Cobham plc
Annual Report and Accounts 2013
The most important thing we build is trust
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The most important thing we build is trust
Cobham plc
Brook Road, Wimborne, Dorset, BH21 2BJ, England
T: +44 (0)1202 882020
F: +44 (0)1202 840523
www.cobham.com
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Cobham protects lives and livelihoods with its
differentiated technology and know-how, operating
with a deep insight to customer needs and agility.
The Group offers an innovative range of technologies
and services to solve challenging problems across
commercial, defence and security markets, from
deep space to the depths of the ocean.
It has market leading positions in air-to-air refuelling;
aviation services; audio, video and data communications,
including satellite communications; defence electronics;
life support; and mission equipment.
The most important thing Cobham builds is trust.
Front cover image
Cobham’s Distributed Antenna Systems (DAS)
technology and wireless solutions for the public
safety and cellular markets ensure that buildings
and critical infrastructure have a fail-safe public
safety communications system of the highest
standard. The Burj Khalifa, Dubai, is one of the
many pieces of infrastructure globally that
benefit from Cobham’s DAS technology.
Inside front cover image
Cobham provides governments globally with fixed
and rotary wing services, including helicopter training,
search and rescue, logistics and emergency
medical services.
Find More Online
www.cobham.com
Our website provides further information including shareholder
services and governance, details of our products and services,
corporate responsibility and sustainability and more.
Investor information and share price performance
www.cobhaminvestors.com
Products and service offerings
www.cobham.com/products-and-services
Corporate responsibility and sustainability
www.cobhamsustainability.com
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Highlights of the Year
• Group revenue increased by 2%, with acquisitions
Contents
trading ahead of plan
• Strong growth in commercial markets offset by
continued weakness in defence/security markets
resulted in 4% Group organic* revenue decline
• Further progress in bringing more balance
to the portfolio, with commercial 35% (2012: 31%)
of Group revenue, and good progress with
strategic objectives
• Incremental savings in Excellence in Delivery well
ahead of plan, with site integrations being accelerated
• Group’s PV investment* increased to 6.2% (2012:
5.3%) of revenue, with focus on growth markets
• Recommended full year dividend increase of 10%,
continuing the Group’s long standing, progressive
dividend policy
Dividend
9.68p
(2012: 8.80p)
Total revenue
£1,790m
(2012: £1,749m)
Earnings per Ordinary Share – underlying*
21.6p
(2012: 22.5p)
Earnings per Ordinary Share – basic
10.7p
(2012: 16.0p)
*For definitions, please refer to page 140.
Strategic Report
Group at a Glance
What we Do
Chairman’s Statement
Chief Executive Officer’s Statement
Our Markets
Our Strategy and Key Performance Indicators
Aerospace and Security
Defence Systems
Mission Systems
Aviation Services
Financial Review
Principal Risks
Corporate Responsibility and Sustainability
Corporate Governance
Board of Directors
Corporate Governance Report
Directors’ Remuneration Report
Directors’ Report
Statement of Directors’ Responsibilities
Compliance with the UK Corporate
Governance Code
2
4
6
8
10
12
14
16
18
20
22
28
32
36
38
48
64
67
68
70
74
Financial Statements
Independent Auditors’ Report
Consolidated Income Statement
Consolidated Statement of
75
Comprehensive Income
76
Consolidated Balance Sheet
78
Consolidated Statement of Changes in Equity
79
Consolidated Cash Flow Statement
Notes to the Group Financial Statements
80
Parent Company Independent Auditors’ Report 125
127
Parent Company Financial Statements
Other Information
Group Financial Record
Shareholder Information
Glossary
Definitions
Find More Online
136
137
138
140
141
The Annual Report and Accounts contains certain
forward looking statements with regard to the
operations, performance and financial condition of
the Group. By their nature, these statements involve
uncertainty since future events and circumstances
can cause results to differ from those anticipated.
Nothing contained in this Annual Report and
Accounts should be construed as a profit forecast.
You can view this Annual Report and Accounts
online at www.cobhaminvestors.com
www.cobham.com
Cobham plc Annual Report and Accounts 2013
1
Group at a Glance
Cobham operates from 14 principal manufacturing locations,
with nine in the USA, three in the UK and two in continental
Europe, as well as satellite locations and sales offices across
the world that provide a permanent presence in faster growth
markets. In addition, Aviation Services operates from airport
bases in Australia, the UK and elsewhere in the world.
Revenue
£1,790m
Trading profit
£318m
The Group in 2013
The Group leverages its
innovative technology,
know-how and understanding
of customer needs to build and
maintain leading positions in
the second and third tiers of
the global defence/security
and commercial aerospace,
marine and land markets.
Aerospace and Security 42%
17%
Defence Systems
20%
Mission Systems
21%
Aviation Services
Aerospace and Security 44%
15%
Defence Systems
25%
Mission Systems
16%
Aviation Services
Divisional percentages for revenue and trading profit exclude non-core activities, head office results and eliminations:
see note 4 on page 90
Aerospace and Security (CAS)
See page 14
Defence Systems (CDS)
See page 16
Provides aircraft and in-building communication equipment,
law enforcement and national security monitoring solutions,
and satellite communication equipment for land, sea and
air applications.
Provides critical technology for network centric operations,
moving information around the digital battlefield with
customised and off-the-shelf solutions for people and
systems to communicate on land, sea and in the air.
Operating locations
United States, United Kingdom, Denmark, France, South Africa,
Finland and Sweden
Operating locations
United States and Mexico
Revenue
£744m
(2012: £697m)
Trading profit
£132m
(2012: £149m)
Revenue
Trading profit
£309m
(2012: £323m)
£47m
(2012: £45m)
2
Cobham plc Annual Report and Accounts 2013
Rebalancing the portfolio for sustainable organic revenue growth
Markets
Geography
US defence/security
37%
Non US defence/security 28%
35%
Commercial
USA
UK
Other EU
45%
13%
16%
Australia
Asia
RoW
14%
7%
5%
Mission Systems (CMS)
See page 18
Aviation Services (CAvS)
See page 20
Provides safety and survival systems for extreme environments,
nose-to-tail refuelling systems and wing-tip to wing-tip mission
systems for fast jets, transport aircraft and rotorcraft, and
provides remote controlled robots and fully equipped bomb
disposal vehicles for homeland security and military applications.
