on the latest platform, including Oticon More and Philips HearLink. Revenue and growth (DKK million) 4,416 4,564 8,980 2,937 3,886 6,823 55% 18% 34% 871 762 1,633 465 657 1,122 94% 14% 46% 3,545 3,802 7,347 2,472 3,229 5,701 48% 19% 31% Insights and highlights Our business Corporate information Financial report Back to content Hearing Care Demant - Annual Report 2021 33 Core SDG impact Through our clinics, we offer free yearly hearing assessment to people over 60 years and aim to increase the number of assessments by at least 5% each year. Key 2021 sustainability result 1,609 hearing aids were donated as part of the global Campaign for Better Hearing. Every time someone gets their hearing tested in one of the clinics enrolled in the campaign, the clinic donates a specific amount of money to the Campaign for Better Hearing. The donations are allocated to provide free hearing aids to people who need hearing aids but have low purchasing power. Hearing Care REVENUE 7,553 DKK MILLION GROWTH 38% IN LOCAL CURRENCIES Insights and highlights Our business Corporate information Financial report Back to content Hearing Care Oticon More Demant - Annual Report 2021 33 Insights and highlights Our business Corporate information Financial report Back to content Hearing Care Demant - Annual Report 2021 34 Market developments Please refer to Market developments in the Hearing Aids section above for details on developments in the hearing aid market in 2021. Under normal circumstances, growth rates in the hearing aid retail and whole- sale markets are relatively similar, but we have seen some differences in 2020 and 2021, as different channels have recov- ered at different paces. Most notably, our Hearing Care business is not exposed to the two large government channels, VA in the US and the NHS in the UK, which have recovered at a slower pace than most commercial channels. Business update In 2021, revenue in Hearing Care amounted to DKK 7,553 million, corresponding to a growth rate of 38% in local currencies. Organic growth was 34% and growth from acquisitions was 4%, the latter pre- dominantly relating to acquisitions made in Europe and in North America. The high organic growth rate can be at- tributed to the fact that most markets recovered strongly from coronavirus, as restrictions were gradually eased, albeit with material regional differences. Growth was first and foremost driven by France, which is our second-largest market in Hearing Care where our strong position enabled us to leverage the extraordinary demand created by the hearing healthcare reform. Revenue growth in Hearing Care was mostly driven by unit growth, but we also saw growth in the ASP, driven by the launch of Oticon More, which resulted in a positive development in the product mix. Following very high growth rates in H1 due to low comparative figures, growth in H2 was 13% in local currencies, with 10% organic growth and 4% acquisitive growth. Besides the effect of low comparative fig- ures, the growth deceleration in H2 rela- tive to H1 reflects the fact that the extraor- dinary growth in France, as expected, lev- elled off during H2, as demand began to below the level seen in H1 but still well above the level in previous years. In H2, we also began to see a more normal mix of new and existing users, and we fine- tuned our marketing activities accordingly. We remain encouraged by the resilience of the market and our distribution model to the highly dynamic conditions. Compared to 2020, North America was the fastest growing region thanks to a combination of high organic growth and growth from acquisitions in both the US and Canada. In the US, organic growth was first and foremost driven by the com- bination of low comparative figures in H1 and strong market recovery from March. As expected, we continued to see a nega- tive impact of growth in the managed care segment of the market, which has a dilu- tive impact on the aggregate revenue gen- erated per sale. In Canada, restrictions im- pacted revenue negatively in part of H1 and in the early part of H2, but revenue and organic growth then accelerated in the remainder of the year. Driven mainly by the extraordinary growth in France, revenue in Europe was very strong, particularly in H1. We also saw strong recovery in most other European markets during the year, not least in the UK, Ireland, Spain and Poland. Growth was supported by acquisitions in several European markets, now also including Germany. In Australia, revenue recovered strongly at the beginning of H1 and neared normal- isation, but temporary local lockdowns at the end of H1 and the beginning of H2 weighed down growth. Audika clinic Hearing Care (DKK million) 3,737 3,816 7,553 72% 10% 34% 5% 4% 4% 78% 13% 38% -4% 2% 0% 74% 15% 38% Insights and highlights Our business Corporate information Financial report Back to content Hearing Implants Demant - Annual Report 2021 35 Core SDG impact Every year, we help well above 75,000 hearing implant users living with profound, conductive and single-sided hearing loss. Key 2021 sustainability activities We are involved in research that aims to uncover knowledge of how we can better enable cochlear implant users to enjoy music. We released tools that allow us to do research with partners with a view to delivering personalised hearing solutions, for instance a medical image modelling tool to be used in surgery and a CI fitting tool to be used when fitting individual patient inner ears. Hearing Implants REVENUE 512 DKK MILLION GROWTH -2% IN LOCAL CURRENCIES Insights and highlights Our business Corporate information Financial report Back to content Hearing Implants Oticon Medical BAHS Ponto5Mini Demant - Annual Report 2021 35 Insights and highlights Our business Corporate information Financial report Back to content Hearing Implants Demant - Annual Report 2021 36 Market developments Under normal circumstances, the market for hearing implants is the fastest growing area of hearing healthcare, as it benefits from a combination of favourable demo- graphic drivers and increasing penetration. Fundamentally, we believe that these fac- tors are intact, but since the beginning of the pandemic in 2020, the market has seen material headwinds, as implantations re- quire surgery, and as a wide range of elec- tive surgeries have been postponed. Over- all, we estimate that growth in the hearing implants market was 15-20% in 2021 and that the market was more or less back to its pre-pandemic level in 2019, albeit still well below the normal growth rate of 10- 15% per year. Particularly in the cochlear implants (CI) market, activity levels in our core markets in Europe and a number of emerging markets remained low throughout most of 2021 due to continued postponements of elective sur- geries. We began to see signs of improve- ments in the market in H2, but the recovery remained slow. In terms of geographies, we estimate that recovery in the US and in Asia was faster than in Europe. The market for bone anchored hearing solutions (BAHS) recovered at a slightly faster pace than the CI market due to the lower surgical footprint, but it has yet to fully normalise. Business update Revenue in Hearing Implants amounted to DKK 512 million in 2021. This corresponds to growth of -2% in local currencies, all of which was organic growth. After seeing positive growth in H1, mostly as a result of low comparative figures, Hearing Implants saw growth of -13% in H2 due to higher comparative figures and the voluntary field corrective action initiated by our CI business as announced in mid-October. Cochlear implants Facing several headwinds in 2021, our CI business had a difficult year and organic growth was negative. In H1 and in the first part of H2, revenue was hampered by the slow pace of recovery in many of our core markets and in emerging markets, in par- ticular. In mid-October, our CI business fur- thermore initiated a voluntary field correc- tive action, resulting in the recall of a num- ber of non-implanted Neuro Zti implants and a temporary halt in sales of new coch- lear implants. This action was taken due to an issue with loss of hermiticity in a small number of implants, causing them to shut down and stop working. There have been no reported safety events in relation to the implants, and there are still no safety con- cerns for existing users. The root cause of the issue has been iden- tified, and work is progressing to implement and verify a solution. We expect sales ac- tivities to be resumed in Q3 2022 and ramped up in the subsequent months. This expected timeline is subject to final verifi- cation and validation, including approval by relevant external bodies. Later in 2022, we expect to re-initiate our launch of coch- lear implants in the important US market. Once sales activities are resumed, we ex- pect to see strong growth not least after the introduction in H2 2021 of Neuro Zti 3T, a cochlear implant approved for 3 Tesla MRI scanning. Bone anchored hearing systems Our BAHS business delivered positive, albeit modest, organic growth in 2021, as it remained unaffected by the head- winds experienced by the CI business, even though it still had not fully normalised post-coronavirus. Revenue was supported by sales of sound processors, including up- grades for existing users, which were less impacted by the pandemic than sales of new implants. We saw solid performance in many European markets, whereas growth in the large US market was slower. Overall, we saw an improvement towards the end of the year, as sales were sup- ported by the successful launch in autumn of Ponto 5 Mini, a new BAHS sound pro- cessor that delivers strong audiological improvements and enables the use of RemoteCare for online appointments. Additionally, the introduction of MONO, a next-generation surgical procedure to further enhance clinical efficiency, sup- ported our commercial positioning. To- wards the end of Q1, we will launch a Super Power version of the Ponto 5 sound processor, which will contribute to further growing BAHS sales in 2022. Fitting softband for BAHS users Hearing Implants (DKK million) 266 246 512 11% -13% -2% 0% 0% 0% 11% -13% -2% -3% 1% -1% 8% -11% -2% Insights and highlights Our business Corporate information Financial report Back to content Diagnostics Demant - Annual Report 2021 37 Core SDG impact Every year, our technology helps screen and diagnose over 200 million people with suspected hearing loss and screen approx. 20 million new-borns. Key 2021 sustainability results We improved the method to validate hearing aid fitting of children aged 3-12 months when speech develop- ment is crucial. We prepared for the 14001 certification scheduled for March 2022 by focusing on reducing the footprint from new products. Diagnostics REVENUE 1,823 DKK MILLION GROWTH 25% IN LOCAL CURRENCIES Insights and highlights Our business Corporate information Financial report Back to content Diagnostics Interacoustics Pump system testing Demant - Annual Report 2021 37 Insights and highlights Our business Corporate information Financial report Back to content Diagnostics Demant - Annual Report 2021 38 Market developments Compared with other markets for hearing healthcare products, the market for diag- nostic instruments and services has proven very resilient throughout the pandemic. We estimate that in 2021, market growth was around 10-15% and thus significantly above the estimated structural growth rate of 3-5% per year. We believe that this was largely due to the effect of some pent-up demand from 2020 being released, and compared to 2019, we estimate that the market has seen growth of 0-5%. Business update Diagnostics generated revenue of DKK 1,823 million in 2021, corresponding to growth of 25% in local currencies. This comprises 25% organic growth and less than 1% growth from acquisitions. The strong organic growth is the result of an exceptionally successful year with sig- nificant market share gains in most geog- raphies coupled with a positive market en- vironment that has only seen rather limited impacts of coronavirus. Building on a strong foundation of innovation, a complete prod- uct portfolio in several brands and truly global distribution, Diagnostics has seen several years of good performance, lead- ing to a number of scale advantages. After seeing unusually strong organic growth of 34% in H1, we continued to see strong organic growth in H2 of 17%. For 2021 as a whole, growth in instrument sales was higher than growth in sales of services and disposables, and all instru- ment categories and all brands saw dou- ble-digit growth. The order intake remained at a high level throughout the year, result- ing in a strong order book at the end of the year. From a geographical perspective, we saw strong performances and double-digit growth rates in all regions. In the US, which is our largest market, growth was driven by our e3 Diagnostics network. In Europe, growth was broadly based with the highest relative growth seen in France due to tailwind from the hearing healthcare reform. The UK, Spain and Italy also saw high growth rates, and in addition, we saw strong growth in our other regions driven by Australia, Japan and a number of ten- der orders. Diagnostics (DKK million) 843 980 1,823 34% 17% 25% 1% 1% 1% 35% 18% 25% -7% 2% -2% 28% 20% 24% Interacoustics Orion balance chair Insights and highlights Our business Corporate information Financial report Back to content Communications Demant - Annual Report 2021 39 Core SDG impact Through pioneering audio excellence, EPOS solutions help prevent stress and listening fatigue that can be caused by imperfect audio experiences, and help improve concentration and the ability to focus for longer. Key 2021 sustainability results We continuously work to reduce the footprint of our operations. In 2021, we mapped our scope 3 emissions and started preparing for ISO 14001 certification of our headquarters. All tier 1 manufacturers already hold ISO 14001 certification. Communications Insights and highlights Our business Corporate information Financial report Back to content Communications EPOS REVENUE 1,183 DKK MILLION GROWTH -9% IN LOCAL CURRENCIES EPOS GSP 601 Gaming headset Demant - Annual Report 2021 39 Insights and highlights Our business Corporate information Financial report Back to content EPOS Demant - Annual Report 2021 40 EPOS Financial review Insights and highlights Our business Corporate information Financial report Back to content Communications GROWTH -9% IN LOCAL CURRENCIES REVENUE 1,183 DKK MILLION Income statement (DKK million) 621 546 14% 562 760 -26% 1,183 1,306 -9% -321 -291 10% -291 -358 -19% -612 -649 -6% 300 255 18% 271 402 -33% 571 657 -13% 48.3% 46.7% 48.2% 52.9% 48.3% 50.3% -91 -78 17% -106 -91 16% -197 -169 17% -233 -144 62% -231 -213 8% -464 -357 30% -20 -12 67% -12 -17 -29% -32 -29 10% -44 21 n.a -78 81 n.a -122 102 n.a -7.1% 3.8% -13.9% 10.7% -10.3% 7.8% Insights and highlights Our business Corporate information Financial report Back to content EPOS Demant - Annual Report 2021 41 Introduction In the following sections, we review the income statement for our Communications segment, which comprises our audio and video business operating under the EPOS brand. Revenue In H2, revenue in Communications amounted to DKK 562 million. This corre- sponds to -27% growth in local currencies, all of which was organic growth. On a se- quential basis, growth declined by 10% compared to H1, which is in line with our most recent expectations. The decline in revenue is the result of both very strong comparative figures following the extra- ordinary demand seen in 2020 and weak sales at the beginning of H2, but as ex- pected, momentum improved towards the end of the period. For the full year, revenue amounted to DKK 1,183 million, corre- sponding to growth of -9% in local curren- cies. This is below our initial plans for the year but in line with our most recent ex- pectations. Gross profit Gross profit was DKK 271 million in H2, resulting in a gross margin of 48.2%. Compared to H2 2020, the gross margin declined by 4.7 percentage points driven by the significant decline in revenue and further exacerbated by higher-than-nor- mal supply chain costs. Compared to H1 2021, the margin only contracted slightly by 0.1 percentage point. For the full year, the gross margin was 48.3%. Operating expenses (OPEX) OPEX amounted to DKK 349 million in H2, corresponding to growth of 9%. The in- crease reflects our continuous investments in R&D and distribution activities, including sales and marketing activities, despite the temporary slowdown in sales in H2. Admin- istrative expenses declined, which largely reflects periodisation between H1 and H2. For 2021 as a whole, OPEX amounted to DKK 693 million, which is an increase of 25% compared to 2020. The increase re- flects both the fact that we had originally geared our cost base for higher revenue and our long-term ambitions in terms of innovation and commercial positioning. Operating profit (EBIT) EBIT for H2 amounted to DKK -78 million, corresponding to an EBIT margin of -13.9%. This is in line with our most recent expec- tations but well below our original plans. The significant decline in profitability com- pared to H2 2020 was the result of lower revenue combined with continued OPEX investments. EBIT for the full year was DKK -122 million, corresponding to an EBIT margin of -10.3%, a significant decline compared to 2020. EPOS EXPAND Vision 3T Insights and highlights Our business Corporate information Financial report Back to content EPOS Demant - Annual Report 2021 42 Market developments In 2021, growth in the markets for gaming and enterprise solutions was mixed. Growth was high at the beginning of the year due to a combination of strong demand related to remote working dynamics and low com- parative figures. However, market growth decelerated from around mid-March and into H2, particularly in Europe, due to a significantly higher comparative base and a softening of the extraordinary demand in H1, not least when it comes to low-priced wired headsets. Demand then improved gradually towards the end of the year, as the market contin- ued to move towards wireless products and equipment for meeting rooms, includ- ing video equipment, even though certain supply chain constraints may have damp- ened market growth to some degree. We still consider the fundamental growth drivers of the market to be fully intact. Overall, we estimate that in 2021, the market for enterprise headsets grew by mid- to high-single-digit percentages, whereas the market for gaming headsets saw flattish growth. The market for video solutions saw very strong growth, albeit with differences between subsegments. For all markets, we estimate that growth was stronger in the US and Asia than in Europe, which had the strongest compara- tive figures and saw the biggest slowdown in the middle of the year. Business update Revenue in our Communications business amounted to DKK 1,183 million in 2021, corresponding to a growth rate of -9% in local currencies, all of which was organic growth. This was substantially below the original plans for the year but in line with our most recent expectations. In broader terms, our Communications business has exceeded the plans made in connection with the demerger of the Sennheiser Com- munications joint venture, thus benefitting from increased focus on remote working. Following high growth at the beginning of the year, growth decelerated from around mid-March, as higher comparative figures coincided with slowing sales momentum, particularly in Europe, which is by far the largest region for Communications. The slow momentum carried into H2, and de- spite an improving trend towards the end of the year, growth was -27%. This re- flects very strong comparative figures fol- lowing the extraordinary demand seen in 2020 in the wake of the initial working- from-home wave. The negative growth was driven by Enter- prise Solutions, which saw the most severe slowdown in momentum during the year, whereas Gaming delivered positive growth. However, the improvement towards the end of the year was also driven by Enter- prise Solutions, which exited the year with more normalised momentum. In terms of geographies, Europe and North America both saw negative growth in 2021, whereas we saw positive growth in the Pacific region and particularly in Asia. After seeing some headwind in 2021, we have entered 2022 in an improved posi- tion, and we will continue to further pro- mote and solidify the EPOS brand as a leading premium player in the industry. This includes maintaining and expanding our state-of-the-art product programme, spanning headsets and video solutions for enterprises and gaming. Communications (DKK million) 621 562 1,183 16% -27% -9% 0% 0% 0% 16% -27% -9% -2% 1% 0% 14% -26% -9% EPOS R&D Insights and highlights Our business Corporate information Financial report Back to content EPOS Demant - Annual Report 2021 43 Corporate information Capital Markets Day 2021 Demant - Annual Report 2021 43 Insights and highlights Our business Corporate information Financial report Back to content Insights and highlights Our business Corporate information Financial report Back to content Shareholder information Demant - Annual Report 2021 44 Share capital As of 31 December 2021 nal share capital was DKK 48,025,566.60 divided into 240,127,833 shares of DKK 0.20 each. All shares are the same class and carry one vote each. The change compared to the year before is due to the reduction of DKK 112,667 through the cancellation of treasury shares approved at the annual general meeting on 5 March 2021. The Board of Directors has been authorised by the annual general meeting to increase total nom- inal value of up to DKK 6,664,384. This in- crease may consist of no more than DKK 4,800,000 of the share capital with pre- emptive rights for existing shareholders and of no more than DKK 4,800,000 of the share capital without pre-emptive rights for existing shareholders. Furthermore, the Board of Directors has been authorised to increase the share capital by an additional nominal value of up to DKK 2,500,000 for shares offered to employees. All authorisa- tions are valid until 1 March 2026. Ownership William Demant Foundation is a majority shareholder in Demant through its invest- ment company William Demant Invest and has previously communicated its intention to maintain an ownership interest of 55- December 2021, William Demant Founda- tion held either directly or indirectly approx. 58% of the share capital. No other shareholders had flagged an ownership interest of 5% or more as of 31 December 2021. Demant had 32,531 individual investors as of 31 December 2021. Approx. 