Delivers outsourced aviation services for military and civil customers
worldwide through military training, special mission flight operations,
outsourced commercial aviation and aircraft engineering.
Operating locations
United States, United Kingdom and Germany
Operating locations
Australia and United Kingdom
Revenue
Trading profit
Revenue
£358m
(2012: £373m)
£74m
(2012: £81m)
£365m
(2012: £327m)
Trading profit
£48m
(2012: £38m)
www.cobham.com
Cobham plc Annual Report and Accounts 2013
3
Strategic Report What we Do
Our technology and know-how
based business model enables
us to consistently deliver
strong trading margins,
long term growth and
consistently high operating
cash flow conversion.
Investment in differentiated and specialist technologies contributes
to our market leading positions and strong trading margins.
The combination of our margins and our relatively low capital
requirements enables us to generate consistently good levels of cash.
Trading margin
17.7%
(2012: 19.0%)
Free cash flow
(after restructuring)
£155m
(2012: £241m)
Leading positions
in our markets
Investment in high
value-add technology
and know-how
1
4
Understanding
of and response
to customer
needs
2
3
Programme management
and operational excellence
4
Cobham plc Annual Report and Accounts 2013
Leverage of
existing technology,
products and services
into new markets
1
Leading positions
in our markets
2
Investment
in high value-add
technology and
know-how
3
Leverage of existing
technology, products
and services into
new markets
4
Programme
management
and operational
excellence
Cobham operates in specialist
technology markets at the tier
two (subsystems) and tier three
(components) segments, supplying
to a blue chip customer base. Its
market leading positions enable
Cobham to optimise its return on
investment, so it can continue to
invest in technology and in skills
and capabilities as well as pay an
increasing dividend to shareholders.
Tier 1
Tier 2
Tier 3
System of Systems
Platforms
Platform Systems &
Signal Processing
Subsystems
Circuits
Components
Cobham in action
Cobham has built on its strong
position in the commercial slip
ring market for wind turbines
by commencing additional
operations at its Prescott, Arizona
manufacturing facility. This facility is
starting to supply US customers with
products made in-country, which is
leading to further market penetration
of the wind turbine market.
See page 10 for more information.
Private Venture (PV or company
funded research and development
– R&D) investment in the year
increased to 6.2% (2012: 5.3%)
of revenue. This is consistent
with the previously announced
plans to increase technology
investment, closely aligning
this to growth markets.
Total R&D investment, including
customer funded projects, was up
by 19% to £186m (2012: £156m)
primarily due to the ongoing
significant funded development
activity on aerial refuelling
programmes, which is expected
to increase in 2014.
PV investment
£88m
(2012: £75m)
Total R&D investment
£186m
(2012: £156m)
Cobham in action
Cobham’s products are often
smaller, lighter and use less power
than competing technologies.
This means that cost savings
and operational benefits are
generated for customers, together
with a reduced impact on the
environment through reduced
fuel and energy consumption.
See page 9 for more information.
Cobham leverages its technology
into new or adjacent commercial
end markets, where there is strong
customer demand. This is helping
it to bring more balance to its
portfolio and will enable it to grow
revenue through business cycles.
During the year, Cobham
has made progress towards
this objective by growing its
commercial revenue organically
and through acquisitions.
Revenue from
commercial markets
35%
(2012: 31%)
Cobham in action
The new Solo7 ultra-miniature
high quality wireless video
encoder is based on defence/
security technology and is now
being sold into target broadcast
markets. The product has already
been used at the 2014 Sochi
Winter Olympics.
See page 6 for more information.
Programme management is
a core competency focus for
Cobham, which enables it to
meet customer expectations and
deliver growth. Considerable work
has been undertaken to enhance
functional excellence in project
and programme management
across the Group’s diverse range
of activities.
The transformational Excellence
in Delivery (EiD) programme has
continued to deliver further
improvements to operational
performance and customer delivery
in Cobham’s principal locations.
Improvement in direct
labour productivity
since 2010
40%
Cobham in action
EiD is reducing Cobham’s physical
footprint and thereby reducing its
CO2 emissions. Cobham continues
to target reduced impacts on the
environment from its products,
facilities and supply chain.
CO2 emissions
86.6MWh/£m turnover
(2012: 87.2MWh/£m turnover)
See pages 9 and 35
for more information.
Investing in skills and expertise
The delivery of Cobham’s strategy depends on the right skills and capabilities
being in place in the business. Cobham has increased its investment significantly
in learning and development to further build the essential skills and capabilities
that are critical to the delivery of future growth.
366 employees
1,473 hours
Employee training completed in the first three months
on the new online Learning and Development Centre.
See page 8 for more information.
www.cobham.com
Cobham plc Annual Report and Accounts 2013
5
Strategic Report Chairman’s Statement
“There has been considerable
focus on the drive towards
sustainable organic revenue
and profit growth”
Full year dividend
9.68p +10%
(2012: 8.80p)
13% CAGR over ten years
pence
9.68
8.80
8.00
6.00
5.45
10
8
6
4
2
0
2009
2010
2011
2012
2013
6
Cobham plc Annual Report and Accounts 2013
Overview
It has been a year of significant activity for Cobham. The Board
has continued to give considerable focus to the Group’s strategic
objectives, which underpin the drive towards sustainable organic
revenue and profit growth and increasing shareholder value.
The Group’s transformational EiD programme has enabled us to
streamline and simplify the business and is achieving significant
efficiency savings by reducing costs through an extensive site
integration and rationalisation programme. In part, as we guided
in 2012, we are using these savings to increase our investment in
the business, as part of our focus on generating revenue growth.