75% of the Shareholder information Specification of movements in share capital (DKK 1.000) 48,138 49,057 50,474 51,793 53,216 -113 -919 -1,416 -1,319 -1,423 48,025 48,138 49,057 50,474 51,793 0.2 0.2 0.2 0.2 0.2 240,127 240,691 245,287 252,368 258,966 394.7 244.4 237.2 318.6 188.9 219.6 132.2 160.5 167.4 122.3 335.1 240.6 209.8 184.9 173.5 77,117 57,718 50,470 45,308 43,864 111.0 99.8 112.4 128.6 69.3 234.82 239.78 243.55 249.14 256.56 230.13 239.90 240.56 245.22 252.82 10.0 0.8 4.7 7.1 6.1 Insights and highlights Our business Corporate information Financial report Back to content Shareholder information Demant - Annual Report 2021 45 share capital is registered in Denmark and 15% is registered in North America. The remaining 10% of the share capital is split between the remaining geographies. As of 31 December 2021, the company held 9,992,705 treasury shares, corre- sponding to 4.2% of the share capital. Share price development The price of Demant shares increased by 39.3% in 2021, and on 31 December 2021, the share price was DKK 335.10, corre- sponding to a market capitalisation of DKK 77.1 billion (excluding treasury shares). The average daily trading turnover was DKK 111.0 million. The company is a con- stituent of the OMX Copenhagen 25 Index (C25), which covers the 25 largest and most frequently traded shares on Nasdaq Copenhagen. The C25 Index increased by 17.2% during the year. Capital allocation The company uses its substantial cash flow from operating activities for value- adding investments and acquisitions, and any excess liquidity will be used for conti- nuous share buy-backs, however subject ed gearing multiple of 2.0-2.5 measured as net interest-bearing debt relative to EBITDA. Until the next annual general meeting in March 2022, the Board of Directors has been authorised to let the company buy back shares at a nominal value of up to 10% of the share capital. The purchase price may not deviate by more than 10% from the price quoted on Nasdaq Copen- hagen. Investor Relations (IR) Demant strives to ensure a steady and consistent flow of information to IR stake- holders in order to promote the basis for a fair pricing of the company pricing that will at any time reflect the and outlook for the future. The flow of in- formation will contribute to a reduction of the company-specific risk associated with investing in Demant shares, thereby lead- of capital. We aim to reach this goal by continuously providing relevant, correct, adequate and timely information in our company an- nouncements. In addition to the statutory publication of annual reports and interim reports, we publish quarterly interim man- agement statements, containing updates on the Group and its financial position as well as results in relation to the full-year outlook, including updates on important events and transactions in the period under review. Our interim management statements do not include a full set of financial figures. We strive to maintain an active and open dialogue with analysts as well as current and potential investors, which helps us stay updated on the views, interests and holders. At our annual general meeting and through presentations, individual meetings, participation in investor confer- ences, webcasts, capital markets days etc., we aim to maintain an ongoing dialogue with a broad spectrum of IR stakeholders, and in 2021, we held more than 330 inves- Development in share price and daily turnover in 2021 0 200 400 600 800 1,000 1,200 1,400 100 150 200 250 300 350 400 450 Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Daily turnover (DKK million) Share price (DKK) Turnover Demant OMX C25 (rebased) Insights and highlights Our business Corporate information Financial report Back to content Shareholder information Demant - Annual Report 2021 46 tor meetings and presentations. In 2021, most of these meetings were still held vir- tually because of travel restrictions and social distancing measures, but we expect and welcome an increase in the num- ber of in-person meetings in the coming years. We also use our website, www.demant.com, as a means of commu- nication with our stakeholders. At the end of 2021, 23 equity analysts were covering Demant. We refer to our website for a full list of analyst coverage. Demant has a three-week quiet period prior to publication of annual reports, in- terim reports and interim management statements where communication with IR stakeholders is restricted. Annual general meeting 2022 The annual general meeting will be held on Thursday, 10 March 2022 at 4:00 p.m. Both physical and online attendance will be possible. By participating online, it is possible to follow the live webcast, ask the Board of Directors questions via chat and cast votes. Contact information for investors and analysts Phone: +45 3917 7300 E-mail: [email protected] Mathias Holten Møller Head of Investor Relations Peter Pudselykke Investor Relations Officer Company announcements and investor news in 2021 4 Jan 9 Feb Annual Report 2020 9 Feb Notice to annual general meeting 5 Mar Annual general meeting 11 Mar 23 Apr Completion of capital reduction 23 Apr Updated financial calendar 2021 4 May Interim Management Statement 11 May Updated financial calendar 2021 8 Jun 12 Aug Interim Report 2021 24 Aug Major shareholder announcement from Canada Pension Plan Investment Board 27 Sep Capital Markets Day 2021 Delivering sustained growth post coronavirus (investor news) 14 Oct Notification of voluntary field corrective action by the cochlear implants business 2 Nov Interim Management Statement 16 Nov Financial calendar 2022 20 Dec Update on voluntary field corrective action Financial calendar 2022 27 Jan Deadline for submission of items for the agenda of the annual general meeting 8 Feb Annual Report 2021 10 Mar Annual general meeting 3 May Interim Management Statement 16 Aug Interim Report 2022 9 Nov Interim Management Statement Insights and highlights Our business Corporate information Financial report Back to content Shareholder information Demant - Annual Report 2021 47 majority shareholder, was founded in 1957 founder Hans Demant. Its primary goal is to safeguard and expand the Demant various commercial and charitable causes with particular focus on the fields of audi- ology and hearing impairment. William Demant Invest, which is a fully owned holding company for all William Demant shares in Demant. Chari- table tasks are thus handled by the Foun- ment activities by William Demant Invest. Voting rights and decisions to buy and sell Demant shares are still exercised and made by William Demant Foundation. In accordance with William Demant In- apart from an owner- ship interest in Demant also include other assets. William Demant Invest makes active investments in companies whose business model and structure re- semble those of the Demant Group but interest. The investments include, among others, majority ownership of Össur and Vision RT. The Foundation has made a management agreement on a commercial governs the exchange of various invest- ment support and administrative services between the Foundation, William Demant Invest and Demant. Please also see Note 8.1. William Demant Foundation UNICEF Donation of DKK 3.5 million Insights and highlights Our business Corporate information Financial report Back to content Risk management activities Demant - Annual Report 2021 48 Risk management activities Risk management activities Risk management activities in the Demant Group first and foremost focus on the busi- ness-related risks to which the Group is fairly likely to be exposed. In connection gic, budgetary and annual plans, the Board of Directors considers the risks identified. In general, the hearing healthcare market is stable with a number of highly specialised players that operate in an extremely com- petitive market. Besides the competitive dynamics, the risks to which the Group is exposed normally do not change in the short term. During the coronavirus pandemic, the Group has seen an increasing number of changes to the external operating environ- ment, most of which are beyond our own control. We continue to navigate the cur- rent market conditions and monitor poten- tial changes to the competitive situation to ensure that we respond swiftly and effec- tively to any changes in the market. The responsibility of navigating these changes lies with the Executive Board as a part of the general business planning. The main risks for the Group are described below. Please refer to our Sustainability Report for a description of sustainability risk and strategy. Internal control and reporting Once a year, we carry through a very detailed planning and budgetary process, and any deviations from the plans and budgets re- sulting from this process are carefully moni- tored month by month. In terms of sales and costs, month-over-month development is usually very similar from one year to the other, and due to the repetitive nature of our busi- ness, deviations will normally become visible financial reporting systems, the Board of Directors and Executive Board have adopted policies, procedures and guidelines for finan- cial reporting and internal control to which the subsidiaries and reporting units must adhere, including: • Continuous follow-up on the results achieved compared to the approved budgets. • Policies for IT, business ethics, data privacy, insurance, cash management, procurement etc. • Reporting instructions as well as reporting and finance manuals. The responsibility for maintaining suffi- cient and efficient internal control and risk management in connection with financial reporting lies with the Executive Board. The Board of Directors has as- ronment and concluded that it is ade- quate. Macroeconomic developments Development of coronavirus pandemic, supply chain dynamics and general macroeconomic development Risk description Changes in the economic climate can di- rectly impact our activity level. This is espe- cially true in relation to the ongoing corona- virus pandemic, and such changes may adversely affect the demand for hearing healthcare solutions. While demand in 2021 has proved relatively resilient, the pandemic continues to pose a risk for our activity level and our financial results. Our access to hospitals may also be limited if healthcare systems are stressed, leading to postponed surgeries in our Hearing Im- plants business. Similarly, lockdowns and other coronavirus- related impacts have also affected the global supply chain and increased the risk of sudden changes or shutdowns. Stabil- ity in sourcing and delivering manufacturing goods in time and of sufficient quality are crucial to fulfil the commitments we have made to our customers. Supply disruptions of any kind driven by internal or external factors may result in delayed deliveries, inefficient production set-ups or inability to meet demand. We follow changes in the current macroeco- nomic landscape closely, although demand for hearing healthcare solutions usually remain robust. Our response and mitigation efforts Coronavirus continues to impact the com- mercial landscape that we operate in. As always, we strive to service our custom- ers and patients in the best possible way, which includes taking steps to ensure the safety of our employees and patients. We closely monitor our supply situation and seek to keep adequate safety stocks to counter potential interruptions in our production. Furthermore, we also evalu- ate the geographical location of and de- pendency on key suppliers to ensure that we strike the right balance between flexi- bility, exposure and cost. Insights and highlights Our business Corporate information Financial report Back to content Risk management activities Demant - Annual Report 2021 49 Regulatory landscape Need for compliance with regulatory requirements and changes Risk description As a major player in the hearing healthcare market, the Group is exposed to certain regu- latory risks in terms of changes to product requirements, reimbursement schemes and public tenders in the markets where we op- erate. In most markets, the regulatory land- scape is currently deemed stable, but in the large US market, there are two pending reg- ulatory changes. In October 2021, the US Food and Drug Administration (FDA) issued a long-awaited proposed rule to establish a new over-the- counter (OTC) category of hearing aids. The rule has been published for public comment and will subsequently be finalised by the FDA. In our view, any impact of this rule on the hearing aid industry will be limited. Furthermore, during 2021 there were dis- cussions in the US Congress about poten- tially expanding Medicare to include cover- age for hearing aids. The outcome is uncer- tain, but depending on the final design, such expansion could impact both volumes and pricing of hearing aids in the US either pos- itively or negatively. For the United States in general, over the past couple of years, an increasing part of hearing aid purchases has been covered by insurance. The emergence of large man- aged care organisations poses a risk to hearing aid ASP as volumes may increas- ingly be consolidated on fewer players. It may also impact sales in our retail business. Our response and mitigation efforts While regulatory changes are an intrinsic part of the hearing healthcare market, we feel well positioned to respond to such changes in the commercial environment. In response to changing regulatory re- quirements, we work continuously on adapting our operating model some- thing we have already done in markets where we have seen changes to reim- bursement schemes over the years. We continue to monitor any changes in the regulatory landscape and engage in dialogues with regulators as part of our day-to-day business planning. Innovation Development of new, innovative and safe solutions for our customers Risk description Both our Communications and Hearing Healthcare segments are subject to markets that are highly product-driven where signifi- cant R&D initiatives help underpin our mar- ket position. It is vital in the long term to maintain our innovative edge and to attract the most qualified and competent staff. An important part of our ongoing product innovation is to take out, protect and main- tain patents for our own ground-breaking technology. It is our policy to continuously ensure that third party products do not in- fringe our patents and vice versa. In Hearing Implants, which commercialises Class III devices, product recalls are an ad- ditional risk factor that may lead to claims- related costs, such as the cost of replacing products, medical expenses, compensation for actual damage as well as legal fees. In October 2021, Oticon Medical initiated a voluntary field corrective action relating to Neuro Zti cochlear implants due to mal- functioning of a small subset of hearing im- plants. While there are no safety concerns for existing users, sales of Neuro Zti hearing implants have been temporarily halted. We expect to resume sales in Q3 2022 pending final validation and verification, including approval by relevant external bodies. Our response and mitigation efforts We continuously engage with customers, healthcare practitioners and other stake- holders to ensure that we develop ground- breaking products. We seek to minimise the risk of product failures and recalls by continuously improving our quality man- agement systems which are inspected and reviewed by external bodies. As a general principle, our products are de- signed and marketed under risk manage- ment guidelines complying to ISO 14971 to ensure the safety for our users. In case of any unexpected incident, we act fast and decisively and maintain a transpar- ent dialogue with relevant stakeholders. Insights and highlights Our business Corporate information Financial report Back to content Risk management activities Demant - Annual Report 2021 50 IT infrastructure Need for secure, stable and efficient IT infrastructure Risk description As a large, global organisation, we are de- pendent on numerous IT systems and the general IT infrastructure to operate efficiently across our value chain. This carries an inher- ent risk of system errors, human errors, data breaches or other interruptions that may im- pact the Group financially. We continuously seek to minimise these risks, and our IT strat- egy includes both prevention and contingency plans. As our Group becomes increasingly digital- ised, more devices and control systems are connected online, resulting in a broader in- terface across the IT infrastructure that could potentially be compromised. Threats may include attempts to access or steal information, computer viruses, denial of service and other digital security breaches. After the IT incident in 2019, we have con- tinued to increase our focus on IT security across Demant and at all levels, including among other measures the establishment of a dedicated Board Committee that dis- cusses IT security in a structured way and on a regular basis. After the IT incident, the US Office for Con- sumer Rights has reviewed our response to the IT incident based on concerns raised by a consumer. The case has been closed without further comments. Our response and mitigation efforts We are and will continue to be committed to further developing the Following the IT incident in 2019, we have conducted a maturity assessment of our IT security based on the Cyberse- curity Framework of the National Institute of Standards and Technology (NIST) to focus our work on relevant parameters going forward. We regularly conduct maturity assess- ments to measure our ongoing progress on IT security. We will continue to further improve our IT infrastructure in the future. Legal risks and data privacy Need for continuous monitoring of potential legal risks Risk description The Group continuously monitors the legal risks of the business to avoid negligence in compliance with any applicable laws in the jurisdictions that we are active in. This in- cludes alignment with global tax standards as well as adherence to general regulation. Additionally, Demant is entrusted with per- sonal data on employees, customers, users and business partners. We protect such data through policies and security measures. As our business continues to grow, the complex- ity We remain committed to protecting personal data and have performed extensive training of relevant employees to improve awareness. By way of example, the Demant Group has prepared a new Data Ethics Policy in 2021 ethical efforts beyond the legal requirements for handling data. The company is from time to time involved in legal disputes, including over intellectual property rights. We are of the opinion that there are currently no legal disputes that could cial position. As a rule, we always seek to make adequate provisions for any legal proceedings. Our response and mitigation efforts Failure to adhere to current legislation may negatively and result in financial conse- quences for the Group. Our organisation continuously monitors the current and changing legislation and ensures proper compliance, including with general data protection guidelines. In general, management continuously seeks to minimise the financial conse- quences of any damage to corporate as- sets by mitigating actions or insurance coverage if certain risk factors cannot be mitigated by action. The Board of Direc- policies once a year and is briefed regu- larly on developments in identified risks. Insights and highlights Our business Corporate information Financial report Back to content Risk management activities Demant - Annual Report 2021 51 Financial risk Control of risk in exchange rates and interest rate risk Risk description on exchange rates risk Financial risk management concentrates on identifying risks in respect of exchange rates with the purpose to protect the Group against potential losses. Around two-thirds of the Grsales are invoiced in other currencies than Danish kro- ner or Euro. To ensure predictability in terms of profit, we hedge against exchange rate risks mainly through forward exchange contracts with a horizon of up to 18 months. Furthermore, to balance our exchange rate exposure, we continuously seek to balance positive and negative cash flows in our main currencies as much as possible. Risk description of interest rates risk The company continuously adapts its capi- tal structure given the prevailing market conditions in order to secure attractive financing conditions for the Group. Cur- rently, more than half of the debt is funded through short- to medium-term committed facilities with fixed rates and through financial instruments, which limits interest rate risk is manageable. The G DKK 9,150 million as of 31 December 2021. Our response and mitigation efforts We continuously monitor and hedge a significant part of the foreign exchange cies on a rolling basis. It is policy to exclusively hedge financial risks arising from our commercial activities and not to undertake any financial transactions of a speculative nature. The Group monitors the capital structure of the company to ensure that the com- pany remains well-funded. Credit and liquidity risk Control of credit and liquidity risk Risk description on credit risk trade receivables and loans to customers or busi- ness partners. The accumulated revenue from our ten largest customers account for approx. 10% of total consolidated revenue. When granting loans to business partners, we require that our counterparties provide security in their business. In general, we estimate that the risk relative to our total credit exposure is well-balanced at the Group level. Risk on liquidity risk The Group aims to have sufficient cash resources at its disposal to be able to take appropriate steps in case of unforeseen fluctuations in both cash inflows and cash outflows. We have access to considerable undrawn credit facilities and in spite of the uncertainty of the coronavirus pandemic, the Group has remained cash-generating. The liquidity risk of the Group is therefore considered to be low. The Group has not defaulted on loan agree- ments neither in the financial year 2021 nor in previous years. Our response and mitigation efforts To minimise the risk of losses on custom- ers, the Group monitors the outstanding credit risk on an ongoing basis as a part of the financial review of our business. We regularly adjust our financial accounts to reflect the prevailing credit risks. Dur- ing 2020, the Group made a provision for bad debt of DKK 150 million, reflecting in- creased risk of customers defaulting dur- ing the coronavirus pandemic DKK 50 million was reversed in 2020 and during 2021, another DKK 60 million was re- versed, whereas only DKK 40 million ended up being realised as a credit loss. Insights and highlights Our business Corporate information Financial report Back to content Corporate governance Demant - Annual Report 2021 52 The work on corporate governance is an ongoing process for the Board of Directors and Executive Board. Once a year, the Board of Directors and Executive Board ance principles. In that context, we con- sider the corporate governance principles that derive from legislation, recommenda- tions and good practices. We focus on de- veloping and maintaining a transparent corporate governance structure that pro- motes responsible business behaviour and long-term value creation. Recommendations issued by the Danish Committee on Corporate Governance and adopted by Nasdaq Copenhagen are best- practice guidelines for the governance of companies admitted to trading on a regu- lated market in Denmark. When reviewing our corporate governance structures, we determine the extent to which the company complies with the recommendations and regularly assess whether the recommen- dations give rise to amendments to our rules of procedure or managerial processes. When reporting on corporate governance, Demant follows 37 of the 40 recommen- dations. The few cases (three) where we have chosen to deviate from a recommen- dation are well-founded, and we explain what we do instead. To further increase transparency, we provide supplementary and relevant information, even when we follow the recommendations. A complete presentation of the recommen- dations and how we comply, the statutory report on corporate governance, is availa- ble on our website, www.demant.com. The report as well as the financial reporting process and internal control described in Risk management activities in this Annual corporate governance, cf. section 107b of the Danish Financial Statements Act. Tasks and responsibilities of the Board of Directors In accordance with Danish legislation, Demant has a two-tier management sys- tem, comprising the Board of Directors and the Executive Board, with no individual be- ing a member of both. The division of re- sponsibilities between the Board of Direc- tors and the Executive Board is clearly out- lined and described in the Rules of Proce- dure for the Board of Directors and in the Instructions for the Executive Board. The Board of Directors is responsible for the overall strategic management and for the financial and managerial supervision of the company, the ultimate goal being to ensure long-term value creation. On an on- going basis, the Board of Directors evalu- ates the work of the Executive Board as for instance reflected in the annual plan prepared for the Board of Directors. Composition and organisation The Board of Directors has eight members: five members elected by the shareholders at the annual general meeting and three members elected by staff in Denmark. Niels B. Christiansen has been Chairman of the Board since 2017. Shareholders elect Board members for a term of one year, and staff elect Board members for a term of four years. Staff-elected mem- bers are elected in accordance with the provisions of the Danish Companies Act. Although the Board members elected by the annual general meeting are up for election every year, the individual Board members are traditionally re-elected and sit on the Board for an extended number of years. This ensures consistency and maximum insight into the conditions pre- vailing in the company and the industry. Such consistency and insight are consid- ered important in order for the Board members to bring value to the company. Of the five Board members presently elected by the shareholders at the annual general meeting, Anja Madsen, Sisse Fjelsted Rasmussen and Kristian Villumsen are considered independent. Niels B. Christiansen is not considered independ- ent as he is a member of the Board of Directors of William Demant Foundation. Niels Jacobsen is not considered independent as he is the former CEO of Demant. Niels B. Christiansen, Niels Jacobsen, Anja Madsen, Sisse Fjelsted Rasmussen and Kristian Villumsen stand for re-elec- tion at the annual general meeting in March 2022. The Board is composed to ensure the right combination of competencies and experi- ence, with extensive international mana- gerial experience and board experience from major listed companies carrying par- ticular weight. This also applies when new Board candidates are selected. Since 2012, Demant has had a diversity policy and has taken specific initiatives aimed at ensuring gender equality. The age, gender, nationality, education and competencies of the members of our Board of Directors are listed in the Annual Report. At the annual general meeting in March 2020, the Board of Directors reached its target to have at least two female mem- bers before the end of 2020, and with 40% female members and 60% male members, we have an even gender distribution amongst the Board members elected by the shareholders. As part of our ambitions to ensure diver- sity and inclusion in the Group, we have in 2021 developed a diversity, equity and Corporate governance Insights and highlights Our business Corporate information Financial report Back to content Corporate governance Demant - Annual Report 2021 53 inclusion programme, which will along with an inclusion survey form the basis of policy-making and target-setting in the area of diversity in Demant in 2022. On our website, www.demant.com/about/management/, we describe the competencies and qualifi- cations that the Board of Directors deems necessary to have at its overall disposal in order to be able to perform its tasks for the company. Evaluation of the performance of the Board of Directors Once a year, the Chairman of the Board of Directors performs an evaluation of the either through personal, individual inter- views with the Board members or by means of a questionnaire to be filled out by the individual Board members. In both instances, the findings of the evaluation are presented and discussed at the subse- quent Board meeting. At least every third year, the evaluation is performed with external assistance. The evaluation was performed by means of a questionnaire in 2021, as the evalua- tion the year before was performed with external assistance based on individual meetings. Overall, the evaluation confirmed that the Board is satisfied with its governance structures and confirmed that the interac- tion between the Board members is well- functioning. The Board of Directors is keen on keeping focus on and allocating time to the long-term strategic development of the company to continuously ensure that the potential of the company is exploited to the fullest. The collaboration between the Board of Directors and the Executive Board works well, and there is an open and trustful working atmosphere. The work performed by the Board takes its starting point in the annual wheel, which is continuously re- commitment and immersion into relevant areas. Board meeting at the office in Smørum, Denmark Insights and highlights Our business Corporate information Financial report Back to content Corporate governance Demant - Annual Report 2021 54 Board committees up four committees: audit, nomination, remuneration and IT security committees. Please refer to the table for a list of the committee members and to the illustration for meetings held. In 2021, the nomination committee has been engaged in activities in relation to its normal tasks pursuant to the committee charter. The other committees have had certain focus areas during the year. The audit committee has thus been engaged in preparing a suggestion regarding the change of auditors, while the remuneration committee has been particularly engaged in redesigning the remuneration structure for the Executive Board. In the IT security committee, special focus has been given to an externally performed maturity as- sessment of our IT security based on the Cybersecurity Framework of the National Institute of Standards and Technology (NIST), the purpose of which is to ensure that we continue to focus our work on relevant parameters going forward. Board of Directors’ and Executive Board’s remuneration Demant has a remuneration policy and publishes a remuneration report. The cur- rent policy was approved at the annual general meeting in March 2020. The remuneration report is available on our website, www.demant.com/about/management The report will be submitted for advisory vote at the annual general meeting. Members of Board committees Insights and highlights Our business Corporate information Financial report Back to content Executive Board Demant - Annual Report 2021 55 Executive Board Søren Nielsen (male) President & CEO Born 1970 Nationality: Danish 28,042 shares (+6,405) René Schneider (male) CFO Born 1973 Nationality: Danish 15,815 shares (+1,665) Joined the company in 1995 Education: Holds a M.Sc. in Engineering from the Technical University of Denmark Competences: Broad business and leader- ship experience from various management positions in the Group, including the com- mercial area, product innovation, quality and strategic development. International board experience, strong insights into the MedTech industry as well as a wide net- work in the global hearing healthcare community Other positions: HIMPP A/S (M), HIMSA A/S (C), HIMSA II A/S (C), EHIMA (M), Vision RT Ltd. (M), Committee on Life Science un- der the Confederation of Danish Industry (C), Committee on Business Policy under the Confederation of Danish Industry (M) and Central Board of the Confederation of Danish Industry (M) Joined the company in 2015 Education: Holds a M.Sc. in Economics from Aarhus University Competences: Broad business and finan- cial leadership experience from various management positions with major listed companies, leading to international experi- ence in such areas as streamlining and re-establishing companies, completing M&A and driving value creation Areas of responsibility: Finance, HR, IT and Corporate Functions Abbreviations C = Chairman, DC = Deputy Chairman, M = Member Insights and highlights Our business Corporate information Financial report Back to content Board of Directors Demant - Annual Report 2021 56 Board of Directors Niels B. Christiansen (male) Chairman Born 1966 Nationality: Danish 8,060 shares (unchanged) Niels Jacobsen (male) Deputy Chairman Born 1957 Nationality: Danish 901,340 shares (-100,000) Joined the Board in 2008 Chairman since 2017 Chairman of the nomination, remuneration and IT security committees and member of the audit committee Considered independent: No Position: CEO & President, LEGO A/S Other positions: William Demant Founda- tion (DC), William Demant Invest A/S (M), Tetra Laval S.A. (M) and Committee on Business Policy under the Confederation of Danish Industry (C) Education: Holds a M.Sc. in Engineering from the Technical University of Denmark and an MBA from INSEAD Competences: International leadership experience from major, global, industrial, consumer goods and high-tech companies, business management and board experi- ence as well as strong insights into indus- trial policy Attendance in Board and committee meetings: No absence Joined the Board in 2017 Deputy Chairman since 2017 Member of the audit, nomination, remuner- ation and IT security committees Considered independent: No Position: CEO, William Demant Invest A/S Other positions: KIRKBI A/S (DC), Nissens A/S (C), Thomas B. Thrige Foundation (C), ABOUT YOU Holding GmbH (DC), EKF Danmarks Eksportkredit (M). Related to William Demant Invest: Jeudan A/S (C), Össur hf. (C), Vision RT Ltd. (C), Founders A/S (C) and Boston Holding A/S (M) Education: Holds a M.Sc. in Economics from Aarhus University Competences: International leadership experience from major, global companies in the global healthcare and MedTech in- dustry, business management and board experience as well as in-depth insights into financial matters, accounting, risk management and M&A Attendance in Board and committee meetings: No absence Sisse Fjelsted Rasmussen (female) Born 1967 Nationality: Danish No shares Anja Madsen (female) Born 1976 Nationality: Danish 1,500 shares (unchanged) Joined the Board in 2021 Chairman of the audit committee and member of the IT security committee Considered independent: Yes Position: CFO, Stark Group Other positions: CO-RO (M, C audit com- mittee), Conscia A/S (M) and Committee on Tax Policy under the Confederation of Danish Industry (M) Education: Holds a M.Sc. in Business Eco- nomics and Auditing from Copenhagen Business School (CBS) Competences: International leadership experience within the area of finance and accounting, including board and CFO ex- perience from listed companies as well as in-depth insights into value creation, change management and M&A Attendance in Board and committee meetings: No absence Joined the Board in 2020 Member of the audit committee Considered independent: Yes Position: Executive Vice President, Føtex Other positions: Lemvigh-Müller A/S (M) Education: Holds a B.Sc. in Economics from London School of Economics and an MBA from INSEAD Competences: International leadership experience from large companies in the retail segment; experienced leader of oper- ations, e-commerce and transformation with a background in strategy execution; lived and worked in the UK for many years Attendance in Board and committee meetings: Absent from one audit commit- tee meeting Abbreviations C = Chairman, DC = Deputy Chairman, M = Member Insights and highlights Our business Corporate information Financial report Back to content Board of Directors Demant - Annual Report 2021 57 Casper Jensen (male) Born 1979 Nationality: Danish 1,194 shares (+694) Jørgen Møller Nielsen (male) Born 1962 Nationality: Danish 366 shares (unchanged) Staff-elected Board member in 2019 for a term of four years Considered independent: N/A Position: Vice President of Sales, Interacoustics, a subsidiary company of Demant Has been with the Demant Group since 2012 Education: Holds an MBA from Coventry University Attendance in Board and committee meetings: Absent from one meeting Staff-elected Board member since 2017 and also from 2011-2015. Re-elected in 2019 for a term of four years Considered independent: N/A Position: Project Manager, Demant facility in Ballerup, Denmark Has been with the Demant Group since 2001 Education: Holds a M.Sc. in Electrical Engineering from the Technical University of Denmark and a Diploma in Business Administration (Organisation and Strategy) Attendance in Board and committee meetings: No absence Abbreviations C = Chairman, DC = Deputy Chairman, M = Member Kristian Villumsen (male) Born 1970 Nationality: Danish 4,130 shares (+4,130) Thomas Duer (male) Born 1973 Nationality: Danish 1,335 shares (unchanged) Joined the Board in 2021 Member of the audit committee Considered independent: Yes Position: President & CEO, Coloplast Other positions: Committee on Life Science under the Confederation of Danish Industry (M) Education: Holds a Master of Political Science from Aarhus University and a Master in Public Policy from Harvard University Competences: International leadership experience from the global MedTech indus- try, management experience from such areas as innovation, strategy deployment and commercial excellence Attendance in Board and committee meetings: No absence Staff-elected Board member since 2015. Re-elected in 2019 for a term of four years Considered independent: N/A Position: Director of Configuration & Test, R&D, Demant Has been with the Demant Group since 2002 Other positions: Danske Sprogseminarer A/S (M), Oticon A/S (M, staff-elected) Education: Holds a M.Sc. in Electrical Engineering from the Technical University of Denmark Attendance in Board and committee meetings: No absence Insights and highlights Our business Corporate information Financial report Back to content Board of Directors Demant - Annual Report 2021 58 Financial pages Oticon Insights and highlights Our business Corporate information Financial report Back to content Demant - Annual Report 2021 58 Insights and highlights Our business Corporate information Financial report Back to content Management statement Demant - Annual Report 2021 59 The Board of Directors and Executive Board have today reviewed and approved the Annual Report 2021 of Demant A/S for the financial year 1 January to 31 Decem- ber 2021. The consolidated financial statements are prepared and presented in accordance with International Financial Reporting Standards as adopted by the EU and addi- tional requirements in the Danish Financial Statements Act. The Parent financial statements are prepared and presented in accordance with the Danish Financial Statements Act. Further, the Annual Re- port 2021 has been prepared in accord- ance with Danish disclosure requirements for listed companies. In our opinion, the consolidated financial statements and the Parent financial state- ments give a true and fair presentation of ts, liabili- ties and financial position at 31 December cash flows for the financial year 1 January to 31 December 2021. includes a true and fair view of the devel- opment in the operations and financial cir- cumstances of the Group and the Parent, of the results for the year and of the finan- cial position of the Group and the Parent as well as a description of the most signifi- cant risks and uncertainties facing the Group and the Parent. In our opinion, the Annual Report 2021 for Demant A/S with the file name DEMANT- 2021-12-31-en.zip for the financial year 1 January to 31 December 2021 for the Group and the Parent is prepared in com- pliance with the ESEF regulation. We recommend that the Annual Report 2021 be adopted at the annual general meeting on 10 March 2022. Smørum, 8 February 2022 Management statement Executive Board Søren Nielsen, President & CEO René Schneider, CFO Board of Directors Niels B. Christiansen, Chairman Niels Jacobsen, Deputy Chairman Thomas Duer Casper Jensen Anja Madsen Jørgen Møller Nielsen Sisse Fjelsted Rasmussen Kristian Villumsen Insights and highlights Our business Corporate information Financial report Back to content Demant - Annual Report 2021 60 To the shareholders of Demant A/S Opinion We have audited the consolidated finan- cial statements and the Parent financial statements of Demant A/S for the financial year 1 January 2021 to 31 December 2021, which comprise the income state- ment, balance sheet, statement of changes in equity and notes, including a summary of significant accounting policies, for the Group as well as the Parent, and the statement of comprehensive income and the cash flow statement of the Group. The consolidated financial statements are pre- pared in accordance with International Fi- nancial Reporting Standards as adopted by the EU and additional requirements of the Danish Financial Statements Act, and the Parent financial statements are pre- pared in accordance with the Danish Fi- nancial Statements Act. In our opinion, the consolidated financial statements give a true and fair view of the ber 2021 and of the results of its opera- tions and cash flows for the financial year 1 January 2021 to 31 December 2021 in accordance with International Financial Reporting Standards as adopted by the EU and additional requirements under the Danish Financial Statements Act. Further, in our opinion, the Parent financial statements give a true and fair view of the ber 2021 and of the results of its opera- tions for the financial year 1 January 2021 to 31 December 2021 in accordance with the Danish Financial Statements Act. Our opinion is consistent with our audit book comments issued to the audit com- mittee and the Board of Directors. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs) and the additional requirements ap- plicable in Denmark. Our responsibilities under those standards and requirements sponsibilities for the audit of the consoli- dated financial statements and the Parent financial statements section of this audi- Group in accordance with the International International Code of Ethics for Profes- sional Accountants (IESBA Code) and the additional ethical requirements applicable in Denmark, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appro- priate to provide a basis for our opinion. To the best of our knowledge and belief, we have not provided any prohibited non- audit services as referred to in Article 5(1) of Regulation (EU) No 537/2014. After Demant A/S was listed on Nasdaq OMX Copenhagen, we were appointed au- ditors for the first time on 29 April 1996 for the financial year 1996. We have been re- appointed annually by decision of the gen- eral meeting for a total contiguous en- gagement period of 25 years up to and in- cluding the financial year 2021. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the con- solidated financial statements and the Parent financial statements for the finan- cial year 1 January 2021 to 31 December 2021. These matters were addressed in the context of our audit of the consolidated financial statements and the Parent finn- cial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Accounting for business combinations Refer to Note 6.1 in the consolidated finan- cial statements. The allocation of the purchase price in business combinations to other intangible assets acquired relies on assumptions and judgements made by Management. Man- agement has performed fair value calcula- tions, which include judgements and esti- mates, including the future cash flow an- ticipated from the acquired customer base and the discount rate applied. We have tested internal controls that ad- dress the accounting for business combi- nations and tested the reasonableness of the key assumptions, including market po- discount rates. We assessed and chal- in its fair value models for identifying and measuring customer bases and for other intangible assets, including: • Discussed the future cash flow projec- tions with Management and key em- ployees. • Consulted with subject matter experts regarding the valuation methodologies applied. • Tested the valuation model, including mathematical accuracy, and obtained supporting evidence for future cash flow projections, estimates and key as- sumptions, including the applied dis- count rate. • Considered the impact of reasonably possible changes in key assumptions and performed sensitivity calculations to quantify the impact of potential models. Independent auditor’s report Insights and highlights Our business Corporate information Financial report Back to content Demant - Annual Report 2021 61 • Assessed the adequacy and appropri- ateness of disclosures in the notes and compliance with the requirements of IFRS 3. Statement on the Management commentary Management is responsible for the Man- agement commentary. Our opinion on the consolidated financial statements and the Parent financial state- ments does not cover the Management commentary, and we do not express any form of assurance conclusion thereon. In connection with our audit of the consoli- dated financial statements and the Parent financial statements, our responsibility is to read the Management commentary and, in doing so, consider whether the Manage- ment commentary is materially incon- sistent with the consolidated financial statements and the Parent financial state- ments or our knowledge obtained in the audit or otherwise appears to be materi- ally misstated. Moreover, it is our responsibility to con- sider whether the Management commen- tary provides the information required un- der the Danish Financial Statements Act. Based on the work we have performed, we conclude that the Management commen- tary is in accordance with the consolidated financial statements and the Parent finan- cial statements and has been prepared in accordance with the requirements of the Danish Financial Statements Act. We did not identify any material misstatement of the Management commentary. Management’s responsibilities for the consolidated financial statements and the Parent financial statements Management is responsible for the prepa- ration of consolidated financial statements that give a true and fair view in accord- ance with International Financial Report- ing Standards as adopted by the EU and additional requirements of the Danish Fi- nancial Statements Act as well as the preparation of Parent financial statements that give a true and fair view in accord- ance with the Danish Financial Statements Act and for such internal control as Man- agement determines is necessary to ena- ble the preparation of consolidated finan- cial statements and Parent financial state- ments that are free from material mis- statement, whether due to fraud or error. In preparing the consolidated financial statements and the Parent financial state- ments, Management is responsible for as- ity to continue as a going concern, for dis- closing, as applicable, matters related to going concern and for using the going con- cern basis of accounting in preparing the consolidated financial statements and the Parent financial statements, unless Man- agement either intends to liquidate the Group or the entity or to cease operations or has no realistic alternative but to do so. Auditor’s responsibilities for the audit of the consolidated financial statements and the Parent financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements and the Parent finan- cial statements as a whole are free from material misstatement, whether due to port that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs and the additional requirements applicable in Denmark will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered ma- terial if, individually or in the aggregate, they could reasonably be expected to in- fluence the economic decisions of users taken on the basis of these consolidated fi- nancial statements and these Parent fi- nancial statements. As part of an audit conducted in accord- ance with ISAs and the additional require- ments applicable in Denmark, we exercise professional judgement and maintain pro- fessional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the consolidated finan- cial statements and the Parent financial statements, whether due to fraud or er- ror, design and perform audit proce- dures responsive to those risks, and ob- tain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collu- sion, forgery, intentional omissions, mis- representations or the override of inter- nal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the trol. • Evaluate the appropriateness of ac- counting policies used and the reasona- bleness of accounting estimates and re- lated disclosures made by Manage- ment. • Conclude on the appropriateness of basis of accounting in preparing the consolidated financial statements and the Parent financial statements, and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may going concern. If we conclude that a material uncertainty exists, we are re- quired to draw attention in our audito report to the related disclosures in the consolidated financial statements and the Parent financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our However, future events or conditions may cause the Group and the entity to cease to continue as a going concern. Insights and highlights Our business Corporate information Financial report Back to content Demant - Annual Report 2021 62 • Evaluate the overall presentation, struc- ture and content of the consolidated fi- nancial statements and the Parent fi- nancial statements, including the disclo- sures in the notes, and whether the con- solidated financial statements and the Parent financial statements represent the underlying transactions and events in a manner that gives a true and fair view. • Obtain sufficient appropriate audit evi- dence regarding the financial infor- mation of the entities or business activi- ties within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely re- sponsible for our audit opinion. We communicate with those charged with governance regarding, among other mat- ters, the planned scope and timing of the audit and significant audit findings, includ- ing any significant deficiencies in internal control that we identify during our audit. We also provide those charged with gov- ernance with a statement that we have complied with relevant ethical require- ments regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and, where applicable, safeguards put in place and measures taken to eliminate threats. From the matters communicated with those charged with governance, we deter- mine those matters that were of most sig- nificance in the audit of the consolidated financial statements and the Parent finan- cial statements of the current period and are therefore the key audit matters. We port unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communi- cation. Report on compliance with the ESEF Regulation As part of our audit of the consolidated fi- nancial statements and the Parent finan- cial statements of Demant A/S, we per- formed procedures to express an opinion on whether the Annual Report of Demant A/S for the financial year 1 January 2021 to 31 December 2021 with the file name DEMANT-2021-12-31-en.zip is prepared, in all material respects, in compliance with the Commission Delegated Regulation (EU) 2019/815 on the European Single Electronic Format (ESEF Regulation), which includes requirements related to the prep- aration of the annual report in XHTML for- mat and iXBRL tagging of the consoli- dated financial statements. Management is responsible for preparing an annual report that complies with the ESEF Regulation. This responsibility in- cludes: • The preparing of the annual report in XHTML format; • The selection and application of appro- priate iXBRL tags, including extensions to the ESEF taxonomy and the anchor- ing thereof to elements in the taxonomy, for financial information required to be tagged using judgement where neces- sary; • Ensuring consistency between iXBRL tagged data and the consolidated fi- nancial statements presented in human readable format; and • For such internal control as Manage- ment determines necessary to enable the preparation of an annual report that is compliant with the ESEF Regulation. Our responsibility is to obtain reasonable assurance on whether the annual report is prepared, in all material respects, in com- pliance with the ESEF Regulation based on the evidence we have obtained and to is- sue a report that includes our opinion. The nature, timing and extent of procedures ment, including the assessment of the risks of material departures from the require- ments set out in the ESEF Regulation, whether due to fraud or error. The proce- dures include: • Testing whether the annual report is prepared in XHTML