EiD has continued to deliver improvements in operational
performance and customer delivery through implementation
of a standard operating framework across Cobham’s principal
locations. With this first phase largely complete, the programme
is moving into a continuous improvement phase that will not only
sustain the progress already made but also drive further performance
improvements. Operational excellence is essential to enable the
Group to meet or, wherever possible, exceed customer expectations
as the foundation for the delivery of sustainable organic revenue
and profit growth.
We have increased our investment in the business, linking this more
closely to market opportunities and the needs of our customers.
We have leading positions in attractive technology-led markets
and we aim to grow market share and revenue by investing in
new or improved products, which are often smaller, lighter and
less power consumptive than legacy products.
Furthermore, we also leverage our core suite of technologies into new
commercial and geographic markets where suitable opportunities can
be identified. This is aligned with our strategic objective of bringing
more balance to the portfolio, so that the Group remains exposed to
faster growth markets. The shift in the portfolio is also being achieved
through carefully selected acquisitions, with two businesses with
highly complementary technology and know-how purchased in the
year, also reinforcing our market positions.
None of this is possible without the right skills and capabilities in the
business. We have therefore increased our investment in our people
in recent years, and we are linking our workforce requirements more
closely to the business planning process, reinvigorating our approach
to training and development and strengthening key management
capabilities within the business. The Board is also mindful of the
ageing demographics within the aerospace and defence industry and
so we are gradually increasing the number of university graduates in
the business, with a focus on science and engineering, and we are
increasing the number of apprentices we recruit from schools.
A strong and effective governance framework is essential in enabling
the achievement of the Group’s strategic objectives. Good progress
has been made in this area in 2013, in particular in enhancing the
Group’s programme management processes and introducing new
procedures aimed at improving allocation of PV expenditure to
targeted commercial opportunities.
The Group strives for the highest standards possible in setting its
ethics and compliance rules, and at all times to comply with all laws
and regulations that apply in the jurisdictions in which it operates.
It is therefore very disappointing for me to have to tell you about a
potential issue with sales practices in a small business unit supplying
products into Asia. This issue was identified internally and elevated
through Cobham’s reporting lines, in accordance with our ethics
policy and training. After an initial internal investigation, we made
a voluntary disclosure to the US Department of Justice (DoJ) on
24 February 2014. The investigation into this issue is ongoing and
Cobham continues to co-operate fully with the DoJ.
The Board
We welcomed Simon Nicholls to the Board as Chief Financial Officer on
1 May 2013. Simon joined us from Senior plc, a FTSE250 international
group manufacturing engineered products for aerospace, defence and
industrial applications. In his previous role as Group Finance Director
at Senior, Simon played a key role in the strategic evolution and growth
of the business and his experience of financial leadership will make him
pivotal to the delivery of our strategic objectives.
Simon replaced Warren Tucker, who stood down after ten years
service as Chief Financial Officer. The Board would like to thank
Warren for his vision and enormous contribution to the Group
over this time.
We also welcomed to the Board on 1 May 2013 Jonathan Flint
as a Non-executive Director. Jonathan is Chief Executive of Oxford
Instruments plc, a leading provider of high technology tools and
systems for research and industry, where he continues to deliver
strong growth and shareholder value in technology-led markets
around the world.
John Patterson, Non-executive Director and the Chairman of the
Remuneration Committee, will stand down from the Board at the
conclusion of the 2014 Annual General Meeting. The Board is grateful
for his significant contribution and support over the last nine years.
Alison Wood will assume the role of Chair of the Remuneration
Committee following his departure.
Dividend
The Board is recommending a final dividend for 2013 of 7.04p (2012:
6.40p). This, together with the interim dividend of 2.64p (2012: 2.40p),
will result in a total dividend per share for 2013 of 9.68p (2012: 8.80p),
an increase of 10% on the prior year.
The Board is proud of Cobham’s long record of delivering a
progressive dividend to our shareholders. The dividend has been
increased consecutively for the last 43 years, an enduring track record
that only a handful of other companies can match. This has been
made possible in part due to Cobham’s cash generative business
model, its differentiated positions in attractive technology markets
and its prudent investment in acquisitions. Following investment in
the business, we will continue to prioritise increasing the dividend
payment in line with the long standing, progressive dividend policy.
Outlook
Cobham has delivered full year results in line with its guidance,
in what remains a challenging US defence/security market. It has
made good progress in the year against its strategic objectives,
including increased technology and other organic investments,
and accelerated benefits from the operational excellence
programme. It is now realigning its organisational structure
to enable the next stage of development.
Trading conditions in the US defence/security market are likely
to remain challenging in 2014 with potentially significant foreign
currency headwinds and continued pressure on US defence/security
investment accounts. However, the Group anticipates that its strong
and growing positions in attractive commercial markets and the
generally positive prospects for its non-US defence/security markets
will partially offset this, and Cobham continues to plan for Group
organic revenue to decline by low-to-mid single digits in 2014.
Cobham will continue to take further actions as appropriate to
substantially mitigate the impact of this organic decline.
Cobham has innovative technology and know-how supported
by market leading positions, which allows it to leverage across
its markets. As a result the Board continues to anticipate that it
will deliver mid-single digit organic revenue growth from 2015.
Cobham benefits from a cash generative business model and a
strong balance sheet, which enables it to maintain its long standing
policy of a 10% progressive annual dividend increase.
Marcus Beresford, Non-executive and Senior Independent Director,
stood down from the Board at the conclusion of the 2013 Annual
General Meeting. The Board is grateful to Marcus for his dedicated
service over nine years and his invaluable contribution to Cobham
during that time. With his departure, Michael Wareing has taken
on the role of Senior Independent Director.
John Devaney
Chairman
5 March 2014
www.cobham.com
Cobham plc Annual Report and Accounts 2013
7
Strategic Report
Chief Executive Officer’s Statement
“We are transforming
the Group’s operational
performance and
customer delivery
through our Excellence
in Delivery programme”
Strategic Overview
Our seven strategic priorities will enable us to return to sustainable
growth. They focus on:
1. Innovation with insight
2. Focus on components and subsystems
3. Leverage our technology
4. Focus on M&A
5. Operational excellence
6. Programme execution
7. Invest in skills and capabilities
This will enable us to:
Deliver growth – Generate free cash flow
– Create shareholder value
See page 12 for more information
8
Cobham plc Annual Report and Accounts 2013
Strategy
Last year, I set out the Group’s strategy which is to leverage its
innovative technology, know-how and understanding of customer
needs to build and maintain leading positions in the second and third
tiers of the global defence/security and commercial land, marine and
aerospace markets. This enables Cobham to generate sustainable top
and bottom line growth, relative to the markets in which we operate,
while consistently generating good free cash flow, thereby creating
shareholder value.
As a Group, we have invested significantly in the development of
our strategy during the year and we are making tangible progress
towards achieving our objectives and we anticipate a return to
mid-single digit organic revenue growth from 2015.
Investment in management capabilities
We have increased investment in the year to achieve the objective
of enhancing the skills and capabilities of our employees, who are
critical to the delivery of future growth. As part of this investment,
we are implementing a strategic workforce plan, have commenced
deployment of an integrated talent management programme and
are continuing to invest in an online learning and development centre.
Programme management is a core competency focus which enables
us to meet customer expectations and deliver growth. Considerable
work has been undertaken to enhance functional excellence in
project and programme management across the Group’s diverse
range of customer and internally funded activities, together with
an increased focus on lifecycle management.
To enable the next stage of our strategic development and to make
further progress towards achieving sustainable growth, we have
undertaken a review of our structure. We will be retaining our four
previously reported Divisions, now calling them Sectors, and these will be
Communications and Connectivity (previously Aerospace and Security),
US Defence Electronics, Mission Systems and Aviation Services. Within
this structure, we will consolidate our three separate Special Security
Agreements into one, with all classified US Government work being
carried out within US Defence Electronics. This consolidation requires
the transfer of some business units from Communications and
Connectivity to US Defence Electronics. There are no changes to the
other two Sectors. We will reflect these changes in our reported results,
commencing with our 2014 interims.
Work has now been completed, as planned, in the principal locations on
implementing the production, supply chain and engineering standard
operating frameworks. Since the programme started, it has delivered
significant improvements in the principal locations across a range of
operational and customer metrics including on time delivery, quality
and an improvement in direct labour productivity of 40%.
We are also strengthening our senior management and reporting
structure to support the continuing transformation. This includes
the appointment of a Chief Operating Officer (COO) who will be
given direct responsibility for some key Group-wide functions as
well as direct responsibility for Communications and Connectivity
and Mission Systems.
Technology investment
We have significantly increased PV investment to 6.2% (2012: 5.3%)
of Group revenue. This is consistent with our previously announced
plans to increase investment in our markets where there are good
growth opportunities.
As part of this, we have increased technology investment in SATCOM
product development, relating to the new Inmarsat Global Xpress
(GX) satellite constellation, with global coverage expected by the end
of 2014. Within Antenna Systems, a revolutionary next generation
Distributed Antenna System (DAS) platform, ‘idDAS’, has been
launched. idDAS is the first major DAS platform that provides the
ability to dynamically shift capacity around an ‘in-building’ facility
on demand.
We have also increased PV investment in Cobham Defence Systems
in a range of critical defence/security technologies, including
components and subsystems for next generation radar, electronic
warfare and electronic attack applications, where there is an
identified customer need and funding.
Total R&D investment, including customer funded projects, was
up 19% to £186m (2012: £156m). The increased level of customer
funding is primarily due to the ongoing significant funded
development activity on aerial refuelling programmes, which
is expected to increase in 2014.
Operational excellence
Our transformational EiD programme has continued to deliver critical
improvements to operational performance and customer delivery.
EiD has three components: the integration and rationalisation of
operating sites into a set of principal locations; the implementation
of a standard operating framework designed to drive operational
excellence and establish a culture of continuous improvement; and
the implementation of a standard ERP system.
Given the challenging conditions the Group is continuing to face
in its US defence/security market, we have worked hard to accelerate
the benefits of the integration and downsizing activities. A number
of satellite facilities have been integrated or rationalised during
the year and, in total, we have now rationalised 27 sites since the
beginning of 2010. This has significantly reduced the cost base of the
Group. We are using the savings generated in part to fund increased
investment in our business, to help deliver sustainable organic growth.
EiD has also simplified the Group’s operating structure and enhanced
our flexibility and scalability.
With centrally driven implementation activities largely finished,
we are now focusing on actions to ensure that the significant
progress that has been made to date is sustained, and that a
culture of continuous improvement is embedded across the
business to drive further improvements.
Work on the ERP system, also a major contributor to sustaining
the operating and customer benefits of the standard operating
framework, has continued.
Largely driven by the significant acceleration of integration activity,
we have achieved £28m of year-on-year efficiency savings during
2013, well ahead of the £19m guidance. This brings the total
annualised benefits to £76m since the programme began in 2010.
The success in reducing costs means that we now expect EiD will
generate £105m of annualised efficiency benefits by 2015, which
is an increase of £5m on the previous guidance and this will be
achieved one year earlier than planned. We expect to be able to
achieve this within the existing budget, which is £191m over the
programme life. EiD costs in the year were £56m, reflecting the
acceleration of activity.
Capital allocation and mergers and acquisitions
We continue to prioritise investment for organic growth, followed
by our long standing, progressive dividend policy. After this, we use
the significant free cash flows generated and the strong balance sheet
to acquire businesses that are complementary to, and reinforce,
our differentiated technology and know-how and market positions.