format; • Obtaining an understanding of the com- ternal control over the tagging process; • Evaluating the completeness of the iXBRL tagging of the consolidated fi- nancial statements; • Evaluating the appropriateness of the lected from the ESEF taxonomy and the creation of extension elements where no suitable element in the ESEF taxon- omy has been identified; • Evaluating the use of anchoring of ex- tension elements to elements in the ESEF taxonomy; and • Reconciling the iXBRL tagged data with the audited consolidated financial statements. Insights and highlights Our business Corporate information Financial report Back to content Demant - Annual Report 2021 63 In our opinion, the Annual Report of De- mant A/S for the financial year 1 January 2021 to 31 December 2021 with the file name DEMANT-2021-12-31-en.zip is pre- pared in all material respects, in compli- ance with the ESEF Regulation. Copenhagen, 8 February 2022 Deloitte Statsautoriseret Revisionspartnerselskab Business Registration No 33 96 35 56 Anders Vad Dons State-Authorised Public Accountant MNE no 25299 Kåre Kansonen Valtersdorf State-Authorised Public Accountant MNE no 34490 Insights and highlights Our business Corporate information Financial report Back to content Consolidated financial statements Demant - Annual Report 2021 64 Consolidated financial statements Demant - Annual Report 2021 64 Insights and highlights Our business Corporate information Financial report Back to content Insights and highlights Our business Corporate information Financial report Back to content Consolidated financial statements Demant - Annual Report 2021 65 Consolidated income statement (DKK million) 18,388 14,469 -4,634 -4,276 13,754 10,193 -1,350 -1,261 -8,241 -7,067 -937 -840 120 505 99 - 3,445 1,530 43 38 -245 -232 3,243 1,336 -715 -202 2,528 1,134 2,513 1,121 15 13 2,528 1,134 10.70 4.68 10.70 4.68 Consolidated statement of comprehensive income (DKK million) 2,528 1,134 425 -467 -177 110 36 -12 29 -3 313 -372 62 -2 -12 10 50 8 363 -364 2,891 770 2,876 757 15 13 2,891 770 -3 19 40 -25 -8 3 -12 10 17 7 Insights and highlights Our business Corporate information Financial report Back to content Consolidated financial statements Demant - Annual Report 2021 66 (DKK million) 48 48 7,929 8,202 7,977 8,250 4 29 7,981 8,279 2,795 3,499 1,610 1,437 470 339 268 305 340 313 423 381 5,906 6,274 6,422 3,612 511 456 808 802 - 5 267 131 81 17 2,302 1,801 81 14 501 536 10,973 7,374 16,879 13,648 24,860 21,927 Consolidated balance sheet 31 December (DKK million) 10,317 9,104 2,277 2,139 2,079 1,847 858 833 267 247 11 14 569 503 596 553 4,380 3,997 16,974 15,240 2,366 1,968 3,203 2,808 147 111 68 63 616 441 6 81 308 263 1,172 952 7,886 6,687 24,860 21,927 Insights and highlights Our business Corporate information Financial report Back to content Consolidated financial statements Demant - Annual Report 2021 67 Acquisition of enterprises, participating in- terests and activities includes loans of DKK 63 million (DKK 120 million in 2020) classi- fied as other non-current assets, which have been settled as part of acquisitions without cash payments. (DKK million) 3,445 1,530 876 855 -472 266 -424 -73 345 236 91 41 106 41 3,967 2,896 27 20 -243 -234 -476 -61 3,275 2,621 -708 -394 161 - -164 -174 -558 -507 16 14 -434 -219 390 288 -1,297 -992 (DKK million) -2,404 -82 2,506 1,446 1,886 -2,157 -533 -442 -34 -3 -3,200 -197 -1,779 -1,435 199 194 952 792 21 -34 1,172 952 1,172 952 1,172 952 Consolidated cash flow statement Insights and highlights Our business Corporate information Financial report Back to content Consolidated financial statements Demant - Annual Report 2021 68 Consolidated statement of changes in equity (DKK million) 48 -414 55 8,561 8,250 29 8,279 - - - 2,513 2,513 15 2,528 - 425 - - 425 - 425 - - -177 - -177 - -177 - - 36 - 36 - 36 - - - 62 62 - 62 - -3 32 -12 17 - 17 - 422 -109 50 363 - 363 - 422 -109 2,563 2,876 15 2,891 - - - -3,143 -3,143 - -3,143 - - - 8 8 - 8 - - - -14 -14 -40 -54 48 8 -54 7,975 7,977 4 7,981 Insights and highlights Our business Corporate information Financial report Back to content Consolidated financial statements Demant - Annual Report 2021 69 Consolidated statement of changes in equity (DKK million) 49 34 -21 7,574 7,636 9 7,645 - - - 1,121 1,121 13 1,134 - -467 - - -467 - -467 - - 110 - 110 - 110 - - -12 - -12 - -12 - - - -2 -2 - -2 - 19 -22 10 7 - 7 - -448 76 8 -364 - -364 - -448 76 1,129 757 13 770 - - - -147 -147 - -147 - - - 4 4 - 4 -1 - - 1 - - - - - - - - -3 -3 - - - - - 10 10 48 -414 55 8,561 8,250 29 8,279 Insights and highlights Our business Corporate information Financial report Back to content Notes to consolidated financial statements Demant - Annual Report 2021 70 Section 1 page 71 Operating activities and cash flow 1.1 Segment disclosures 1.2 Revenue from contracts with customers 1.3 Employees 1.4 Amortisation, depreciation and impairment losses 1.5 Earnings per share 1.6 Inventories 1.7 Receivables 1.8 Specification of non-cash items etc. Section 2 page 82 Exchange rates 2.1 Exchange rate risk policy 2.2 Sensitivity analysis in respect of exchange rates 2.3 Hedging and forward exchange contracts 2.4 Exchange rates Section 3 page 86 Asset base 3.1 Intangible assets 3.2 Property, plant and equipment 3.3 Leases 3.4 Other non-current assets 3.5 Non-current assets by geo- graphic region 3.6 Impairment testing Section 4 page 95 Capital structure and financial management 4.1 Financial risk management and capital structure 4.2 Net financial items 4.3 Categories of financial instru- ments 4.4 Net interest-bearing debt, li- quidity and interest rate risks 4.5 Fair value hierarchy Section 5 page 103 Tax 5.1 Tax on profit 5.2 Deferred tax Section 6 page 106 Acquisitions 6.1 Acquisition of enterprises and activities 6.2 Divestment of enterprises and activities Section 7 page 110 Provisions, other liabilities etc. 7.1 Provisions 7.2 Other liabilities 7.3 Deferred income 7.4 Contingent liabilities Section 8 page 115 Other disclosure require- ments 8.1 Related parties 8.2 Fees to statutory auditors 8.3 Government grants 8.4 Events after the balance sheet date Section 9 page 118 Basis for preparation 9.1 Group accounting policies 9.2 Accounting estimates and judgements Notes to consolidated financial statements Insights and highlights Our business Corporate information Financial report Back to content Demant - Annual Report 2021 70 Insights and highlights Our business Corporate information Financial report Back to content Section 1 Operating activities and cash flow Demant - Annual Report 2021 71 Operating activities and cash flow REVENUE 18,388 DKK MILLION FREE CASH FLOW 2,525 DKK MILLION Demant - Annual Report 2021 71 Insights and highlights Our business Corporate information Financial report Back to content Section 1 Operating activities and cash flow Demant - Annual Report 2021 72 Description of products and services for each reportable segment Based on IFRS 8 Operating Segments and the internal reporting model used by Man- agement for the assessment of results and the use of resources, Management has identified Hearing Healthcare and Com- munications as the reportable segments in the Group. the organisation and management of activities. Hearing Healthcare comprises the four business areas: Hearing Aids, Hearing Care, Hearing Implants and Diagnostics, which provide hearing healthcare solu- tions, involving manufacturing, servicing and sale of hearing aids and hearing im- plants as well as diagnostic products and services. Communications only comprises our head- set business, which operates under the EPOS brand and provides headsets for the professional call centre and office market (Enterprise Solutions) and headsets for gaming (Gaming). Segment performance is evaluated on EBIT level and is based on the accounting policies for the consolidated income state- ment. The consolidated financial income and expenses as well as income taxes are managed on a Group basis and are not allocated to operating segments. Segmentation of assets and liabilities Segment assets and liabilities are based on the accounting policies for the consoli- dated balance sheet and allocated based on the operation of the segment. derivative finan- cial instruments and income tax-related assets and liabilities are managed on a Group basis and are not allocated to operating segments. 1.1 Segment disclosures (DKK million) 17,205 1,183 18,388 13,163 1,306 14,469 -4,022 -612 -4,634 -3,480 -796 -4,276 13,183 571 13,754 9,683 510 10,193 -1,153 -197 -1,350 -1,092 -169 -1,261 -8,241 - -8,241 -6,621 -446 -7,067 -905 -32 -937 -811 -29 -840 120 - 120 52 453 505 99 - 99 - - - 3,567 -122 3,445 1,211 319 1,530 887 25 912 843 17 860 108 14 122 143 8 151 48 - 48 1 453 454 Insights and highlights Our business Corporate information Financial report Back to content Section 1 Operating activities and cash flow Demant - Annual Report 2021 73 1.1 Segment disclosures (continued) (DKK million) 9,835 482 - - 10,317 8,620 484 - - 9,104 2,250 27 - - 2,277 2,123 16 - - 2,139 2,031 48 - - 2,079 1,802 45 - - 1,847 791 67 - - 858 766 67 - - 833 781 66 - 596 1,443 763 46 - 508 1,317 3,603 181 - 596 4,380 3,331 158 - 508 3,997 15,688 690 - 596 16,974 14,074 658 - 508 15,240 1,841 525 - - 2,366 1,710 258 - - 1,968 2,940 263 - - 3,203 2,468 340 - - 2,808 1,130 - -1,130 - - 635 - -635 - - 1,013 132 - - 1,145 873 86 - - 959 1,113 59 - - 1,172 911 41 - - 952 8,037 979 -1,130 - 7,886 6,597 725 -635 - 6,687 23,725 1,669 -1,130 596 24,860 20,671 1,383 -635 508 21,927 17,126 272 - -9,417 7,981 14,970 359 - -7,050 8,279 - - - 2,795 2,795 - - - 3,499 3,499 1,572 38 - - 1,610 1,400 37 - - 1,437 1,014 31 - 456 1,501 982 30 - 326 1,338 2,586 69 - 3,251 5,906 2,382 67 - 3,825 6,274 - - - 6,422 6,422 - - - 3,612 3,612 499 12 - - 511 448 8 - - 456 - 1,130 -1,130 - - - 635 -635 - - 3,514 186 - 340 4,040 2,871 314 - 121 3,306 4,013 1,328 -1,130 6,762 10,973 3,319 957 -635 3,733 7,374 23,725 1,669 -1,130 596 24,860 20,671 1,383 -635 508 21,927 Insights and highlights Our business Corporate information Financial report Back to content Section 1 Operating activities and cash flow Demant - Annual Report 2021 74 Consolidated revenue mainly derives from the sale of goods and is broken down by the customers' geographic region. The ten largest single customers together account for around 10% (11% in 2020) of total consolidated revenue. Value adjustments transferred from equity relating to derivatives made for hedging foreign exchange risks on revenue amount to DKK -36 million (DKK 12 million in 2020). 1.2 Revenue from contracts with customers (DKK million) 72 93 852 824 304 213 162 116 1,390 1,246 (DKK million) 1,246 1,372 52 -54 -510 -553 469 448 81 28 41 -13 11 18 1,390 1,246 (DKK million) 269 262 7,764 6,262 7,255 5,340 1,112 932 1,562 1,313 426 360 18,388 14,469 (DKK million) 7,347 5,701 7,553 5,464 512 523 1,823 1,475 1,183 1,306 -30 - 18,388 14,469 Insights and highlights Our business Corporate information Financial report Back to content Section 1 Operating activities and cash flow Demant - Annual Report 2021 75 Nature of goods and services Control is normally transferred to the cus- tomer when the goods are shipped to the customer, though delivery terms can vary and control may be transferred at a later point. When selling hearing aids to cus- tomers, we transfer control and recognise revenue when the hearing aid is delivered to the customer at a given point in time and when a hearing aid is initially fitted to countries, the users are granted a trial pe- riod. In such cases, the transfer of control occurs when the trial period expires. In some countries, customers are given the right to return the hearing aid within a cer- tain period. In such cases, the expected re- turns are estimated based on an analysis of historical experience adjusted for any known factors impacting expectations for future return rates. Revenue and cost of goods sold are adjusted accordingly, and contract liabilities (refund liabilities) and rights to the returned goods (included in prepaid expenses) are recognised for the expected returns. Our activities also involve delivery of vari- ous services, such as extended warranties, warranty-related coverages (loss and damage) and after-sales services (e.g. fine-tuning of the hearing aid, additional hearing test and cleaning). Revenue from these services is recognised on a straight- line basis over the warranty or service pe- riod as the user makes use of the service continuously. Some users purchase a bat- tery package or are given batteries free of charge as part of the purchase of the hearing aid, entitling them to free batteries for a certain period. Revenue is recognised when the user receives the batteries or is given batteries free of charge as part of the purchase of the hearing aid. When available, we use an observable price to determine the stand-alone selling price for the separate performance obligations re- lated to these services, and in countries where observable prices are not available, we use a cost-plus-margin method. The standard warranty period for hearing aids and diagnostic equipment varies be- tween countries but is typically 12-24 months and for certain products or coun- tries up to 48 months. The extended war- ranty covers periods beyond the standard warranty period or standard warranty terms. Payment terms vary significantly between countries and depend on whether the customer is a private or public customer. The majority of hearing aids sold to users are invoiced and paid for after the initial fitting, but some customers choose to have the hearing aid financed by us. The trans- action price of such arrangements is ad- justed for any significant financing benefit, and the financing component is recognised as financial income. Accounting policies Revenue is recognised when obligations under the terms of the contract with the customer are satisfied, which usually oc- curs with the transfer of control of our products and services within Hearing Healthcare and Communications. Revenue is measured as the consideration we ex- pect to receive in exchange for transferring goods and providing services net of the estimated discounts or other customer- related reductions. Accounting estimates and judgements Discounts, returns etc. (estimate) Discounts, loyalty programmes and other revenue reductions are estimated and ac- crued when the related revenue is recog- nised. To make such estimates is a matter of judgement, as all conditions are not known at the time of sale, e.g. the number of units sold to a given customer or the ex- pected utilisation of loyalty programmes. Sales discounts, rebates and loyalty pro- grammes are adjusted, as we obtain bet- ter information on the likelihood that they will be realised and the value at which they are expected to be realised. Sales dis- counts and rebates are recognised under other cost payables as part of other liabili- ties, and loyalty programmes are recog- nised under deferred income. Depending on local legislation and the conditions to which a sale is subject, some customers have the option to return pur- chased goods and obtain a refund. Based on historical return rates, an estimate is made of the expected returns and a provi- sion is recognised. This provision is up- dated, as returns are recognised or when we collect more accurate data on return rates. After-sales services (estimate) After-sales services are provided to users of our hearing aids and are based on esti- mates as not all users make use of these services. The estimate is a matter of judge- ment and is based on the number of visits, and the expected number of users that make use of the after-sales services. 1.2 Revenue from contracts with customers (continued) Insights and highlights Our business Corporate information Financial report Back to content Section 1 Operating activities and cash flow Demant - Annual Report 2021 76 President & CEO, Søren Nielsen, is entitled sal. CFO, René Schneider, is currently enti- dismissal, which increases with seniority. In 2021, the basic remuneration for a was DKK 400,000 (DKK 350,000 in 2020). The Chairman of the Board of Directors re- ceives three times the basic remuneration and the Deputy Chairman twice the basic remuneration. The members of the audit committee each receive basic remunera- tion of DKK 50,000 (DKK 50,000 in 2020), and the chairman of the audit committee receives three times the basic remuneration. Accounting policies Employee costs comprise wages, salaries, social security contributions, annual and sick leave, bonuses and non-monetary benefits and are recognised in the year in which the associated services are ren- dered by the employees. Where Demant provides long-term employee benefits, the costs are accrued to match the rendering of the service by the employees concerned. 1.3 Employees (DKK million) 6,736 5,953 18 12 91 79 19 28 731 627 7,595 6,699 960 892 880 839 4,959 4,289 796 679 7,595 6,699 17,500 16,155 (DKK million) 12.9 3.7 16.6 11.9 2.9 14.8 5.7 1.6 7.3 5.2 1.3 6.5 18.6 5.3 23.9 17.1 4.2 21.3 4.8 - 4.8 3.6 - 3.6 Insights and highlights Our business Corporate information Financial report Back to content Section 1 Operating activities and cash flow Demant - Annual Report 2021 77 The Group has two types of share-based remuneration programmes, which consist was introduced in 2019 and is equity- gramme, which was introduced in 2016, is cash-settled. Both programmes are awarded on a yearly basis and are contin- gent on the employee still being employed and not under termination when three years have passed from the time of the grant. The fair value at the time of the grant of the shares granted under both programmes is based on the average share price of the first five trading days after publication of the annual report. “Shadow share” programme In 2021, the Group granted 43,514 to five employees (six in 2020) was DKK 11 million (DKK 10 million in 2020) at the time of the grant. The liability is recognised on a straight-line basis, as the service is rendered, and the liability is remeasured at each reporting date and at the settle- ment date based on the fair value of the are recognised as financial income or fi- nancial expenses. If relevant, the liability is adjusted to reflect the expected risk of non-vesting as a result of resignations. Any changes to the liability are recognised in the income statement. In 2021, the Group bought back shares to cover the financial risk of share price fluctuations related to the programmes. At 31 December 2021, the remaining average contractual life of cash-settled remuneration programmes was 15 months (19 months in 2020). RSU programme In 2021, RSU shares were granted to 110 employees (13 employees in 2020). The Group recognised costs of DKK 8 million (DKK 2 million in 2020) in the income state- ment related to the RSU programme. There is no subsequent remeasurement of fair value. The costs are recognised on a straight-line basis, as the service is ren- dered. At 31 December 2021, the remain- ing average contractual life of equity-set- tled share programmes was 21 months (21 months in 2020). No. (DKK million) 16,543 21,899 5 -3,738 34,704 72,855 20 -1,246 -237 106,076 Accounting estimates and judgements Vesting conditions and fair value (estimate) Management must evaluate the likelihood of vesting conditions for the share-based programmes being fulfilled. Vesting is en- tirely dependent on the persons enrolled in the share-based programmes remaining employed until the end of the vesting period. The estimate made based on this likeli- hood is used to calculate the fair value of the share-based programmes. Further- more, the shares must be valued. For this purpose, Management uses the share price quoted on Nasdaq Copenhagen. 1.3 Employees (continued) (DKK million) 7.0 9.0 6.3 7.3 5.6 4.1 4.2 5.1 5.3 4.2 0.7 0.8 -3.5 -4.3 -4.2 -4.2 14.4 13.0 7.0 9.0 7.5 4.0 6.0 3.7 11.4 7.3 7.3 5.3 Insights and highlights Our business Corporate information Financial report Back to content Section 1 Operating activities and cash flow Demant - Annual Report 2021 78 For accounting policies on amortisation and depreciation, please refer to Note 3.1, Note 3.2 and Note 3.3. There are no impairment losses in 2021 and 2020. 1.4 Amortisation, depreciation and impairment losses (DKK million) 122 151 374 367 538 493 1,034 1,011 99 103 49 69 713 633 173 206 1,034 1,011 1.5 Earnings per share 2,513 1,121 240.30 242.09 -5.48 -2.31 234.82 239.78 10.70 4.68 10.70 4.68 Insights and highlights Our business Corporate information Financial report Back to content Section 1 Operating activities and cash flow Demant - Annual Report 2021 79 Write-downs for the year are shown net, as breakdown into reversed write-downs and new write-downs is not possible. In- ventories are generally expected to be sold within one year. Accounting policies Raw materials, components and goods for resale are measured at cost according to the FIFO principle (according to which the most recently purchased items are consid- ered to be in stock) or at their net realisa- ble value, whichever is lower. Group-manufactured products and work in progress are measured at the value of direct costs, direct payroll costs, consuma- bles and a proportionate share of indirect production costs, which are allocated on the basis of the normal capacity of the production facility. Indirect production costs include the proportionate share of capacity costs directly relating to Group- manufactured products and work in pro- gress. The net realisable value of inventories is determined as the estimated selling price less costs of completion and costs to sell. Accounting estimates and judgements Indirect production cost (judgement) Indirect production cost allocations to in- ventory are based on relevant judgements related to capacity utilisation at the pro- duction facility, production time and other product-related factors. The judgements are reviewed regularly to ensure that in- ventories are measured at their actual pro- duction cost. Changes in judgements may affect gross profit margins as well as the valuation of work in progress, finished goods and goods for resale. Obsolescence provision (estimate) The obsolescence provision for inventories is based on the expected sales forecast for the individual types of hearing devices, diagnostic equipment, hearing implants, headsets and other gaming/enterprise de- vices. Sales forecasts are based on Man- tions and trends, and the obsolescence provision is subject to changes in these assumptions. 1.6 Inventories (DKK million) 940 682 74 108 1,352 1,178 2,366 1,968 179 125 90 77 3,539 3,192 Insights and highlights Our business Corporate information Financial report Back to content Section 1 Operating activities and cash flow Demant - Annual Report 2021 80 The opening balance of trade receivables in 2020 amounted to DKK 3,209 million. Of the total amount of trade receivables, DKK 250 million (DKK 243 million in 2020) is expected to be collected after 12 months. For information on security and collateral, please refer to Credit risks in Note 4.1. In 2020, an additional provision for bad debt of DKK 100 million was made to cover uncertainties caused by the Covid- 19 pandemic. The provision was recog- nised in loss allowance for trade receiva- bles, which were more than 12 months overdue. In 2021, the Group reversed the provision for additional bad debt of DKK 60 million, while DKK 40 million has been realised during the year. As of 31 Decem- ber 2021, no additional provision to cover uncertainties caused by the Covid-19 pandemic exists. 1.7 Receivables (DKK million) 3,203 2,808 690 610 495 334 4,388 3,752 -426 -339 -12 26 88 145 -134 -267 133 9 -351 -426 (DKK million) 2,202 582 224 210 319 3,537 697 - - - 10 707 495 - - - - 495 3,394 582 224 210 329 4,739 27 43 49 47 168 334 11 - - - 6 17 - - - - - - 38 43 49 47 174 351 0.5% 1.5% 3.0% 5.0% 10.0% 1,939 525 182 251 317 3,214 619 3 1 - 7 630 334 - - - - 334 2,892 528 183 251 324 4,178 19 20 19 55 293 406 12 1 1 - 6 20 - - - - - - 31 21 20 55 299 426 0.5% 1.5% 3.0% 5.0% 10.0% Insights and highlights Our business Corporate information Financial report Back to content Section 1 Operating activities and cash flow Demant - Annual Report 2021 81 Accounting policies Receivables include trade receivables, cus- tomer loans and other receivables. Receiv- ables are financial assets with fixed or de- terminable payments, which are not listed on an active market and are not derivatives. On initial recognition, receivables are meas- ured at fair value with the addition of trans- action costs. Receivables with a definite maturity date are measured at amortised cost. Receivables without a definite maturity date are measured at cost. Current receiva- nary activities are measured at nominal value. For trade receivables, the Group has a simplified approach to providing the ex- pected credit loss prescribed by IFRS 9. The provision for credit loss is measured through a provision matrix. To measure the expected credit loss, trade receivables have been grouped based on shared credit risk and the number of days that have passed after the due date. In accordance with IFRS 9, provisions have also been made for trade receivables not due. For trade receivables that are considered credit-impaired, the expected credit loss is determined on an individual basis. At initial recognition, a loss allowance is recognised for customer loans based on tomer loans that are considered credit- impaired, the expected credit loss is deter- mined on an individual basis. Accounting estimates and judgements Impairment of receivables (estimate) Allowance for impairment is calculated for both trade receivables and customer loans. The allowances are determined as ex- pected credit losses based on an assess- spectively, ability to pay. These assess- ments are made by local management for uniform groups of debtors and customer loans based on maturity analyses. When indicated by special circumstances, impair- ments are made for individual trade re- ceivables and customer loans. Other receivables are assessed on an indi- vidual basis. 1.8 Specification of non-cash items etc. (DKK million) 1,086 1,048 -120 -505 -4 2 -27 114 -43 156 65 50 -2 -12 -99 - 20 2 876 855 1.7 Receivables (continued) Insights and highlights Our business Corporate information Financial report Back to content Section 2 Exchange rates Demant - Annual Report 2021 82 Exchange rates Philips charger Insights and highlights Our business Corporate information Financial report Back to content Demant - Annual Report 2021 82 Insights and highlights Our business Corporate information Financial report Back to content Section 2 Exchange rates Demant - Annual Report 2021 83 The Group seeks to hedge against ex- change rate risks, first and foremost through forward exchange contracts. In relation to exchange rate fluctuations, hedging ensures predictability in the profit and gives Management the opportunity and the necessary time to redirect busi- ness arrangements in the event of persis- tent changes in foreign exchange rates. The Group aims to hedge such changes in foreign exchange rates by seeking to match positive and negative cash flows in the main currencies as much as possible and by entering into forward exchange contracts. The Group predominantly hedges estimated cash flows with a horizon of up to 18 months. operating profit (EBIT) and consolidated equity, given a change of 5% in the curren- cies with the highest exposures. The exchange rate impact on EBIT has EBIT for each currency and does not take into account a possible exchange rate im- pact on balance sheet values in those cur- rencies. 2.2 Sensitivity analysis in respect of exchange rates 2.1 Exchange rate risk policy (DKK million) (DKK million) +82 +19 +188 +179 +23 +16 +23 +20 +22 +15 +53 +48 +11 +11 +13 +13 +4 +5 +4 +4 -25 -22 +29 +27 Insights and highlights Our business Corporate information Financial report Back to content Section 2 Exchange rates Demant - Annual Report 2021 84 Open forward exchange contracts at the balance sheet date may be specified as shown below, with contracts for the sale of currency being shown at negative con- tract values. The expiry dates reflect the periods in which the hedged cash flows are expected to be realised. Realised forward exchange contracts are recognised in the income statement to- gether with the items, typically the revenue in foreign currency, that such contracts are designed to hedge. In 2021, our forward exchange contracts realised a loss of DKK 36 million (gain of DKK 12 million in 2020), which decreased reported revenue for the year. There have been no ineffectiveness in 2021 or 2020. Accounting policies On initial recognition, derivatives are measured at fair value at the settlement date. After initial recognition, derivatives are measured at fair value at the balance sheet date. Any positive or negative fair values of derivatives are recognised as separate items as Unrealised gains/losses on financial contracts in the balance sheet. Forward exchange contracts are meas- ured based on current market data and by use of commonly recognised valuation methods. Please refer to Note 4.5. Any changes in fair values of derivatives classified as hedging instruments and satisfying the criteria for hedging the fair value of a recognised asset or a recog- nised liability, are recognised in the income statement together with any changes in the fair value of the hedged asset or hedged li- ability. Any changes in fair values of deriv- atives classified as hedging instruments and satisfying the criteria for effective hedging of future transactions are recog- nised in other comprehensive income. The ineffective portion is recognised directly in the income statement. On realisation of the hedged transactions, the accumulated changes are recognised together with the related transactions. Derivatives not fulfilling the conditions for treatment as hedging instruments are con- sidered trading investments and measured at fair value, with fair value adjustments being recognised on an ongoing basis in the income statement. 2.3 Hedging and forward exchange contracts (DKK million) 2022 11 months 632 -1,124 -38 1 39 2022 10 months 464 -334 -8 - 8 2022 11 months 863 -552 -12 - 12 2022 11 months 495 -441 -16 - 16 2022 11 months 5.69 -120 - 1 1 2022 10 months 160 432 -4 1 5 2024 36 months 741 895 3 3 - -1,244 -75 6 81 2021 11 months 638 -1,193 65 65 - 2021 10 months 457 -281 -4 - 4 2021 9 months 825 -384 2 3 1 2021 9 months 484 -372 7 7 - 2021 9 months 6.00 -120 3 3 - 2021 10 months 166 402 -6 1 7 2024 48 months 741 895 2 2 - -1,053 69 81 12 Insights and highlights Our business Corporate information Financial report Back to content Section 2 Exchange rates Demant - Annual Report 2021 85 ish kroner. The table show the exchange rates for our main trading currencies according to the central bank of Denmark. Depending on the phasing of revenue, EBIT and pay- ments, the exchange rate effect on the consolidated income statement can vary from the averages. Accounting policies On initial recognition, transactions in for- eign currencies are translated at the ex- change rates prevailing at the date of the transaction. The functional currencies of the enterprises are determined by the eco- nomic environment in which the enter- prises operate, usually the local currency. Receivables, payables and other monetary items in foreign currencies are translated into Danish kroner at the exchange rates prevailing at the balance sheet date. Real- ised and unrealised foreign currency trans- lation adjustments are recognised in the income statement within gross profit or net financial items, depending on the pur- pose of the underlying transaction. Property, plant and equipment, intangible assets, inventories and other non-mone- tary assets purchased in foreign currencies and measured on the basis of historical cost are translated at the exchange rates prevailing at the transaction date. Non- monetary items, which are revalued at their fair values, are translated using the exchange rates at the revaluation date. On recognition in the consolidated finan- cial statements of enterprises presenting their financial statements in a functional currency other than Danish kroner, the in- come statement is translated using aver- age exchange rates for the months of the year in question, unless they deviate mate- rially from actual exchange rates at the transaction dates. In case of the latter, actual exchange rates are applied. Balance sheet items are translated at the exchange rates prevailing at the balance sheet date. Goodwill is considered as be- longing to the acquired enterprise in ques- tion and is translated at the exchange rate prevailing at the balance sheet date. All foreign currency translation adjustments are recognised in the income statement, except for the following, which are recog- nised in other comprehensive income: • The translation of net assets of foreign subsidiaries using exchange rates pre- vailing at the balance sheet date. • The translation of income statements of foreign subsidiaries using monthly aver- age exchange rates for the respective months of the year, while the balance sheet items of such foreign subsidiaries are translated using exchange rates prevailing at the balance sheet date. • The translation of non-current, intra- Group receivables that are considered to be an addition to or deduction from net investments in foreign subsidiaries. • The translation of investments in asso- ciates and joint ventures. 744 745 -0.1% 629 654 -3.8% 472 451 4.7% 865 839 3.1% 502 488 2.9% 5.73 6.13 -6.5% 163 168 -3.0% 744 744 0.0% 656 606 8.3% 477 464 2.8% 886 824 7.5% 514 474 8.4% 5.70 5.88 -3.1% 162 163 -0.6% 2.4 Exchange rates Insights and highlights Our business Corporate information Financial report Back to content Section 3 Asset base Demant - Annual Report 2021 86 Asset base INTANGIBLE ASSETS 10,317 DKK MILLION PROPERTY, PLANT AND EQUIPMENT 2,277 DKK MILLION OTHER NON-CURRENT ASSETS 4,380 DKK MILLION Demant - Annual Report 2021 86 Insights and highlights Our business Corporate information Financial report Back to content Section 3 Asset base Demant - Annual Report 2021 87 Accounting policies On initial recognition, goodwill is recog- nised and measured as the difference be- tween the acquisition cost including the value of non-controlling interests in the ac- quired enterprise and the fair value of any existing investment in the acquired enterprise and the fair values of the ac- quired assets, liabilities and contingent lia- bilities. Please refer to Accounting policies in Note 6.1. On recognition, goodwill is allocated to corporate activities that generate inde- pendent payments (cash-generating units). The definition of a cash-generating structure as well as the internal financial management reporting. 3.1 Intangible assets (DKK million) 8,320 122 1,055 283 9,780 7,826 120 919 221 9,086 338 - 14 5 357 -373 1 -15 -5 -392 - 3 28 136 167 - - 41 133 174 813 - 12 - 825 867 1 22 - 890 - - -1 - -1 - - - - - - - -17 - -17 - - -11 - -11 - 12 138 -150 - - - 99 -66 33 9,471 137 1,229 274 11,111 8,320 122 1,055 283 9,780 - -110 -566 - -676 - -99 -411 - -510 - - -10 - -10 - - 11 - 11 - -5 -117 - -122 - -11 -140 - -151 - -1 -1 - -2 - - -30 - -30 - - 16 - 16 - - 4 - 4 - -116 -678 - -794 - -110 -566 - -676 9,471 21 551 274 10,317 8,320 12 489 283 9,104 Insights and highlights Our business Corporate information Financial report Back to content Section 3 Asset base Demant - Annual Report 2021 88 Goodwill is not amortised but is tested for impairment at least once a year. If the re- coverable amount of a cash-generating unit is lower than the carrying amounts of property, plant and equipment and intan- gible assets, including goodwill, attributa- ble to the particular cash-generating unit, the particular assets will be written down. Patents and licences acquired from third parties are measured at cost less accumu- lated amortisation and impairment losses. Patents and licences are amortised on a straight-line basis over their estimated useful lives. Other intangible assets consist of software, other rights than patents and licences and other intangible assets acquired in connec- tion with business combinations, primarily brand value, customer bases and non- compete agreements. Other intangible assets are measured at cost less accumulated amortisation and impairment losses. Other intangible assets are amortised on a straight-line basis over their estimated useful lives, except other rights, which are not amortised, as the re- sidual value of other rights is considered to exceed the cost price and is instead tested for impairment annually. Please refer to Note 3.6. Assets under development include inter- nally developed IT systems. Assets under development are measured at cost, which includes direct salaries, consultant fees and other direct costs attributable to the development of such assets. Assets under development are not amortised, as they are not available for use. Accounting estimates and judgements Reportable segments and cash- generating units (judgements) Impairment testing is carried out annually on preparation of the annual report or on indication of impairment in which dis- counted values of future cash flows are compared with carrying amounts. Group enterprises cooperate closely on R&D, pur- chasing, production, marketing and sale, as the use of resources in the individual markets is coordinated and monitored by Management in Denmark. Group enter- prises are thus highly integrated. Regard- less of this, the products and services within Hearing Healthcare and Communi- cations address different customer de- mands and customer groups, which would not be comparable by nature. Manage- ment therefore considers it most appropri- ate to split the activities into two reporta- ble segments, Hearing Healthcare and Communications. The two reportable seg- -gener- ating units. Individual impairment testing is cash-generating units, Hearing Healthcare and Communications. Please refer to Note 3.6. Product development (judgement) uct development undertaken by the Group today cannot meaningfully be allocated to either the development of new products or the further development of existing prod- ucts. Moreover, as the products are subject to approval by various authorities, it is dif- ficult to determine the final completion of new products. Patents and licences 5-20 years Software 3-10 years Brand value 5-10 years Customer bases 5-7 years 3.1 Intangible assets (continued) Insights and highlights Our business Corporate information Financial report Back to content Section 3 Asset base Demant - Annual Report 2021 89 3.2 Property, plant and equipment (DKK million) 1,254 742 1,341 973 181 4,491 1,147 712 1,368 950 135 4,312 17 3 42 28 3 93 -35 -25 -59 -30 -1 -150 6 36 204 153 80 479 60 49 100 110 150 469 3 - 3 7 - 13 5 3 33 5 4 50 - -3 -13 -1 - -17 - - - - - - - -16 -44 -46 -4 -110 - -8 -94 -54 -1 -157 28 26 91 19 -133 31 77 11 -7 -8 -106 -33 1,308 788 1,624 1,133 127 4,980 1,254 742 1,341 973 181 4,491 -274 -525 -991 -562 - -2,352 -260 -472 -996 -523 - -2,251 -6 -3 -33 -17 - -59 10 17 46 19 - 92 -27 -71 -161 -115 - -374 -24 -88 -145 -110 - -367 - 2 12 1 - 15 - - - - - - - 14 43 41 - 98 - 7 85 52 - 144 1 7 -36 -3 - -31 - 11 19 - - 30 -306 -576 -1,166 -655 - -2,703 -274 -525 -991 -562 - -2,352 1,002 212 458 478 127 2,277 980 217 350 411 181 2,139 Insights and highlights Our business Corporate information Financial report Back to content Section 3 Asset base Demant - Annual Report 2021 90 Accounting policies Property, plant and equipment are recog- nised at cost less accumulated deprecia- tion and impairment losses. Cost is defined as the acquisition price and costs directly relating to the acquisition until such time as the particular asset is ready for use. For assets produced by the Group, cost in- cludes all costs directly attributable to the production of such assets, including mate- rials, components, sub-supplies and pay- roll. If the acquisition or the use of an asset requires the Group to defray costs for the demolition or restoration of such asset, the calculated costs hereof are recognised as a provision and as part of the cost of the particular asset, respectively. The cost of a total asset is divided into various elements, which will be depreci- ated separately if their useful lives are not the same. Property, plant and equipment are depre- ciated on a straight-line basis over their estimated useful lives. Land is not depreci- ated. Accounting estimates and judgements Useful lives (estimate) The depreciation basis is cost less the esti- mated residual value of an asset after the end of its useful life. The residual value is the estimated amount, which could after deduction of costs to sell be obtained through the sale of the asset today, such asset already having the age and being in the state of repair expected after the end of its useful life. The residual value is de- termined at the time of acquisition and is reviewed annually. If the residual value ex- ceeds the carrying amount, depreciation will be discontinued. Buildings 30-50 years Technical installations 10 years Plant and machinery 3-5 years Other plant, fixtures and operating equipment 3-5 years IT hardware 3-5 years Leasehold improvements Up to 10 years Depreciation methods, useful lives and re- sidual values are reviewed annually. Prop- erty, plant and equipment are written down to their recoverable amounts, if these are lower than their carrying amounts. of property agreements. The lease terms are of various length and may contain ex- tension and termination options. Management exercises significant judge- ment in determining whether it is reasona- bly certain that these extension and termi- nation options will be exercised. 3.3 Leases (DKK million) 1,847 1,937 43 -59 673 391 99 122 -45 -51 -538 -493 2,079 1,847 1,893 1,964 50 -71 660 388 99 119 -2 -12 -46 -53 -533 -442 2,121 1,893 511 456 1,610 1,437 32 20 27 21 5 6 3.2 Property, plant and equipment (continued) Insights and highlights Our business Corporate information Financial report Back to content Section 3 Asset base Demant - Annual Report 2021 91 Covid-19-Related Rent Con- cessions (Amendment to IFRS 16) IFRS 16 is amended to exempt lessees, who have received rent concessions as a direct consequence of the Covid-19 pan- demic, from the requirement to assess whether the concession is a lease modifi- cation. The Group has decided to apply the practical expedient to all rent concessions that meet the conditions as outlined in paragraph 46B of IFRS 16, resulting in ac- counting for the concession as a variable lease payment. The rent concessions rec- ognised in the income statement for 2021 amount to DKK 2 million (DKK 12 million in 2020). Accounting policies Lease assets Lease assets and liabilities are recognised in the balance sheet at the commencement date of the contract, if it is or contains a lease. Lease assets are recognised at cost less accumulated depreciation and impair- ment. Cost is defined as the lease liability adjusted for any lease payments made at or before the commencement date. Lease assets are depreciated on a straight-line basis over the lease term. Lease liabilities Lease liabilities are measured at the pre- sent value of future payments, using the interest rate implicit in the lease agree- ment. Lease payments are discounted, us- adjusted for the functional currencies and length of the lease term, if the interest rate implicit in the lease agreement cannot be determined. Lease payments contain fixed payments less any lease incentives receiv- able, variable lease payments that depend on an index or a rate as well as payments of penalties for terminating the lease, if the terms of the lease warrants that the Group exercises that option. The lease liability is remeasured if or when the future payment or lease term changes. Any net remeasurement of the lease liabil- ity is recognised as an adjustment to the lease asset. If the carrying amount of the lease asset is reduced to zero, the adjust- ment will be recognised in the income statement. Additional information Short-term lease expenses, low-value as- sets and variable lease payments are clas- sified as operating expenses in the income statement. Please refer to Note 4.4 for a maturity analysis of the lease liabilities. Accounting estimates and judgements Lease term (estimate) The lease term is the period during which the lease contract is enforceable. If the original expiry date of a lease contract has passed, typically in the case of property leases, but the contract continues without a determined expiry date, the lease term is set for an estimated period during which the lease contract is expected to be en- forceable. This assessment is based on Manag consideration the location of the lease, capitalised leasehold improvements and the experience with similar leases for the specific area. Extension and termination options (judgement) When determining the lease term for lease agreements containing extension and ter- mination options, Management considers circumstances that create a financial in- centive to exercise an extension option or not to exercise a termination option. Exten- sion and termination options are only in- cluded in the lease term if it is reasonably certain that a lease will be extended/termi- nated. 3.3 Leases (continued) Insights and highlights Our business Corporate information Financial report Back to content Section 3 Asset base Demant - Annual Report 2021 92 3.4 Other non-current assets (DKK million) 799 247 446 86 946 182 531 94 30 15 34 4 -38 -11 -43 -5 - 106 282 6 7 92 131 3 - - - - 132 7 - 1 -26 -98 - 4 -165 - - - - - -117 -1 -83 -23 -83 -3 - 1 -144 -2 - - -90 -4 803 271 501 97 799 247 446 86 34 - -9 -20 17 - -8 -19 1 - -1 -1 1 - 1 2 120 - - - 48 - - - -106 - - - -41 - - - -2 -1 - - -74 - - - 8 -3 -2 - 83 - -2 -2 - - 4 - - - - -1 55 -4 -8 -21 34 - -9 -20 858 267 493 76 833 247 437 66 Insights and highlights Our business Corporate information Financial report Back to content Section 3 Asset base Demant - Annual Report 2021 93 Transactions with associates and joint ventures In 2021, the Group recognised revenue from associates and joint ventures of DKK 544 million (DKK 294 million in 2020), re- ceived royalties from and paid licence fees to associates and joint ventures, amount- ing to net income of DKK 0 million (DKK 1 million in 2020), and received dividends from associates and joint ventures in the amount of DKK 106 million (DKK 41 million in 2020). In 2021, the Group received inter- est income from associates and joint ven- tures in the amount of DKK 11 million (DKK 4 million in 2020). Under the provisions of contracts concluded with associates and joint ventures, the Group is not entitled to receive dividends from certain associates and joint ventures. This is reflected in the profit included in the income statement, as no profit is recog- nised if the Group is not entitled to receive dividends. Accounting policies Investments in associates and joint ven- tures are recognised and measured using the equity method, i.e. investments are rec- ognised in the balance sheet at the pro- portionate share of the equity value deter- counting policies after the deduction and addition of proportionate intra-Group gains and losses, respectively, and after the ad- dition of the carrying amount of any good- will. The proportionate shares of profit af- ter tax in associates and joint ventures are recognised in the income statement after - Group profits less any impairment loss relating to goodwill. The proportionate shares of all transac- tions and events, which have been recog- nised in other comprehensive income in associates and joint ventures, are recog- nised in consolidated other comprehensive income. On the acquisition of interests in associates and joint ventures, the acquisi- tion method is applied. For accounting policies on segment infor- mation, please refer to Note 1.1. (DKK million) 796 518 120 50 120 50 3.5 Non-current assets by geographic region (DKK million) 2,351 2,223 6,338 5,690 6,527 5,722 784 731 208 212 170 109 16,378 14,687 3.4 Other non-current assets (continued) Insights and highlights Our business Corporate information Financial report Back to content Section 3 Asset base Demant - Annual Report 2021 94 Impairment testing is carried out for the -generating units, Hear- ing Healthcare and Communications. Based on the impairment tests performed, a ma- terial excess value was identified in each cash-generating unit compared to the car- rying amount for which reason no impair- ment of goodwill was made at 31 Decem- ber 2021. At 31 December 2021, goodwill amounted to DKK 9,054 million in Hearing Healthcare (DKK 7,903 million in 2020) and DKK 417 million in Communications (DKK 417 mil- lion in 2020). Future cash flows are based on the budget for 2022, on strategy plans and on projec- tions hereof. Projections extending beyond 2022 are based on general parameters, such as expected market growth, selling prices and profitability assumptions. The terminal value for the period after 2026 is determined on the assumption of 2% growth. The pre-tax discount rate is 6.5% for Hearing Healthcare and 12% for Com- munications. Sensitivity calculations show that even a significant increase in the dis- count rate or a significant reduction of the growth assumptions will not change the outcome of the impairment test. Apart from goodwill, all intangible assets have limited useful lives. The market capitalisation of the company on Nasdaq Copenhagen by far exceeds the equity value of the company, lending further support to the conclusion that we had no need for impairment in 2021. Accounting policies The carrying amounts of property, plant and equipment and intangible assets with definite useful lives as well as investments in associates and joint ventures are re- viewed at the balance sheet date to deter- mine whether there are indications of im- pairment. If so, the recoverable amount of the particular asset is calculated to deter- mine the need for impairment, if any. The recoverable amounts of goodwill and other intangible assets with indefinite useful lives will be estimated, whether or not there are indications of impairment. The recoverable amount is estimated for the smallest cash-generating unit of which the asset is part. The recoverable amount is determined as the higher of the fair value of the asset or cash-generating unit less costs to sell and the value in use of such asset or unit. On determination of the value in use, estimated future cash flows will be discounted to their present values, using a discount rate that reflects partly current market valuations of the time value of money, and partly the special risks at- tached to the particular asset or cash-gen- erating unit for which no adjustment has been made in the estimated future cash flows. If the recoverable amount of a par- ticular asset or cash-generating unit is lower than its carrying amount, such asset or unit is written down to its recoverable amount. Impairment losses are recognised in the in- come statement. On any subsequent re- versal of impairment losses due to changes in the judgements on which the calculation of the recoverable amount is based, the carrying amount of an asset or cash-gen- erating unit is increased to the adjusted estimate of the recoverable amount, how- ever not exceeding the carrying amount of the asset or cash-generating unit, had the particular asset or cash-generating unit not been written down. Impairment of goodwill is not reversed. 