During the year, we invested over £150m in acquisitions: primarily
Axell in May for up to £85m, including contingent consideration,
and in July the £74m acquisition of the outstanding 50% stake in FBH,
our helicopter joint venture. We remain focused on bringing more
balance to the portfolio and we will achieve this through a rigorous
and disciplined approach to investment.
Conclusion
We remain convinced that the successful pursuit of these objectives
is key to the ongoing health of the business. Accordingly, we intend
to maintain our strategic focus on executing our key priorities. This is
especially important as conditions in the US defence/security market
are likely to remain challenging in 2014. We remain confident that
this will enable us to develop the capabilities, processes and people
that we need to meet the Board’s growth expectations and deliver
increasing value for Cobham’s shareholders and other stakeholders.
Bob Murphy
Chief Executive Officer
5 March 2014
www.cobham.com
Cobham plc Annual Report and Accounts 2013
9
Strategic Report
Our Markets
The Group operates in three end markets: US defence/
security, non-US defence/security and commercial, which
comprises specialist aerospace, marine and land markets.
The Group operates in three market segments
Commercial
35%
(2012: 31%)
US defence/security
37%
(2012: 42%)
Non-US defence/security
28%
(2012: 27%)
Competitive position within our markets
During the year, the Group has continued
to make progress in bringing more balance
to the revenue derived from its end markets,
with the proportion generated from
commercial markets increasing to 35% (2012:
31%). This has increased due to a combination
of organic growth and acquisitions. These
acquisitions have brought complementary
technology and capability to the Group in
predominantly commercial markets.
The Group has market leading positions and
a portfolio of attractive technologies which
can be leveraged across defence/security
and commercial customers.
Within the US defence/security market, the
Group is well positioned on high priority new
platforms, including the KC-46 aerial refuelling
tanker, the F-35 Joint Strike Fighter, and on a
number of ballistic missile defence
programmes. It is also well positioned to
benefit from upgrade programmes where
it partners with a number of different system
integrators to supply key components and
subsystems, including on a variety of high
priority next generation radar and electronic
warfare programmes.
Cobham’s technology and know-how are
also highly relevant to non-US defence/
security markets, where there are
opportunities to benefit from significant
platform/programme export orders won by
larger defence companies and also from
selling products and services direct to end
customers. The Group has strong positions
on a number of defence/security platforms
with good export potential in markets
outside of the US, including the European
A400M and Brazilian KC-390 aerial refuelling
tankers, the Eurofighter Typhoon and the
Swedish Gripen fighter aircraft.
The Group has strong technology and know-how
positions in a number of aerospace and aviation
markets, including large transport, regional and
business jets, helicopters and smaller aircraft. It
has technology positions with manufacturers
such as Boeing, Airbus, Airbus Helicopters and
Bombardier, as well as airline customers.
In addition to aerospace, it also has positions in
the SATCOM market, where it is a leader in the
marine market, and in a number of commercial
land markets.
Achieving further balance across the portfolio
remains a strategic objective for the Group.
10
Cobham plc Annual Report and Accounts 2013
US defence/security market
Non-US defence/security markets
Commercial markets
Conditions in the US defence/security
market in 2013 were challenging, as
expected, and are likely to remain so for the
foreseeable future. The Bipartisan Budget
Act of 2013 has brought increased certainty
to the level of US Federal spending in 2014
and 2015 and partial relief from the full
impact of budget cuts mandated under
the Budget Control Act of 2011.
However, ongoing pressure is still expected
on the US Department of Defense
investment accounts, as the bulk of the
relief funding is likely to be used to reduce
the backlog in training, maintenance and
the readiness of the armed forces, rather
than for investment in capabilities. The
Group also remains cautious on medium-
term prospects in this market as, based on
previous down-cycles, the investment
accounts may continue to drift lower,
before reaching their cyclical trough.
Notwithstanding these market challenges,
Cobham continues to believe that its
differentiated technology and know-how,
with its focus on improving communications,
enhancing mobility and keeping people
safe in harsh environments, remain aligned
with the customers’ priorities.
Demand conditions in defence/security
markets outside of the US have remained
subdued in Europe but there are sizeable
and growing opportunities elsewhere in
the world. The Group believes that overall
prospects in these markets remain good,
with growth being driven by regional
procurement priorities and a variety of
security concerns including border security,
piracy, drug trafficking and terrorism.
Overall, the Group anticipates that
demand in accessible non-US defence/
security markets is likely to be aligned
with the ongoing shift in spending away
from the flat or lower growth budgets
in Europe, to increasing budgets in the
Middle East, Asia and other faster growth
economies. The Group remains well
positioned to capitalise on this trend.
Cobham’s Aviation Services business
has significantly enhanced its existing
capabilities during the year through the
acquisition of FB Heliservices (FBH), which
has added rotary to its existing fixed wing
capability in markets including the Middle
East and the Caribbean. Going forward,
this market is expected to continue to
benefit from a trend towards increased
outsourcing.
Cobham’s differentiated technology and
know-how are also used in attractive
commercial markets, where it has strong
and growing positions. The Group’s primary
commercial markets are those in specialist
aviation in Australia, the marine SATCOM
market, land markets globally and a range
of other aerospace markets including large
transport aircraft, regional and business jets,
helicopters and smaller aircraft, as well as
land markets globally.
Growth in Cobham’s Aviation Services
business in Australia is linked to the long
term growth in demand for natural
resources. The Group has made good
progress during the year in this market,
winning some significant long term
orders in Australia.
Demand in other commercial markets
has also increased strongly, driven by
factors including aircraft production rates,
a desire for increased bandwidth on air
and marine platforms, and demand for
smaller and lighter products which drive
operational efficiency and fuel savings.
The Group also benefits from an
increasing desire for communication
in locations that lack effective terrestrial
communications and from increasingly
stringent safety requirements.