3.6 Impairment testing Insights and highlights Our business Corporate information Financial report Back to content Section 4 Capital structure and financial management Demant - Annual Report 2021 95 Capital structure and financial management NET INTEREST- BEARING DEBT 9,150 DKK MILLION NET FINANCIAL ITEMS -202 DKK MILLION Demant - Annual Report 2021 95 Insights and highlights Our business Corporate information Financial report Back to content Section 4 Capital structure and financial management Demant - Annual Report 2021 96 Policies relating to financial risk management and capital structure Financial risk management concentrates on identifying risks in respect of exchange rates, interest rates, credit and liquidity with a view to protecting the Group against potential losses and ensuring that Man- are only to a limited extent affected by changes or events in the surrounding world be they changes in exchange rates or in interest rates. It is Group policy to exclu- sively hedge commercial risks and not to undertake any financial transactions of a speculative nature. Interest rate risks In previous years, we only hedged interest rate risks on Group loans to a limited ex- tent, as the Group only had limited debt compared to its volume of activities. Be- generation and relatively low financial gearing, the majority of our loans are raised on floating terms and predomi- nantly as short-term commitments, result- ing in a low level of interest expenses. In order to secure relatively low interest rates for the Group on the long term and as a consequence of our attractive funding pos- sibilities in the financial market, the Group now partly funds its debt through medium- term committed facilities with fixed rates and through financial instruments, which interest-bearing debt amounted to DKK 9,150 million as of 31 December 2021, and the gearing (NIBD/EBITDA) was 2.0. Credit risks s credit risks relate primarily to trade receivables and loans to customers or business partners. Our customer base is fragmented, so in general, credit risks only involve minor losses on loans to individual customers. The accumulated revenue from our ten largest customers accounts for ap- prox. 10% of total consolidated revenue. Furthermore, when granting loans, we re- quire that our counterparties provide secu- rity in their business. Overall, we therefore estimate that the risk relative to our total credit exposure is well-balanced at Group level. The maximum credit risk relating to receiv- ables matches the carrying amounts of such receivables. Overall, the Group has limited deposits with financial institutions for which reason the credit risk of deposits is considered to be low. In 2020, the Group made an additional provision for bad debt of DKK 100 million, reflecting the increased risk of customers defaulting on their debt due to coronavirus. In 2021, DKK 60 million of the provision was reversed towards the end of the year as a result of an updated risk assessment, while DKK 40 million has been realised during the year. Liquidity risks The Group aims to have sufficient cash resources to be able to take appropriate steps in case of unforeseen fluctuations in cash outflows. We have access to consid- erable undrawn credit facilities, and the li- quidity risk is therefore considered to be low. We are of the opinion that the Group has strong cash flows and a satisfactory credit rating to secure the current inflow of working capital and funds for potential ac- quisitions. Neither in previous years nor in the financial year 2021 has the Group de- faulted on any loan agreements. 4.1 Financial risk management and capital structure Insights and highlights Our business Corporate information Financial report Back to content Section 4 Capital structure and financial management Demant - Annual Report 2021 97 In addition to the foreign exchange items above, foreign exchange hedging instru- ments as described in Note 2.3 and foreign exchange effects of balance sheet items are reflected in the consolidated income statement, affecting production costs by DKK 33 million (DKK -83 million in 2020). Accounting policies Net financial items mainly consist of inter- est income and interest expenses, credit card fees and bank fees and also include interest on lease liabilities, the unwinding of discounts on financial assets and liabili- -based remuneration programmes as well as certain realised and unrealised foreign exchange gains and losses. Interest income and interest expenses are accrued based on the princi- pal amount and the effective interest rate. The effective interest rate is the discount rate used for discounting expected future payments attaching to the financial asset or financial liability in order for the present value to match the carrying amount of such asset or liability. As regards financial assets and liabilities, their carrying amounts approximate their fair values. The following non-financial item is included in the balance sheet and represents the difference between the ta- ble above and the balance sheet: Other li- abilities of DKK 429 million (DKK 351 mil- lion in 2020). Accounting policies Debt to credit institutions is recognised at the date of borrowing as the proceeds re- ceived less transaction costs. For subse- quent periods, financial liabilities are measured at amortised cost in order for the difference between proceeds and the 4.2 Net financial items (DKK million) 4 1 34 32 2 1 40 34 3 4 43 38 -68 -72 -41 -45 -109 -117 - -1 -136 -114 -245 -232 -202 -194 4.3 Categories of financial instruments (DKK million) 6 81 6 81 414 358 690 610 495 334 3,203 2,808 1,172 952 5,974 5,062 11 14 11 14 -81 -14 -81 -14 -6,020 -5,930 -3,197 -1,181 -2,121 -1,893 -808 -802 -2,212 -1,763 -14,358 -11,569 Insights and highlights Our business Corporate information Financial report Back to content Section 4 Capital structure and financial management Demant - Annual Report 2021 98 4.3 Categories of financial instruments (continued) nominal value to be recognised as a finan- cial expense over the term of the loan. On initial recognition, other financial liabili- ties are measured at fair value and subse- quently at amortised cost using the effec- tive interest method, and the difference between proceeds and the nominal value is recognised in the income statement as a financial expense over the term of the loan. 4.4 Net interest-bearing debt, liquidity and interest rate risks (DKK million) 256 748 47 1,051 1,016 1,176 - - 1,176 1,172 1,432 748 47 2,227 2,188 1.8% -3,240 -2,806 - -6,046 -6,020 -3,220 - - -3,220 -3,197 -6,460 -2,806 - -9,266 -9,217 0.5% -520 -1,336 -488 -2,344 -2,121 -5,548 -3,394 -441 -9,383 9,150 241 491 218 950 917 955 - - 955 952 1,196 491 218 1,905 1,869 1.6% -2,441 -3,525 -1 -5,967 -5,930 -1,201 - - -1,201 -1,181 -3,642 -3,525 -1 -7,168 -7,111 0.6% -436 -1,255 -411 -2,102 -1,893 -2,882 -4,289 -194 -7,365 -7,135 Insights and highlights Our business Corporate information Financial report Back to content Section 4 Capital structure and financial management Demant - Annual Report 2021 99 Trade payables and other liabilities have a contractual maturity of less than one year, with the exception of other liabilities of DKK 339 million (DKK 313 million in 2020), which have a contractual maturity of 1-10 years. The contractual cash flows approxi- mate their carrying amounts. Borrowings broken down by currency: 14% in US dollars (29% in 2020), 66% in Danish kroner (55% in 2020), 19% in euros (16% in 2020) and 1% in other currencies (0% in 2020). Reconciliation of liabilities arising from financing activities The table below shows the changes in consolidated liabilities arising from financ- ing activities, including both cash and non- cash changes. Liabilities arising from fi- nancing activities are those for which cash flows were, or future cash flows will be, classified in the consolidated cash flow statement as cash flows from financing activities. The fair value of the interest cap (a strip of call options) outstanding at the balance sheet date is DKK 0 million (DKK -2 million in 2020), and the contractual value of the interest cap is DKK 650 million (DKK 650 million in 2020). The cap will run until 2023. Sensitivity analysis in respect of interest rates Based on consolidated net debt at the end of the 2021 financial year, a rise of 1 per- centage point in the general interest rate level will cause an increase in consolidated annual interest expenses before tax of ap- prox. DKK 25 million (DKK 10 million in 2020). About 49% (59% in 2020) of con- solidated net interest-bearing debt is sub- ject to fixed or limited interest rates, partly due to a bought cap (a strip of call options), and partly due to loans being raised at fixed interest rates. The Group has limited the maximum inter- est rates on part of its non-current debt through an interest rate cap. 4.4 Net interest-bearing debt, liquidity and interest rate risks (continued) (DKK million) 0% 650 - - 650 - - 0% 650 - 2 650 - 2 Insights and highlights Our business Corporate information Financial report Back to content Section 4 Capital structure and financial management Demant - Annual Report 2021 100 4.4 Net interest-bearing debt, liquidity and interest rate risks (continued) (DKK million) -1,893 533 - 2 -99 -50 -660 46 -2,121 -5,930 -103 - - - 13 - - -6,020 -1,181 -1,887 - - -3 -119 - -7 -3,197 -9,004 -1,457 - 2 -102 -156 -660 39 -11,338 -9,004 -1,457 - 2 -102 -156 -660 39 -11,338 -1,964 442 - 12 -119 71 -388 53 -1,893 -4,687 -1,364 154 - -40 7 - - -5,930 -3,338 2,157 -154 - - 154 - - -1,181 -9,989 1,235 - 12 -159 232 -388 53 -9,004 -9,989 1,235 - 12 -159 232 -388 53 -9,004 Insights and highlights Our business Corporate information Financial report Back to content Section 4 Capital structure and financial management Demant - Annual Report 2021 101 Methods and judgements for determining fair values Other investments Other investments are assessed on the basis of their equity value. Derivatives Forward exchange contracts are assessed using discounted cash flow valuation tech- niques. Future cash flows are based on forward exchange rates from observable forward exchange rates at the end of the reporting period and on contractual for- ward exchange rates discounted at a rate that reflects the credit risk related to vari- ous counterparties. Interest swaps are assessed using dis- counted cash flow valuation techniques. Future cash flows are based on observable forward yield curves at the end of the re- porting period and on contractual interest rates discounted at a rate that reflects the credit risk related to various counterparties. The value of a cap is assessed using dis- counted cash flow valuation techniques. A cap consists of a series of interest rate op- tions (IRGs) with the same strike rate. The individual interest rate options each cover an interest period. The key elements, when pricing interest rate options, are strike rate, forward rate, maturity and volatility. The value of an interest rate option is made up of the intrinsic value and the time value of such option. The value of a cap is the com- bined value of the individual IRGs. Contingent considerations Contingent considerations are measured at their fair values based on the contrac- tual terms of the contingent considerations and on non-observable inputs (level 3), such as the financial performance and purchasing patterns of the acquired enter- prises for a period of typically 1-5 years after the date of acquisition. Fair value hierarchy for assets and liabilities measured at fair value in the balance sheet Financial instruments measured at fair value are broken down according to the fair value hierarchy: • Listed prices in an active market for the same type of instrument (level 1). • Listed prices in an active market for similar assets or liabilities or other valu- ation methods, with all significant inputs being based on observable market data (level 2). • Valuation methods, with any significant inputs not being based on observable market data (level 3). Accounting policies On initial recognition, other investments are classified as assets available for sale, recognised at fair value and subsequently measured at fair value through profit and loss. Unrealised value adjustments are rec- ognised in other comprehensive income. On realisation, value adjustments are transferred to net financial items in the in- come statement. The determination of fair values is based on equity values. Contin- gent considerations arising from the acqui- sition of enterprises and activities are rec- ognised at fair value at the time of acquisi- tion. The obligations are re-evaluated on a recurring basis at fair value. 4.5 Fair value hierarchy Insights and highlights Our business Corporate information Financial report Back to content Section 4 Capital structure and financial management Demant - Annual Report 2021 102 There have been no transfers between level 1 and 2 in the 2021 and 2020 financial years. Financial assets and contingent considera- tions are measured at fair value in the bal- ance sheet based on valuation methods, with any significant inputs not being based on observable market data (level 3). (DKK million) - 6 - 6 - - 11 11 - -81 - -81 - - -148 -148 - 81 - 81 - - 14 14 - -14 - -14 - - -121 -121 4.5 Fair value hierarchy (continued) (DKK million) 14 16 -121 -128 1 -1 -6 7 - - -113 -76 -4 -1 62 56 - - 30 20 11 14 -148 -121 Insights and highlights Our business Corporate information Financial report Back to content Section 5 Tax Demant - Annual Report 2021 103 Tax TAX ON PROFIT 715 DKK MILLION EFFECTIVE TAX RATE 22.1% DKK MILLION Demant - Annual Report 2021 103 Insights and highlights Our business Corporate information Financial report Back to content Section 5 Tax Demant - Annual Report 2021 104 Accounting policies tax and any changes in deferred tax. Cur- rent tax includes taxes payable determined on the basis of the estimated taxable in- come for the year and any prior-year tax adjustments. Tax on changes in equity and other comprehensive income is recognised directly in equity and in other comprehen- sive income, respectively. Foreign currency translation adjustments of deferred tax are recognised as part of Current tax liabilities or tax receivables are recognised in the balance sheet and deter- able income adjusted for any tax on ac- count. The tax rates prevailing at the bal- ance sheet date are used for calculation of The tax value of deferred tax assets not recognised is DKK 120 million (DKK 111 million in 2020) and relates mainly to tax losses and tax credits for which there is considerable uncertainty about their future utilisation. The tax losses carried forward will not expire in the near future. 5.1 Tax on profit (DKK million) -611 -224 -4 48 -121 8 21 -32 - -2 -715 -202 22.0% 22.0% 1.7% 1.3% 0.0% 0.2% 0.1% 1.1% -3.0% -11.6% 1.3% 2.1% 22.1% 15.1% 5.2 Deferred tax (DKK million) 596 553 -470 -339 126 214 214 237 -5 -2 -121 8 - -2 21 -32 - -2 17 7 126 214 Insights and highlights Our business Corporate information Financial report Back to content Section 5 Tax Demant - Annual Report 2021 105 Accounting policies Deferred tax is recognised, using the bal- ance sheet liability method on any tempo- rary differences between the tax base of assets and liabilities and their carrying amounts, except for deferred tax on tem- porary differences arisen either on initial recognition of goodwill or on initial recog- nition of a transaction that is not a busi- ness combination, with the temporary dif- ference ascertained on initial recognition affecting neither net profits nor taxable income. Deferred tax is determined on the basis of the tax rules and rates prevailing at the balance sheet date in a particular country. The effect of any changes in tax rates on profit, unless such deferred tax is attribut- able to items previously recognised directly in equity or in other comprehensive income. In the latter case, such changes will also be recognised directly in equity or in other comprehensive income. The tax base of a loss, if any, which may be set off against future taxable income, is carried forward and set off against deferred tax in the same legal tax entity and jurisdiction. Accounting estimates and judgements Deferred tax assets (estimate) Deferred tax assets, including the tax value of any tax losses allowed for car- ryforward, are recognised in the balance sheet at the estimated realisable value of such assets, either by a set-off against a deferred tax liability or by a net asset to be set off against future positive taxable in- come. At the balance sheet date, an as- sessment is made as to whether it is prob- able that sufficient taxable income will be available in the future against which the deferred tax asset can be utilised. Deferred tax on temporary differences between the carrying amounts and the tax values of investments in subsidiaries, associates and joint ventures is recognised, unless the Parent is able to control the time of reali- sation of such deferred tax, and it is prob- able that such deferred tax will not be re- alised as current tax in the foreseeable fu- ture. Deferred tax is recognised in respect of eliminations of intra-Group profits and losses. 5.2 Deferred tax (continued) (DKK million) -401 -24 - -75 - -500 -43 1 - -23 - -65 11 - - 1 - 12 253 3 - 21 - 277 66 3 - -15 - 54 94 2 - -11 - 85 159 4 - -11 - 152 94 6 - -52 - 48 -19 - - 65 17 63 214 -5 - -100 17 126 (DKK million) -365 21 -1 -56 - -401 -29 - 2 -16 - -43 6 -1 - 6 - 11 241 -2 - 14 - 253 58 -5 - 13 - 66 79 17 -1 -1 - 94 183 -23 - -1 - 159 63 -9 - 40 - 94 1 - -2 -25 7 -19 237 -2 -2 -26 7 214 Insights and highlights Our business Corporate information Financial report Back to content Section 6 Acquisitions Demant - Annual Report 2021 106 Acquisitions Sanibel EARturtle Demant - Annual Report 2021 106 Insights and highlights Our business Corporate information Financial report Back to content Section 6 Acquisitions Demant - Annual Report 2021 107 The Group acquired a number of minor retail acquisitions in North America and Europe in 2021. In respect of these acqui- sitions, we paid acquisition costs exceed- ing the fair values of the acquired assets, liabilities and contingent liabilities. Such positive balances in value can be attributed to expected synergies between the activi- ties of the acquired entities and our exist- ing activities, to the future growth opportunities and to the value of staff competencies in the acquired entities. These synergies are not recognised sepa- rately from goodwill, as they are not sepa- rately identifiable. At the time of acquisition, non-controlling measured at their proportionate shares of the total fair value of the acquired entities, including goodwill. On obtaining a control- ling interest through step acquisitions, pre- viously held non-controlling interests are at the time of obtaining control included at fair value with fair value adjustments in the income statement. In 2020, the Group obtained full control of the Gaming and Enterprise Solutions seg- ments in Sennheiser Communications for a purchase price of DKK 477 million. Further- more, the Group acquired an additional in- terest in Audilab SAS and is now the direct owner of 95% of the shares. The fair value of the shares on the acquisition date was DKK 381 million. 6.1 Acquisition of enterprises and activities (DKK million) 6 6 - 12 8 6 9 23 7 6 - 13 5 30 15 50 20 78 - 98 14 235 16 265 4 5 - 9 5 13 73 91 11 7 - 18 14 124 112 250 20 10 - 30 8 27 34 69 -19 -78 - -97 -12 -101 -13 -126 -35 -13 - -48 -11 -127 -186 -324 14 21 - 35 31 207 60 298 408 405 - 813 185 265 417 867 422 426 - 848 216 472 477 1,165 -14 -4 - -18 -7 -204 -24 -235 -35 -13 - -48 2 -3 -453 -454 -21 -92 - -113 -62 -14 - -76 -20 -10 - -30 -8 -27 -34 -69 332 307 - 639 141 224 -34 331 Insights and highlights Our business Corporate information Financial report Back to content Section 6 Acquisitions Demant - Annual Report 2021 108 In 2021, a few adjustments were made to the preliminary recognition of acquisitions made in 2020. These adjustments were made in respect of payments made, con- tingent considerations provided as well as and net assets and goodwill acquired. The impact of these adjustments on goodwill was DKK 8 million (DKK 1 million in 2020) and on contingent considerations DKK 8 million (DKK 0 million in 2020). In relation to acquisitions with final recognition in 2014-2020, adjustments were made in 2021 in respect of estimated contingent considerations. Such adjustments are rec- ognised in the income statement. The total impact on the income statement of fair value adjustments of non-controlling interests in step acquisitions amounted to DKK 48 million (DKK 454 million in 2020), and adjustments of contingent considera- tions made via the income statement of DKK 30 million (DKK 16 million in 2020) are recognised as part of distribution costs for acquisitions and DKK 0 million (DKK 5 million in 2020) are recognised in share of profit after tax, associates and joint ven- tures. Of the total acquisition entries in 2021, the fair value of estimated contingent consid- erations in the form of earn-outs or de- ferred payments accounted for DKK 121 million (DKK 76 million in 2020). Such pay- ments depend on the results of the ac- quired entities for a period of 1-5 years after takeover and can total a maximum of DKK 121 million (DKK 82 million in 2020) for acquisitions. The acquired assets include contractual receivables amounting to DKK 15 million (DKK 126 million in 2020) of which DKK 3 million (DKK 1 million in 2020) was thought to be uncollectible at the date of the acquisition. Of total goodwill in the amount of DKK 813 million (DKK 867 mil- lion in 2020), DKK 521 million (DKK 91 mil- lion in 2020) can be amortised for tax pur- poses. Transaction costs in connection with ac- quisitions made in 2021 amounted to DKK 5 million (DKK 2 million in 2020), which has been recognised under distribution costs. Revenue and profit generated by the ac- quired enterprises since our acquisition in 2021 amount to DKK 181 million (DKK 1,428 million in 2020) and DKK 9 million (DKK 217 million in 2020), respectively. Had such revenue and profit been consoli- dated on 1 January 2021, we estimate that consolidated pro forma revenue and profit would have been DKK 18,755 million (DKK 14,524 million in 2020) and DKK 2,542 mil- lion (DKK 1,136 million in 2020), respec- tively. Without taking synergies from our core business into account, we believe that these pro forma figures reflect the level of consolidated earnings after our acquisition of the enterprises. The above statements of the fair values of acquisitions are not considered final until 12 months after takeover. From the balance sheet date and until the date of financial reporting in 2022, we have acquired additional distribution enterprises. We are in the process of assessing their fair value. The acquisition cost is expected to relate primarily to goodwill. Accounting policies Newly acquired or newly established en- terprises are recognised in the consoli- dated financial statements from the time of acquisition or formation. The time of acquisition is the date when control of the enterprise is transferred to the Group. For Group accounting policies on control, please refer to the consolidated financial state- ments in Note 9.1. In respect of newly ac- quired enterprises, comparative figures and key figures will not be restated. On ac- quiring new enterprises of which the Group obtains control, the purchase method is applied according to which their identified assets, liabilities and contingent liabilities are measured at their fair values on the acquisition date. Any non-current assets acquired for the purpose of resale are, however, measured at their fair values less expected cost of disposal. Restructuring costs are solely recognised in the pre-ac- quisition balance sheet if they are a liabil- ity for the acquired enterprise. Any tax ef- fect of revaluations will be taken into ac- count. The acquisition cost of an enterprise con- sists of the fair value of the consideration paid for the enterprise with addition of fair value of previously held interests in the ac- quiree. If the final consideration is condi- tional upon one or more future events, the consideration will be recognised at the fair value on acquisition. Any subsequent ad- justment of contingent consideration is recognised directly in the income state- ment, unless the adjustment is the result of new information about conditions pre- vailing on the acquisition date, and this information becomes available up to 12 months after the acquisition date. Trans- action costs are recognised directly in the income statement when incurred. If costs exceed the fair values of the assets, liabili- ties and contingent liabilities identified on acquisition, any remaining positive differ- ences (goodwill) are recognised in the bal- ance sheet under intangible assets and tested for impairment at least annually. If the carrying amount of an asset exceeds its recoverable amount, it is written down to such lower recoverable amount. If, on the acquisition date, there are any uncertainties with respect to identifying or measuring acquired assets, liabilities or contingent liabilities or uncertainty with respect to determining their cost, initial recognition is made on the basis of provi- sionally calculated values. Such provision- ally calculated values may be adjusted, or additional assets or liabilities may be rec- ognised up to 12 months after the acquisi- tion date, if new information becomes 6.1 Acquisition of enterprises and activities (continued) Insights and highlights Our business Corporate information Financial report Back to content Section 6 Acquisitions Demant - Annual Report 2021 109 available about conditions prevailing on the acquisition date, which would have affected the calculation of values on that day, had such information been known. Accounting estimates and judgements Identification of assets and liabilities (judgement) On recognition of assets and liabilities from business combinations, Management judgements may be required for the follow- ing areas: • Intangible assets resulting from technol- ogy, customer relationships, client lists or brand names. • Contingent consideration arrangements. Contingent consideration (estimate) Business combinations may include provi- sions that additional payments of contin- gent considerations be paid to the previ- ous owners when certain events occur or certain results are obtained. Management assesses on a regular basis the judgements made in respect of the particular acquisi- tions, taking sales run rates of the acquired entity into account. In 2021, the Group divested FrontRow Calypso LLC, a 75%-owned subsidiary focused specifically on audio systems for classrooms and schools. The divestment resulted in a gain, including recycling of cumulative exchange differences of DKK 99 million, which is recognised as other income in the income statement. (DKK million) 1 - 2 - 5 - 46 - 38 - -3 - -7 - 82 - -20 - 62 - -3 - 102 - 161 - 6.1 Acquisition of enterprises and activities (continued) 6.2 Divestment of enterprises and activities Insights and highlights Our business Corporate information Financial report Back to content Section 7 Provisions, other liabilities etc. Demant - Annual Report 2021 110 Provisions, other liabilities etc. PROVISIONS 349 DKK MILLION OTHER LIABILITIES 2,642 DKK MILLION Demant - Annual Report 2021 110 Insights and highlights Our business Corporate information Financial report Back to content Section 7 Provisions, other liabilities etc. Demant - Annual Report 2021 111 Miscellaneous provisions relate to provi- sions for disputes etc. and are essentially expected to be realised within the next five years. 7.1 Provisions (DKK million) 50 29 79 46 47 93 - - - - -2 -2 1 4 5 - 1 1 - 73 73 - 19 19 - -4 -4 - -10 -10 6 -3 3 4 -26 -22 57 99 156 50 29 79 57 18 75 50 12 62 - 81 81 - 17 17 57 99 156 50 29 79 (DKK million) 57 50 99 29 156 79 193 243 349 322 268 305 81 17 349 322 Insights and highlights Our business Corporate information Financial report Back to content Section 7 Provisions, other liabilities etc. Demant - Annual Report 2021 112 Generally, the Group does not offer defined benefit plans, but it has such plans in Swit- zerland, France and Germany where they are required by law. Defined benefit plan costs recognised in the income statement amount to DKK 19 million (DKK 28 million in 2020), and the accumulated actuarial loss recognised in the statement of comprehensive income amounts to DKK 73 million (DKK 129 mil- lion in 2020). In 2022, the Group expects to pay approx. DKK 18 million (DKK 23 million in 2021) into defined benefit plans. Defined benefit obligations in the amount of DKK 137 mil- lion (DKK 117 million in 2020) will mature within 1-5 years and obligations in the amount of DKK 401 million (DKK 447 million in 2020) after five years. If the discount rate is 0.5% higher (lower), the defined benefit obligation would de- crease by 7% (increase by 10%). If the expected salary growth rate is 0.5% higher (lower), the defined benefit obligation would increase by 1% (decrease by 1%). Accounting policies Provisions are recognised if, as a result of an earlier event, the Group has a legal or constructive obligation, and if the settle- ment of such an obligation is expected to draw on corporate financial resources, but there is uncertainty about the timing or amount of the obligation. Provisions are measured on a discount estimate of the amount at which a particu- lar liability may be settled. The discount effect of any changes in the present value of provisions is recognised as a financial expense. The Group has defined benefit plans and similar agreements with some of its em- ployees. As regards defined contribution plans, the Group pays regular, fixed contri- butions to independent pension compa- nies. Contributions are recognised in the income statement for the period in which employees have performed work entitling them to such pension contributions. Contri- butions due are recognised in the balance sheet as a liability. As regards defined benefit plans, the Group is obliged to pay a certain contribution when an employee covered by such a plan retires, for instance a fixed amount or a An actuarial calculation is made periodi- cally of the accrued present value of future benefits to which employees through their past employment with the Group are enti- tled and which are payable under the de- fined benefit plan. This defined benefit ob- ligation is calculated annually, using the projected unit credit method on the basis of judgements in respect of the future de- velopment in for instance wage levels, in- terest rates and inflation rates. 7.1 Provisions (continued) (DKK million) 564 519 21 -2 19 28 - 1 -53 11 -19 -1 9 8 541 564 321 291 15 - -1 - 9 9 23 22 -19 -1 348 321 193 243 8 9 -1 - 9 9 0.3% 0.1% 0.0% 0.0% 1.2% 1.2% Insights and highlights Our business Corporate information Financial report Back to content Section 7 Provisions, other liabilities etc. Demant - Annual Report 2021 113 The defined benefit obligation less the fair value of any assets relating to the defined benefit plan is recognised in the balance sheet under provisions. Defined benefit costs are categorised as follows: • Service costs, including current service costs, past-service costs as well as gains and losses on curtailments and settlements • Net interest expense or income • Remeasurements Remeasurements, comprising actuarial gains and losses, any effects of changes to the asset ceiling as well as return on de- fined benefit assets, excluding interest, are reflected immediately in the balance sheet with a charge or credit recognised in other comprehensive income in the period in which it occurs. Remeasurements recognised in other com- prehensive income are reflected immedi- ately in retained earnings and are not re- classified to the income statement. Service costs and net interest expenses or income are included in the income statement as staff costs. Other non-current employee benefits are recognised using actuarial calculation. Ac- tuarial gains or losses on such benefits are recognised directly in the income statement. Accounting estimates and judgements Assessment of provisions (estimate) Management assesses, on an ongoing basis, provisions for restructuring costs and the likely outcome of pending and probable lawsuits etc. (other provisions). When assessing the likely outcome of law- suits, Management bases its assessment on internal and external legal advice and established precedent. Provisions for re- structuring costs are based on the esti- mated costs of implementing restructuring initiatives and thus on a number of as- sumptions about future costs and events. For all provisions, the outcome and final expense depend on future events, which are by nature uncertain. Product-related liabilities include standard warranties and returned products etc. Staff-related liabilities include holiday pay and payroll costs due. The carrying amounts of other liabilities approximate the fair values of such liabilities. Accounting policies Other non-financial liabilities are recog- nised if, as a result of an earlier event, the Group has a legal or constructive obliga- tion, and if the settlement of such obliga- tion is expected to draw on corporate fi- nancial resources. Other non-financial lia- bilities are measured on a discounted ba- sis, and the discount effect of any changes in the present value of the liabilities is rec- ognised as a financial expense. On the sale of products with a right of re- turn, a refund liability and a right to the returned products are recognised as a re- fund liability and a current asset (included in prepaid expenses), respectively. The re- fund liability is deducted from revenue and the right to the returned products is offset in cost of sales. Warranty commitments include an obligation to remedy faulty or defective products during the warranty period. Accounting estimates and judgements Warranty and return liabilities (estimates) Liabilities in respect of service packages and warranties are calculated on the basis of information on products sold, related service and warranty periods and past ex- perience of costs incurred by the Group to fulfil its service and warranty liabilities. Liabilities in respect of returns are calcu- lated based on information on products sold, related rights concerning returns and past experience of products being returned in the various markets. Consolidated prod- uct-related liabilities are the sum of a large number of small items, the sum changing constantly due to a large number of trans- actions. 7.2 Other liabilities (DKK million) 430 351 816 738 424 374 148 121 824 530 2,642 2,114 2,302 1,801 340 313 7.1 Provisions (continued) Insights and highlights Our business Corporate information Financial report Back to content Section 7 Provisions, other liabilities etc. Demant - Annual Report 2021 114 Free products, service and some of the warranty-related services mentioned are provided free of charge to the customer. Certain other services and warranty-re- lated services are paid by the customer in connection with delivery of the related goods, but delivery of the service takes place 1-4 years after delivery of the goods. Please refer to Note 1.2 for a description of the nature of the deferred income. Accounting policies Deferred income includes income received or future performance obligations relating to subsequent financial years and is recog- nised as revenue when the Group performs its obligations by transferring the goods or services. 7.4 Contingent liabilities The Demant Group is involved in a few disputes, lawsuits etc. Management is of the opinion that such disputes do not or nancial position. The Group seeks to make adequate provisions for legal proceedings. As part of our business activities, the Group has entered into normal agree- ments with customers and suppliers etc. as well as agreements for the purchase of shareholdings. 7.3 Deferred income (DKK million) 72 - - - 72 253 179 77 4 513 81 46 10 1 138 95 67 36 3 201 501 292 123 8 924 88 5 - - 93 262 160 69 3 494 99 44 7 1 151 87 64 27 1 179 536 273 103 5 917 (DKK million) 72 93 513 494 138 151 201 179 924 917 Insights and highlights Our business Corporate information Financial report Back to content Section 8 Other disclosure requirements Demant - Annual Report 2021 115 Other disclosure requirements EPOS ADAPT MB660 Demant - Annual Report 2021 115 Insights and highlights Our business Corporate information Financial report Back to content Section 8 Other disclosure requirements Demant - Annual Report 2021 116 William Demant Foundation, Kongebakken 9, 2765 Smørum, Denmark, is the only re- lated party with a controlling interest. Con- trolling interest is achieved through a com- own shareholding and the shareholding of William Demant Invest A/S for which Wil- liam Demant Foundation exercises the vot- ing rights. Subsidiaries and associated en- terprises of William Demant Invest A/S are related parties to the Demant Group. Related parties with significant influence of Directors and their related parties. Fur- thermore, related parties are companies in which the above persons have significant interests. Subsidiaries, associates and joint ventures interests in these companies appear from Subsidiaries, associates and joint ventures in Section 11 and financial information on transactions with associates and joint ven- tures can be found in Note 3.4. In 2021, William Demant Foundation paid administration fees to the Group of DKK 1 million (DKK 1 million in 2020). The Group paid administration fees to William De- mant Invest A/S of DKK 2 million (DKK 1 million in 2020). In 2021, the Group paid service fees to Össur hf., a subsidiary of William Demant Invest A/S, of DKK 32 million (DKK 52 mil- lion in 2020) and received service fees of DKK 22 million (DKK 20 million in 2020) from Össur hf. In 2021, the Group received service fees from Vision RT, a subsidiary of William Demant Invest A/S, in the amount of DKK 2 million (DKK 7 million in 2020). At year-end 2021, the Group had receiva- bles of DKK 6 million for services provided to Vision RT and Össur hf. (DKK 6 million in 2020). In 2021, William Demant Foundation do- nated DKK 1 million to Eriksholm Research Centre and DKK 2 million to an industrial PhD project in Oticon A/S. Further, William Demant Foundation acquired diagnostic equipment worth DKK 0.1 million (DKK 0.5 million in 2020) from the Group. Since 2011, the Group has settled Danish tax on account and residual tax with Wil- liam Demant Invest A/S, which is the ad- ministration company for the joint taxa- tion. There have been no transactions with the Executive Board and the Board of Directors apart from normal remuneration. Please refer to Note 1.3. A few Group enterprises are not audited The fee for non-audit services delivered by Deloitte Statsautoriseret Revisionspartner- selskab to the Group amounts to DKK 2 million (DKK 3 million in 2020) and consists of VAT and tax services, tax advisory ser- vices related to transfer pricing, issuance of various assurance reports as well as consulting services. 8.1 Related parties 8.2 Fees to statutory auditors (DKK million) 14 14 2 2 3 2 19 18 Insights and highlights Our business Corporate information Financial report Back to content Section 8 Other disclosure requirements Demant - Annual Report 2021 117 In 2021, the Demant Group received gov- ernment grants in the amount of DKK 48 million (DKK 346 million in 2020) of which DKK 28 million (DKK 326 million in 2020) are Covid-19-related publicly funded com- pensation schemes. Non-Covid-19 grants are offset against R&D costs. Accounting policies Government grants are recognised when there is reasonable certainty that the con- ditions for such grants are satisfied and that they will be awarded. Grants received as compensation for costs incurred are recognised proportionately in the income statement over the periods in which the re- lated costs are recognised in the income statement and are offset against costs incurred. Government grants relating to the acqui- sition of non-current assets are deducted from the cost of such assets. No events have occurred after the report- ing date that might affect the consolidated financial statements. 8.3 Government grants (DKK million) 5 42 22 52 19 227 2 25 48 346 8.4 Events after the balance sheet date Insights and highlights Our business Corporate information Financial report Back to content Section 9 Basis for preparation Demant - Annual Report 2021 118 Basis for preparation Interacoustics Titan Demant - Annual Report 2021 118 Insights and highlights Our business Corporate information Financial report Back to content Section 9 Basis for preparation Demant - Annual Report 2021 119 are described below. In addition to this, specific accounting policies are described in each of the individual notes to the con- solidated financial statements as outlined here: 1.1 Segment disclosures 1.2 Revenue from contracts with customers 1.3 Employees 1.6 Inventories 1.7 Receivables 2.3 Hedging and forward exchange contracts 2.4 Exchange rates 3.1 Intangible assets 3.2 Property, plant and equipment 3.3 Leases 3.4 Other non-current assets 3.6 Impairment testing 4.2 Net financial items 4.3 Categories of financial instruments 4.5 Fair value hierarchy 5.1 Tax on profit 5.2 Deferred tax 6.1 Acquisition of enterprises and activities 7.1 Provisions 7.2 Other liabilities 7.3 Deferred income 8.3 Government grants General The consolidated financial statements are presented in compliance with International Financial Reporting Standards (IFRS) as adopted by the EU and Danish disclosure requirements for annual reports published by reporting class D (listed) companies, cf. the Danish executive order on IFRS issued in compliance with the Danish Financial Statements Act. The registered office of Demant A/S is in Denmark. The consolidated financial statements are presented in Danish kroner (DKK), which is the functional currency for the Parent. The consolidated financial statements are pre- sented based on historical costs, except for obligations for contingent consideration in connection with business combinations, share-based remuneration, derivatives and financial assets classified as assets available for sale, which are measured at fair value. The financial statements for the Parent are presented separately from the consoli- dated financial statements and are shown on the last pages of this Annual Report 2021. Effect of new accounting standards The Group has adopted all new, amended and revised accounting standards and in- terpretations as published by the IASB and adopted by the EU effective for the ac- counting period beginning 1 January 2021. None of these new, updated and amended standards and interpretations resulted in any changes to the accounting policies for the Group or had any significant impact on the consolidated financial statements for 2021. IASB has issued new accounting stand- ards and amendments effective for ac- counting periods beginning after 1 January 2021, which have not been adopted by the EU yet. The changes to these standards are not expected to have any significant impact on the Group. Except for the implementation of new and amended standards as well as insignifi- cant reclassifications of the comparative figures for 2020, the accounting policies remain unchanged compared to last year. Consolidated financial statements The consolidated financial statements comprise Demant A/S (the Parent) and the enterprises in which the Parent can or does exercise control by either directly or indi- rectly holding more than 50% of the voting rights, or in which the Parent exercises control in some other manner. Enterprises in which the Group holds 20-50% of the voting rights and/or in some other manner can or does exercise significant influence are considered associates or joint ventures and are incorporated proportionately into the consolidated financial statements us- ing the equity method. Consolidation principles The consolidated financial statements are prepared based on the financial state- ments of the Parent and its subsidiaries by aggregating uniform items. Enterprises that, by agreement, are managed jointly with one or more other enterprises are recognised using the equity method. The consolidated financial statements are accounting policies. Intra-Group income, expenses, shareholdings, balances and dividends as well as unrealised intra- Group profits on inventories are elimi- nated. The accounting items of subsidiaries are recognised 100% in the consolidated fi- nancial statements. On initial recognition, non-controlling interests are measured ei- ther at fair value or at their proportionate share of the fair value of the identifiable assets, liabilities and contingent liabilities of the acquired subsidiary. The method is chosen for each individual transaction. Non-controlling interests are subsequently adjusted according to their proportionate share of changes in equity of the subsidiary. Comprehensive income is allocated to non-controlling interests whether or not, as a result hereof, the value of such inter- ests is negative. The purchase or sale of non-controlling interests in a subsidiary, which does not result in obtaining or dis- continuing control of such subsidiary, is treated as an equity transaction in the 9.1 Group accounting policies Insights and highlights Our business Corporate information Financial report Back to content Section 9 Basis for preparation Demant - Annual Report 2021 120 consolidated financial statements, and any difference between the consideration and the carrying amount is allocated to the Income statement Income and costs are recognised on an accruals basis. The income statement is broken down by function, and all costs, including depreciation, amortisation and impairment losses, are therefore charged to production, distribution, administration and R&D. Production costs Production costs are costs incurred to gen- erate revenue. Distribution companies rec- ognise cost of goods sold under production costs. Production companies recognise cost of raw materials, consumables, production staff as well as maintenance of and depre- ciation, amortisation and impairment losses on property, plant and equipment and in- tangible assets used in the production pro- cess under production costs. R&D costs Research costs are always recognised in the income statement as such costs incur. Development costs include all costs not satisfying capitalisation criteria but in- curred in connection with the develop- ment, prototype construction, development of new business concepts and amortisa- tion of capitalised development costs. Distribution costs Distribution costs include costs relating to training, sales, marketing, promotion ma- terials, distribution, bad debts as well as depreciation and amortisation of and im- pairment losses on assets used for distri- bution purposes. Administrative expenses Administrative expenses include adminis- trative staff costs, office expenses as well as depreciation and amortisation of and impairment losses on assets used for ad- ministrative purposes. Prepaid expenses Prepaid expenses recognised under assets include costs relating to the subsequent fi- nancial years. Prepaid expenses are meas- ured at cost. Other operating income Other operating income includes income from all activities not related to the core business activities of the Group. Equity Foreign currency translation reserves in- clude foreign currency translation adjust- ments on the translation of financial state- ments of foreign subsidiaries, associates and joint ventures from their respective functional currencies into Danish kroner. Foreign currency translation adjustments are recognised in the income statement on realisation of the net investment. Hedging reserves include fair value adjustments of derivatives and loans satisfying the criteria for hedging of future transactions. The amounts are recognised in the income statement or the balance sheet at the same time as hedged transactions are recognised. Treasury shares and dividend On the buy-back of shares or sale of treas- ury shares, the purchase price or selling price, respectively, is recognised directly in equity under other reserves (retained earn- ings). A capital reduction through the can- cellation of treasury shares will reduce the share capital by an amount corresponding to the nominal value of such shares. Pro- posed dividends are recognised as a liabil- ity at the time of adoption at the annual general meeting. Cash flow statement The cash flow statement is prepared ac- cording to the indirect method and reflects the consolidated net cash flow broken down into operating, investing and financ- ing activities. Cash flow from operating activities in- adjusted for non-cash operating items, changes in working capital, financial in- come received, financial expenses paid, realised foreign currency translation gains and losses and income tax paid. Cash flow from operating activities also includes short-term lease payments, lease pay- ments of low-value assets and variable lease payments. Cash flow from investing activities includes payments in respect of the acquisition or divestment of enter- prises and financial assets as well as the purchase, development, improvement or sale of intangible assets and property, plant and equipment. In addition to this, cash flow from investing activities also in- cludes movement in receivables from as- sociates and joint ventures as well as cus- tomer loans. Cash flow from financing activities includes payments to and from shareholders and the raising and repayment of non-current and current debt and lease liabilities. Cash flow in currencies other than the functional currency is recognised at aver- age exchange rates for the months of the year unless they deviate significantly from actual exchange rates on the transaction dates. Repayments of lease liabilities are included as well. Cash and cash equivalents are cash less overdrafts, which consist of uncommitted bank facilities that often fluctuate from positive to overdrawn. Any short-term bank facilities that are consistently over- drawn are considered cash flow from fi- nancing activities. 