US defence/security market
Aligned to the customers’ priorities
Non-US defence/security markets
Sizeable and growing opportunities
across the globe
Commercial markets
Leverage technology and know-how into
attractive markets
CAS
11%
CDS 16%
CMS 10%
Total 37%
CAS
9%
CDS
1%
8%
CMS
CAvS 10%
Total 28%
CAS
22%
2%
CMS
CAvS 11%
Total 35%
www.cobham.com
Cobham plc Annual Report and Accounts 2013
11
Strategic Report Our Strategy and Key Performance Indicators
Delivering on our seven strategic priorities enables us to generate
sustainable top and bottom line growth, relative to the markets
in which we operate, while consistently generating good free cash
flow and creating shareholder value.
Our strategic priorities focus on
1.
Innovation with insight
2.
Focus on components
and subsystems
3.
Leverage our technology
4.
Focus on M&A
Improve understanding of our
markets and customers’ future
needs, aligning PV investments
with these priorities.
Remain focused on the
second and third tiers of
global defence/security
markets, and commercial
aerospace, marine and
land markets.
Identify adjacent markets
where our existing technology
and know-how can be
leveraged to meet the needs
of new customers.
Use mergers and acquisitions
to shift the emphasis of the
portfolio ahead of market
movements to remain exposed
to faster growing markets.
Why this is important:
Our differentiated
technology and know-
how are a key competitive
advantage in our markets.
Having a thorough
understanding of market
opportunities and our
customers’ future needs
optimises our ability
to closely align our
technology investments
to customer requirements.
Why this is important:
Our innovative technology
and know-how are focused on
tier two (subsystems) and tier
three (components) segments
of our markets, where we
have a competitive edge.
This enables us to provide
comprehensive solutions for
our customers’ complex
technology problems.
Why this is important:
Accessing adjacent
commercial markets allows
us to leverage our existing
technology and know-how,
thereby increasing revenue
and shareholder returns. This
also brings more balance to
our portfolio and enables us
to provide sustainable growth
through business cycles.
Group PV investment
Group organic revenue growth
Target: 6%
6.2%
(2012: 5.3%)
Target: mid-single digit organic revenue growth from 2015
(4)%
(2012: (1)%)
Why this is important:
Utilising our strong free
cash flow and the Group’s
balance sheet, we acquire
businesses that are
complementary to, and
reinforce, our differentiated
technology and know-how.
We achieve this through a
rigorous and disciplined
approach to investment.
Our strategic objective is
to use M&A to bring more
balance to the portfolio.
During the year, we invested
over £150m in acquisitions,
primarily Axell for up to
£85m, including contingent
consideration, and the
£74m acquisition of the
outstanding 50% stake in
FBH, the helicopter joint
venture. These acquisitions
bring differentiated and
complementary technology
and know-how in growing
and attractive markets.
See page 9 for more information.
See page 23 for more information.
See page 11 for more information.
12
Cobham plc Annual Report and Accounts 2013
5.
Operational excellence
6.
Programme execution
7.
Invest in skills
and capabilities
Key Performance
Indicators
Drive a culture of continuous
improvement from an
integrated, streamlined
business through Excellence
in Delivery.
Why this is important:
Alongside financial benefits,
EiD has delivered a number
of significant operating and
customer benefits, including
improved productivity,
shortened manufacturing
lead times and improved levels
of quality. It has resulted in a
simpler, more scalable business
and a sharper focus on the
customer, with enhanced
internal communication
and collaboration.
Operational excellence
is one of a number of tools
with which we drive, improve
and monitor our health &
safety performance.
Staff safety – major accident
incident rate*
Target: zero
326
(2012: 666)
* Per 100,000 employees
Improve programme
execution across customer
and PV funded projects
to achieve sector leading
customer delivery and
operational performance.
Why this is important:
Programme management
is a core competency focus
and enables us to meet
customer expectations
and deliver growth.
We have undertaken
considerable work to
enhance functional
excellence in project and
programme management
across the diverse range of
customer and internally
funded activities, together
with an increased focus on
lifecycle management.
Ensure the right capabilities
are in place in changing
markets by increasing
investment to build essential
skills and capabilities.
Cobham’s progress is
monitored with a score card
of financial and non-financial
metrics. The following
are considered the
most important:
Why this is important:
The delivery of our strategy
depends on the right people,
skills and capabilities being in
place. We have continued to
increase our investment in
learning and development to
build the essential skills and
capabilities from which to
drive future growth, by
attracting, training and
retaining the best talent.
Underlying EPS growth
Target: high single digit
(4)%
(2012: 3%)
See page 24 for more information
Operating
cash conversion
Target: >80%
85%
(2012: 104%)
Voluntary staff turnover
See page 24 for more information
Target: <10%
6.9%
(2012: 8.7%)
Return on invested capital
Target: >10%
15.3%
(2012: 18.1%)
Key performance indicator
used by management.
Used as a measure for determining
executive remuneration.
See pages 9 and 34 for more information.
See page 8 for more information.
See pages 8 and 30 for more information.
For definitions, see page 140.
www.cobham.com
Cobham plc Annual Report and Accounts 2013
13
Strategic Report
Aerospace and Security
Provides aircraft and in-building
communication equipment, law
enforcement and national security
monitoring solutions, and satellite
communication equipment for
land, sea and air applications.
The quality, reliability and innovation demonstrated across
SAILOR and SeaTel maritime based SATCOM systems,
combined with a worldwide network of service facilities,
ensure that Cobham Aerospace and Security meets the
communication requirements of any vessel or fleet,
regardless of size, application or location.
14
Cobham plc Annual Report and Accounts 2013
Highlights
Strategic Report
Revenue
Total revenue increased by £47m, or 7%, and at constant
exchange rates increased by £34m, or 5%, primarily due
to the 2013 acquisition of Axell and the full year impact
of the 2012 Thrane & Thrane acquisition.
There was a good performance in commercial markets with
revenue 6% higher, although this was offset by lower defence/
security revenue resulting in a 6% decline in organic revenue.