9.1 Group accounting policies (continued) Insights and highlights Our business Corporate information Financial report Back to content Section 9 Basis for preparation Demant - Annual Report 2021 121 Key figures and financial ratios Financial ratios are calculated in accord- from CFA Society Denmark. The free cash flow is calculated as the sum of cash flow from operating activities (CFFO) and investing activities (CFFI) be- fore acquisitions and disposals of enter- prises, participating interests and activities. Financial ratios per share are calculated per share of nominally DKK 0.20. On computation of the return on equity, average equity is calculated, duly consid- ering share buy-backs. The gearing multiple is calculated as net interest-bearing debt relative to EBITDA. Net working capital is the net amount of current assets (excluding tax, financial contracts and cash) less trade payables, the current part of other liabilities and de- ferred income. The CEO pay ratio is calculated as the CEO total compensation/the average Demant employee total compensation. Scope 1 emissions entail tonnes of CO2e emissions from natural gas, gasoline, die- sel and fuel oil consumed in Demant. Scope 2 emissions entail tonnes of CO2e emissions from purchased electric power and district heating at production sites, offices and clinics. Every year, the data quality and the scope of re- porting are improved. The 2021 data co- vers more than 90% of our total sites in- cluding estimates. Gender diversity, all employees shows the gender distribution between women and men in percent of the employees in coun- tries enrolled in our global HR data man- agement system. In 2021, 90% of all our employees were registered in the system. Gender diversity, management shows the gender distribution between women and men in percent among all people manag- ers with one or more reports. The data is extracted from our HR data management system that held 90% of our employees in 2021. Gender diversity, Board of directors shows the gender distribution between women and men among the shareholder-elected members of the Board of Directors. iXBRL tagging The Commission Delegated Regulation (EU) 2019/815 on the European Single Electronic Format (ESEF Regulation) has introduced a single electronic reporting format for the annual financial reports of issuers with securities listed on the EU regulated markets. The combination of XHTML format and iXBRL tags makes it possible for annual financial reports to be read by both hu- mans and machines, thus enhancing ac- cessibility, analysis and comparability of the information included in the annual financial reports. pared in accordance with the ESEF taxon- omy, which is included in the ESEF Regula- tion and developed based on the IFRS tax- onomy published by the IFRS Foundation. The line items in the consolidated financial statements are tagged to elements in the ESEF taxonomy. For financial line items that are not directly defined in the ESEF taxonomy, an extension to the taxonomy has been created. Extensions are anchored to elements in the ESEF taxonomy, except for extensions that are subtotals. The annual report submitted to the Danish Financial Supervisory Authority (the Offi- cially Appointed Mechanism) consists of the XHTML document together with the technical files, all of which are included in the ZIP file DEMANT-2021-12-31-en.zip. Key definitions XHTML (eXtensible HyperText Markup Language) is a text-based language used to structure and mark up content such as text, images and hyperlinks in documents that are displayed in a web browser. iXBRL tags (or Inline XBRL tags) are hid- den metainformation embedded in the source code of an XHTML document that enables the conversion of XHTML-format- ted information into a machine-readable XBRL data record using appropriate soft- ware. A financial reporting taxonomy is an elec- tronic dictionary of business reporting ele- ments used to report business data. A tax- onomy element is an element defined in a taxonomy that is used for the machine- readable labelling of information in an XBRL data record. 9.1 Group accounting policies (continued) Insights and highlights Our business Corporate information Financial report Back to content Section 9 Basis for preparation Demant - Annual Report 2021 122 On the preparation of the consolidated fi- nancial statements, Management makes a number of accounting estimates and judgements. These relate to the recogni- tion, measurement and classification of assets and liabilities. Many items can only be estimated rather than accurately meas- ured. Such estimates are based on the most recent information available on prepara- tion of the financial statements. Estimates and assumptions are therefore reassessed on an ongoing basis. Actual figures may, however, deviate from these estimates. Any changes in accounting estimates will be recognised in the reporting period in which such changes are made. Significant accounting estimates and judgements are described below: 1.6 Inventories 1.7 Receivables 3.3 Leases 3.5 Impairment (identification of CGUs) 5.2 Deferred tax 6.1 Acquisition of enterprises and activities Specific accounting estimates and judge- ments are described in each of the individ- ual notes to the consolidated financial statements as outlined below: 1.2 Revenue from contracts with customers 1.3 Employees 1.6 Inventories 1.7 Receivables 3.1 Intangible assets 3.2 Property, plant and equipment 3.3 Leases 5.2 Deferred tax 6.1 Acquisition of enterprises and activities 7.1 Provisions 7.2 Other liabilities 9.2 Accounting estimates and judgements Insights and highlights Our business Corporate information Financial report Back to content Section 9 Basis for preparation Demant - Annual Report 2021 123 Parent financial statements Sonic Insights and highlights Our business Corporate information Financial report Back to content Parent financial statements Demant - Annual Report 2021 123 Insights and highlights Our business Corporate information Financial report Back to content Section 9 Basis for preparation Demant - Annual Report 2021 124 Parent income statement (DKK million) -114 -119 28 34 -86 -85 2,140 379 - 459 24 82 -95 -59 1,983 776 32 13 2,015 789 Insights and highlights Our business Corporate information Financial report Back to content Section 9 Basis for preparation Demant - Annual Report 2021 125 Parent balance sheet 31 December (DKK million) 26 30 26 30 24 24 24 24 1 1 12,826 10,932 1,429 944 36 42 - 1 10 10 14,302 11,930 14,352 11,984 33 12 5 6 9 12 47 30 47 30 14,399 12,014 (DKK million) 48 48 1,859 425 2,799 5,295 4,706 5,768 7 10 7 10 2,762 3,473 1 1 29 25 2,792 3,499 5,512 2,656 1,336 49 46 32 6,894 2,737 9,686 6,236 14,399 12,014 Insights and highlights Our business Corporate information Financial report Back to content Section 9 Basis for preparation Demant - Annual Report 2021 126 Parent statement of changes in equity (DKK million) 49 -78 -3 2,119 3,482 5,569 - - - -100 - -100 49 -78 -3 2,019 3,482 5,469 - - - 375 414 789 -1,594 1,594 - - -4 - -413 - -417 -33 33 - 83 -83 - - - - 68 - 68 - - 4 - - 4 - 1 - - - 1 - - - - -147 -147 -1 - - - 1 - - - - - 2 2 - 3 - -3 -1 -1 48 -78 1 502 5,295 5,768 - - - 2,140 -125 2,015 - - - -768 768 - - 2 - 404 - 406 - - - -342 - -342 - - 1 - - 1 - 1 - - - 1 - - - - -3,143 -3,143 - - - - 4 4 - - - -4 - -4 48 -75 2 1,932 2,799 4,706 Insights and highlights Our business Corporate information Financial report Back to content Section 9 Basis for preparation Demant - Annual Report 2021 127 At year-end 2021, the share capital was nominally DKK 48 million (DKK 48 million in 2020) divided into the corresponding number of shares of DKK 0.20. There are no restrictions on the negotiabil- ity or voting rights of the shares. At year- end 2021, the number of outstanding shares was 230,130,144 (239,893,471 in 2020). As part of the c-back programme, the company acquired 9,763,327 treasury shares in 2021 (667,702 shares in 2020) amounting to a total of DKK 3,143 million (DKK 147 million in 2020). 797,697 0.3% 4,725,862 1.9% -563,335 -0.2% -4,595,867 -1.9% 9,763,327 4.1% 667,702 0.3% 9,997,689 4.2% 797,697 0.3% Parent statement of changes in equity (continued) Insights and highlights Our business Corporate information Financial report Back to content Section 10 Basis for preparation Demant - Annual Report 2021 128 Notes to Parent financial statements Interacoustics Orion Chair Insights and highlights Our business Corporate information Financial report Back to content Section 10 Notes to Parent financial statements Demant - Annual Report 2021 128 Insights and highlights Our business Corporate information Financial report Back to content Section 10 Basis for preparation Demant - Annual Report 2021 129 (DKK million) 57 56 11 9 68 65 29 29 For further details on remuneration to the Executive Board and the Board of Direc- tors and the share-based remuneration programme, please refer to Note 1.3 in the consolidated financial statements. 10.2 Fees to statutory auditors 10.3 Net financial items (DKK million) 24 19 - 2 - 61 24 82 -1 - -43 -47 -6 -12 -45 - -95 -59 -71 23 10.1 Employees (DKK million) 12.9 3.7 16.6 11.9 2.9 14.8 5.7 1.6 7.3 5.2 1.3 6.5 18.6 5.3 23.9 17.1 4.2 21.3 4.8 - 4.8 3.6 - 3.6 (DKK million) 2 2 1 - 3 2 Insights and highlights Our business Corporate information Financial report Back to content Section 10 Basis for preparation Demant - Annual Report 2021 130 10.4 Tax on profit for the year and deferred tax (DKK million) -33 -12 4 - - -1 -3 - -32 -13 -10 -11 3 1 -7 -10 10.5 Proposed distribution of net profit (DKK million) 2,140 375 -125 414 2,015 789 10.6 Intangible assets (DKK million) 65 11 76 65 11 76 -35 -11 -46 -4 - -4 -39 -11 -50 26 - 26 65 11 76 65 11 76 -32 -10 -42 -3 -1 -4 -35 -11 -46 30 - 30 Insights and highlights Our business Corporate information Financial report Back to content Section 10 Basis for preparation Demant - Annual Report 2021 131 10.7 Property, plant and equipment (DKK million) 31 31 -7 -7 24 31 31 -6 -1 -7 24 Insights and highlights Our business Corporate information Financial report Back to content Section 10 Basis for preparation Demant - Annual Report 2021 132 The carrying amount of investment in subsidiaries includes capitalised goodwill in the amount of DKK 6,768 million (DKK 5,784 million in 2020). Amortisation of capitalised goodwill for the year is DKK 493 million (DKK 439 million in 2020). Loans to subsidiaries of DKK 1,429 million (DKK 944 million in 2020) are considered additions to the total investments in the particular enterprises and are therefore considered non-current. Please refer to Section 11 Subsidiaries and associates for further information on sub- sidiaries, joint ventures and associates. 10.8 Financial assets (DKK million) 10,418 944 54 1 8,275 751 330 97 - 5 - - - -5 - - 167 563 - - 2,143 276 - - - -83 -4 -1 - -78 -193 -96 - - - - - - -83 - 10,585 1,429 50 - 10,418 944 54 1 514 - -12 - 2,174 - -58 - - - - - -100 - - - 514 - -12 - 2,074 - -58 - 404 - -1 - -413 - - - 2,140 - - - 379 - -4 - -767 - -1 - -1,594 - - - - - - - - - -33 - -50 - - - 68 - 83 - 2,241 - -14 - 514 - -12 - 12,826 1,429 36 - 10,932 944 42 1 12,826 1,429 36 - 10,932 944 42 1 Insights and highlights Our business Corporate information Financial report Back to content Section 10 Basis for preparation Demant - Annual Report 2021 133 A part of other debt of DKK 47 million (DKK 32 million in 2020) has a contractual maturity of less than one year, and a part of other debt of DKK 29 million (DKK 25 million in 2020) has a contractual maturity of 1-5 years. The contractual cash flows approximate their carrying amounts. Interest-bearing debt broken down by currency: 72% in Danish kroner (63% in 2020), 21% in euros (27% in 2020) and 7% in US dollars (10% in 2020). The maximum interest rates on part of s non-current debt are limited through an interest rate cap. Sensitivity analysis in respect of interest rates Based on the bank debt facilities at the end of the 2021 financial year, a rise of 1 percentage point in the general interest rate level will cause an increase in the Par- of approx. DKK 37 million (DKK 19 million in 2020). About 55% of the interest-bear- ing debt is subject to fixed or limited inter- est rates, partly due to a bought cap (a strip of call options), and partly due to loans being raised at fixed interest rates. (DKK million) 0% 650 - - 650 - - 0% 650 - 2 650 - 2 10.9 Interest-bearing debt (DKK million) 3,226 2,774 - 6,000 5,973 2,316 - - 2,316 2,301 - 1 - 1 1 5,542 2,775 - 8,317 8,275 0.5% 2,041 3,498 - 5,539 5,496 640 - - 640 633 - 1 - 1 1 2,681 3,499 - 6,180 6,130 0.6% Insights and highlights Our business Corporate information Financial report Back to content Section 10 Basis for preparation Demant - Annual Report 2021 134 Demant A/S has provided security in respect of credit facilities established by Danish subsidiaries. These credit facilities totalled DKK 2,472 million in 2021 (DKK 3,144 million in 2020) of which DKK 514 million was drawn (DKK 453 million in 2020). Moreover, Demant A/S has established a mutual guarantee with Oticon A/S in the amount of DKK 650 million (DKK 650 mil- lion in 2020), which is being drawn upon on a current basis. Demant A/S has provided security in re- spect of rent as well as guarantees con- cerning the continuous operation and pay- ment of liabilities in 2021 for some of our subsidiaries. The Parent is jointly taxed with William Demant Invest A/S, which is the admin- istration company, and all Danish subsidi- aries of both. Under the Danish Corpora- tion Tax Act, the Parent is first of all fully liable for corporate tax payments and for withholding tax at source in respect of in- terest, royalties and dividends in relation to its own subsidiaries and is secondly lia- ble for tax payments due for William Demant Invest A/S and its partly owned subsidiaries. For the purposes of section 357 of the Republic of Ireland Companies Act 2014, Demant A/S has undertaken to indemnify the creditors of its subsidiaries incorpo- rated in the Republic of Ireland in respect of all losses and liabilities for the financial year ending on 31 December 2021 or any amended financial period incorporating said financial year. No material loss is expected to arise from this guarantee. For the purpose of section 78a, subsection 5 of the Danish Financial Statements Act, Demant A/S has undertaken to guarantee liabilities of the subsidiary EPOS Group A/S. No material loss is expected to arise from this guarantee. 10.11 Related parties William Demant Foundation, Kongebakken 9, 2765 Smørum, Denmark, is the only re- lated party with a controlling interest. Con- trolling interest is achieved through a com- own shareholding and the shareholding of William Demant Invest A/S for which Wil- liam Demant Foundation exercises the vot- ing rights. Subsidiaries and associated en- terprises of William Demant Invest A/S are related parties to Demant A/S. Related parties with significant influence of Directors and their related parties. Fur- thermore, related parties are companies in which the above persons have significant interests. 10.12 Events after the balance sheet date Please refer to Note 8.4 in the consolidated financial statements. 10.10 Contingent liabilities Insights and highlights Our business Corporate information Financial report Back to content Section 10 Basis for preparation Demant - Annual Report 2021 135 The financial statements of the Parent, Demant A/S, are presented in accordance with the provisions of the Danish Financial Statements Act for class D entities. The Parent financial statements are pre- sented in Danish kroner (DKK), which is also the functional currency for the Parent. The accounting policies are the same as last year. In respect of recognition and measurement, policies. The instances in which the Par- those of the Group are described below. The Parent has decided to apply the re- cognition and measurement in accordance with IFRS 15 and 16. The standards affect Changes in accounting policies The comparative figures for 2020 for in- vestments in subsidiaries and equity have been restated because of a change in ac- counting policies, arising from the imple- mentation of the changes in the Danish Fi- nancial Statements Act. The changes en- tail that accumulated actuarial gains/losses related to defined benefit plans are recog- nised as part of investments in subsidiaries. The effect of the changes to the compara- tive figures for 2020: • ing balance for 2020 for investments in subsidiaries: DKK -100 million • subsidiaries: DKK 8 million • ing balance for 2020 in equity: DKK -100 million • Income statement Tax The Parent is jointly taxed with its Danish subsidiaries and its parent, William De- mant Invest A/S. Current income tax is al- located to the jointly taxed Danish compa- nies in proportion to their taxable income. Balance sheet Goodwill Goodwill is amortised on a straight-line basis over 20 years, which is the useful life experience in respect of the individual business activities. Goodwill is written down to its recoverable amount, if lower than its carrying amount. Rights Rights acquired are amortised on a straight-line basis over their estimated useful lives and measured at cost less ac- cumulated amortisation and impairment losses. The amortisation period is five years. Rights acquired are written down to their recoverable value, if lower than their carry- ing value. Investments in subsidiaries and associates Investments in subsidiaries and associates are recognised and measured using the equity method, i.e. interests are measured at the proportionate share of the equity values of such subsidiaries and associates with the addition or deduction of the carry- ing amount of goodwill and with the addi- tion or deduction of unrealised intra-Group profits or losses, respectively. its or losses in subsidiaries and associates are recognised in the income statement af- ter elimination of unrealised intra-Group profits or losses less any amortisation and impairment of goodwill. Subsidiaries and associates with negative equity values are measured at DKK 0, and any receivables from such companies are the negative equity value to the extent that such receivable is considered irrecovera- ble. If the negative equity value exceeds the value of receivables, if any, such resid- ual amount is recognised under provisions to the extent that the Parent has a legal or constructive obligation to cover liabilities incurred by the particular subsidiary or as- sociate. On distribution of profit or loss, net revalu- ation and net impairment losses on invest- ments in subsidiaries and associates are transferred to reserves for net revaluation according to the equity method. Other investments On initial recognition, other investments are measured at cost. Subsequently, they are measured at fair value on the balance sheet date, and any changes in fair values are recognised in the income statement under net financial items. Provisions Provisions include liabilities, which are un- certain in respect of the amount or the tim- ing of their settlement. Provisions may in- clude different types of liabilities, such as deferred tax liabilities, onerous contracts, pension obligations as well as provisions for disputes etc. Statement of changes in equity In compliance with the format require- ments of the Danish Financial Statements Act, any items included under comprehen- sive income in the consolidated financial statements are recognised directly in eq- uity in the Parent financial statements. Cash flow statement In compliance with section 86(4) of the Danish Financial Statements Act, a cash flow statement is not drawn up for the Parent, such statement being included in the consolidated cash flow statement. 10.13 Parent accounting policies Insights and highlights Our business Corporate information Financial report Back to content Section 11 Basis for preparation Demant - Annual Report 2021 136 Subsidiaries, associates and Joint ventures Demant - Annual Report 2021 136 Insights and highlights Our business Corporate information Financial report Back to content Section 11 Basis for preparation Demant - Annual Report 2021 137 100% 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% Parent 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% Insights and highlights Our business Corporate information Financial report Back to content Section 11 Basis for preparation Demant - Annual Report 2021 138 100% 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% 95% 40% 25% 20% Insights and highlights Our business Corporate information Financial report Back to content Section 11 Basis for preparation Demant - Annual Report 2021 139 Demant A/S Kongebakken 9 DK-2765 Smørum Denmark Phone +45 3917 7300 [email protected] www.demant.com CVR 71186911 213800RM6L9LN78BVA562021-01-012021-12-31213800RM6L9LN78BVA562021-01-012021-12-31cmn:ConsolidatedMember213800RM6L9LN78BVA562021-01-012021-12-31cmn:ConsolidatedMember1213800RM6L9LN78BVA562021-01-012021-12-31cmn:ConsolidatedMember2213800RM6L9LN78BVA562021-01-012021-12-31cmn:ConsolidatedMember1213800RM6L9LN78BVA562021-01-012021-12-31cmn:ConsolidatedMember2213800RM6L9LN78BVA562021-01-012021-12-31cmn:ConsolidatedMember1213800RM6L9LN78BVA562021-01-012021-12-31cmn:ConsolidatedMember2213800RM6L9LN78BVA562021-01-012021-12-31cmn:ConsolidatedMember3213800RM6L9LN78BVA562021-01-012021-12-31cmn:ConsolidatedMember4213800RM6L9LN78BVA562021-01-012021-12-31cmn:ConsolidatedMember5213800RM6L9LN78BVA562021-01-012021-12-31cmn:ConsolidatedMember6213800RM6L9LN78BVA562021-01-012021-12-31cmn:ConsolidatedMember7213800RM6L9LN78BVA562021-01-012021-12-31cmn:ConsolidatedMember8213800RM6L9LN78BVA562021-01-012021-12-31cmn:ConsolidatedMember1213800RM6L9LN78BVA562021-01-012021-12-31cmn:ConsolidatedMember2213800RM6L9LN78BVA562020-01-012020-12-31213800RM6L9LN78BVA562021-12-31213800RM6L9LN78BVA562020-12-31213800RM6L9LN78BVA562019-12-31213800RM6L9LN78BVA562020-12-31ifrs-full:IssuedCapitalMember213800RM6L9LN78BVA562021-01-012021-12-31ifrs-full:IssuedCapitalMember213800RM6L9LN78BVA562021-12-31ifrs-full:IssuedCapitalMember213800RM6L9LN78BVA562020-12-31ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember213800RM6L9LN78BVA562021-01-012021-12-31ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember213800RM6L9LN78BVA562021-12-31ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember213800RM6L9LN78BVA562020-12-31ifrs-full:ReserveOfCashFlowHedgesMember213800RM6L9LN78BVA562021-01-012021-12-31ifrs-full:ReserveOfCashFlowHedgesMember213800RM6L9LN78BVA562021-12-31ifrs-full:ReserveOfCashFlowHedgesMember213800RM6L9LN78BVA562020-12-31ifrs-full:RetainedEarningsMember213800RM6L9LN78BVA562021-01-012021-12-31ifrs-full:RetainedEarningsMember213800RM6L9LN78BVA562021-12-31ifrs-full:RetainedEarningsMember213800RM6L9LN78BVA562020-12-31ifrs-full:EquityAttributableToOwnersOfParentMember213800RM6L9LN78BVA562021-01-012021-12-31ifrs-full:EquityAttributableToOwnersOfParentMember213800RM6L9LN78BVA562021-12-31ifrs-full:EquityAttributableToOwnersOfParentMember213800RM6L9LN78BVA562020-12-31ifrs-full:NoncontrollingInterestsMember213800RM6L9LN78BVA562021-01-012021-12-31ifrs-full:NoncontrollingInterestsMember213800RM6L9LN78BVA562021-12-31ifrs-full:NoncontrollingInterestsMember213800RM6L9LN78BVA562019-12-31ifrs-full:IssuedCapitalMember213800RM6L9LN78BVA562020-01-012020-12-31ifrs-full:IssuedCapitalMember213800RM6L9LN78BVA562019-12-31ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember213800RM6L9LN78BVA562020-01-012020-12-31ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember213800RM6L9LN78BVA562019-12-31ifrs-full:ReserveOfCashFlowHedgesMember213800RM6L9LN78BVA562020-01-012020-12-31ifrs-full:ReserveOfCashFlowHedgesMember213800RM6L9LN78BVA562019-12-31ifrs-full:RetainedEarningsMember213800RM6L9LN78BVA562020-01-012020-12-31ifrs-full:RetainedEarningsMember213800RM6L9LN78BVA562019-12-31ifrs-full:EquityAttributableToOwnersOfParentMember213800RM6L9LN78BVA562020-01-012020-12-31ifrs-full:EquityAttributableToOwnersOfParentMember213800RM6L9LN78BVA562019-12-31ifrs-full:NoncontrollingInterestsMember213800RM6L9LN78BVA562020-01-012020-12-31ifrs-full:NoncontrollingInterestsMember213800RM6L9LN78BVA562020-01-012020-12-31cmn:ConsolidatedMemberiso4217:DKKiso4217:DKKxbrli:sharesxbrli:pureAnnual reportAuditor's report on audited financial statementsParsePort XBRL Converter2021-01-012021-12-312020-01-012020-12-31Niels Bjørn Christiansen213800RM6L9LN78BVA56Demant A/SReporting class DKongebakken92765 SmørumEgedalDenmarkDK1983-04-22Kongebakken 9, 2765 Smø[email protected] Holding A/SWilliam Demant Holding A/Swww.demant.com/about/sustainability/www.demant.com/about/responsibilitywww.demant.com/about/management/www.demant.com/about/management/213800RM6L9LN78BVA5671186911Demant A/SKongebakken 92765 Smørum EgedalOpinionBasis for OpinionWeidekampsgade62300Copenhagen S33963556DELOITTE STATSAUTORISERET REVISIONSPARTNERSELSKABWeidekampsgade62300Copenhagen S
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