Trading margin
The Division’s trading margin was lower
at 17.8% (2012: 21.4%) principally due to the
adverse impact of reduced US defence/
security volumes, increased PV and other
organic investments, and the dilutive impact
of acquisitions, all offsetting EiD efficiencies.
Divisional revenue
£m
Divisional trading margin
697
92
(45)
744
800
700
600
500
400
300
200
100
0
21.4
(1.0)
(2.6)
17.8
30%
20%
10%
0%
2012
Acquisitions
and currency
translation
Organic
growth
2013
2012
Acquisitions
and currency
translation
Organic
growth
2013
Revenue by market
US defence/security
25%
Non US defence/security 22%
Commercial aerospace/
general aerospace
Commercial
maritime/other
34%
19%
Revenue by geography
USA
UK
Other EU
Australia
Asia
RoW
37%
13%
28%
1%
13%
8%
Other performance highlights
• Strong revenue growth from commercial
aircraft manufacturers, including first
deliveries of radio communication and
other products for the new Airbus A350
aircraft, which is due to enter service
in the second half of 2014;
First significant revenue generated for
the hand-held ‘Minehound’ product for
humanitarian mine clearance applications,
partially offsetting lower counter-IED
revenue in defence/security markets;
• Demand for the new land based Explorer
700 SATCOM terminal, offering high data
rate capability, with first deliveries in 2013;
•
• The planned integration of the Axell
acquisition has been completed and
the business has performed above
expectations, including securing orders
to equip stadia in Brazil for the football
World Cup and for the Olympics.
Development aircraft MSN3’s first flight
was in June 2013 with the A350 XWB entry
into service expected in the second half
of 2014. The A350 aircraft has a number
of Cobham Aerospace and Security
communication products, including
SATCOM antennas and its radio and
audio integrated management system.
www.cobham.com
Cobham plc Annual Report and Accounts 2013
15
Defence Systems
Provides critical technology for
network centric operations, moving
information around the digital
battlefield with customised and
off-the-shelf solutions for people
and systems to communicate on
land, sea and air.
Cobham Defence Systems supplies critical electronics
on the standard missile which is used for ballistic missile
defence, with Cobham Aerospace and Security also
providing major radio frequency and microwave
assemblies for the associated Aegis surveillance
and fire control radar system.
16
Cobham plc Annual Report and Accounts 2013
Highlights
Strategic Report
Revenue
Total revenue fell by £14m, or 4%, and at constant translation
exchange rates organic revenue was down by £18m, an
organic decline of 5%. This was driven principally by reduced
US defence/security spending, with the division adversely
impacted by lower revenue from some land based
programmes and from missile guidance systems.
Trading margin
The trading margin increased to 15.0%
(2012: 13.9%) despite lower volumes and
higher PV and other investments, in part
due to EiD benefits.
Divisional revenue
£m
Divisional trading margin
323
4
(18)
309
400
300
200
100
0
13.9
(0.0)
1.1
15.0
20%
10%
0%
2012
Currency
translation
Organic
growth
2013
2012
Currency
translation
Organic
growth
2013
Revenue by market
US defence/security
94%
Non US defence/security 6%
Revenue by geography
USA
UK
Other EU
Asia
97%
1%
1%
1%
For information on the calculation of geographic and market revenue, please see page 140.
Other performance highlights
•
Increasing shipments of microelectronic
assemblies for proprietary electronic
intelligence programmes, with a strong
backlog supporting continuation of
revenue through to 2015;
• Award of a development contract for a
major subsystem on the Air and Missile
Defense Radar. This new programme
upgrades the US Navy ship-board missile
defense radar, with development activity
continuing to 2015 and first production
the following year;
• The Predator Unmanned Aerial Vehicle
(UAV) successfully demonstrated a ‘sense
and avoid’ capability utilising Cobham
AESA radar panels. This capability is
crucial in enabling the US Federal Aviation
Administration to allow UAV access
into non-segregated US airspace;
• The AMRAAM ‘D’ missile is nearing
successful completion of its operational
evaluation. Full rate production of this
latest version will follow, with Cobham’s
content set to triple.
The Active Electronically Scanned Array
(AESA) radar is the next generation of radar
technology. Cobham Defence Systems has
key components and subsystems for future
AESA upgrades of the F-16 fighter aircraft.
www.cobham.com
Cobham plc Annual Report and Accounts 2013
17
Mission Systems
Provides safety and survival systems
for extreme environments, nose-to-
tail refuelling systems and wing-tip
to wing-tip mission systems for
fast jets, transport aircraft and
rotorcraft, and provides remote
controlled robots and fully equipped
bomb disposal vehicles for homeland
security and military applications.
Cobham supplies aerial refuelling equipment to
every major tanker programme, including the
Lockheed Martin C-130, Airbus Military A300MRTT,
A400M, Boeing KC-46 and Embraer KC-390 aircraft.
The UK’s Voyager programme, which utilises the
A330MRTT aircraft, was formally released to service
in August 2013.
18
Cobham plc Annual Report and Accounts 2013
Highlights
Strategic Report
Revenue
Total revenue was £15m or 4% lower, and at constant
translation exchange rates fell by £18m, an organic decline
of 5%. The principal driver of this was in the US, where
there was reduced revenue in the short cycle life support
products. This decrease was partially offset by an increase
in non-US defence/security revenue, principally relating
to oxygen products and advanced bomb disposal robots.
Also, in the UK there was significant revenue from the initial
provision of aerial refuelling spares to the FSTA programme.
This partially offset the one-off revenue milestone in 2012.
Trading margin
The Division’s trading margin was slightly lower
at 20.7% (2012: 21.8%), despite EiD efficiencies.
The change in margin in part reflected lower
US defence/security volumes and an increase
in funded development revenue in the aerial
refuelling business.
Divisional revenue
£m
Divisional trading margin
373
3
(18)
358
400
300
200
100
0
30%
20%
10%
0%
21.8
(0.1)
(1.0)
20.7
2012
Currency
translation
Organic
growth
2013
2012
Currency
translation
Organic
growth
2013
Revenue by market
52%
US defence/security
Non US defence/security 40%
Commercial aerospace/
general aerospace
Commercial
maritime/other
2%
6%
Revenue by geography
USA
UK
Other EU
Asia
RoW
Australia
62%
12%
14%
7%
4%
1%
For information on the calculation of geographic and market revenue, please see page 140
Other performance highlights
• Significant revenue from the initial
•
provisioning of aerial refuelling spares
to support the UK’s growing FSTA fleet;
Increased revenue from advanced bomb
disposal robots for homeland security
applications, with a growing pipeline
of future prospects in Europe and the
Middle East;
• Deliveries of aircraft oxygen systems
commenced for export to the Indian,
Brazilian, Korean and Turkish military
trainer aircraft programmes, along with
Royal Saudi Air Force F-15 fighter aircraft.
Shipments are expected to continue over
the next five years;
• Qualification of Mobile Aircrew Restraint
Systems and Water Actuated Release
Systems for helicopters. These products
protect crews from injury or death and
will provide a significant revenue stream
over the next five years.
The first major international order for the
Cobham PHANTOM Jump Bottle System
was received in late 2013, representing
the next generation in military parachutist
oxygen equipment. Cobham Mission Systems
utilises state of the art material technology,
expertise and knowledge to ensure this
complex breathing system is perfectly
suited to the high altitudes and harsh
environments experienced by the military.
www.cobham.com
Cobham plc Annual Report and Accounts 2013
19
Aviation Services
Delivers outsourced aviation
services for military and civil
customers worldwide through
military training, special mission
flight operations, outsourced
commercial aviation and
aircraft engineering.
In 2013, the UK Ministry of Defence
awarded Aviation Services a five
year base contract extension worth
£165m through to 2019 for essential
operational readiness training.
Cobham has extensive understanding
of front-line needs and technology
know-how, providing training to
service personnel operating platforms
including some of the UK’s most
modern equipment, such as the
Eurofighter Typhoon aircraft and
Type 45 Destroyer.
20
Cobham plc Annual Report and Accounts 2013
Highlights
Strategic Report
Revenue
Total revenue increased by £38m due to organic growth
of 3% and the FBH acquisition, which was completed in
the year. This was partly offset by an adverse translation
impact from the Australian dollar.
Trading margin
The Division’s trading margin of 13.1%
(2012: 11.6%) including joint ventures,
benefited from the end of lower margin
FSTA conversion work. The prior year trading
margin also included UK redundancy costs.
Divisional revenue
£m
400
327
29
9
365
300
200
100
0
Divisional trading margin
11.6
0.2
1.3
13.1
20%
10%
0%
2012
Acquisitions
and currency
translation
Organic
growth
2013
2012
Acquisitions
and currency
translation
Organic
growth
2013
Revenue by market
Non US defence/security 47%
Commercial aerospace/
general aerospace
53%
Revenue by geography
Australia
UK
Other EU
Asia
RoW
65%
25%
4%
4%
2%
Other performance highlights
• Three of five additional B717 aircraft
under contract for QantasLink have now
entered service with the remaining two
to commence operations in the first half
of 2014;
• Modification of five Dash 8 surveillance
aircraft for Australian Customs and Border
Protection Command was completed
enabling search and rescue operations
as part of the Sentinel contract;
•
• Modification and mobilisation of three
aircraft to provide ongoing support to
the Ok Tedi mine in Papua New Guinea
until 2019;
FB Heliservices’ transition into Cobham
Helicopter Services has progressed well.
Business development activities are
focused on Helicopter Services’ existing
international footprint, with its training
and support contract in Trinidad and
Tobago expanded from the beginning
of 2014.
During 2013, Cobham Aviation Services
was awarded an AUS$150m scope
expansion to its current Boeing 717 (B717)
regional QantasLink contract. This sees
the fleet of B717s operated by Cobham
increase from 13 to 18 aircraft and the
establishment of new operating bases
in Australia.
www.cobham.com
Cobham plc Annual Report and Accounts 2013
21
Financial Review
“Cobham has delivered full
year results in line with
its guidance, in what has
remained a challenging US
defence/security market”
Highlights
• Group revenue increased by 2%, with acquisitions
trading ahead of plan
•
Incremental savings in Excellence in Delivery well ahead
of plan, with site integrations being accelerated
• Technology investment increased 19% to £186m,
including customer funded projects
• Solid operating cash conversion of 85%
Summary of underlying results
£m
Revenue
Trading profit
Trading margin
Underlying net finance expense
Underlying profit before tax
Underlying tax
Underlying tax rate
Underlying profit after tax
Weighted average number of shares (millions)
Underlying EPS (pence)
2013
1,790
318
17.7%
(30)
288
(57)
20.0%
231
1,069
21.6
2012
(as restated)
1,749
332
19.0%
(32)
300
(58)
20.0%
242
1,075
22.5
Results
Orders
At the year end, the Group’s order book was £2.27bn (2012: £2.40bn).
At constant translation exchange rates, and after adjusting for the
impact of the 2013 acquisitions, the Group’s order book was 4%
lower than the prior year, in part driven by the US defence/security
exposed businesses. Group order intake in the year was £1,670m
(2012: £1,656m).
The Group’s book-to-bill ratio in the year was 0.93 times (2012: 0.95
times). The overall book-to-bill ratios in Cobham’s long and short
cycle businesses were both broadly in line with these trends.
Book-to-bill in the largely commercial SATCOM business reflected
the anticipated flat revenue profile, ahead of the GX satellite
constellation achieving global coverage by the end of 2014.
22
Cobham plc Annual Report and Accounts 2013
Revenue
Analysis of Group revenue (£m)
2012
1,749
FX
translation
Acquisitions
Organic
growth
7
103
(69)
2013
1,790
Total Group revenue increased 2% to £1,790m (2012: £1,749m), primarily
due to the positive impacts of the 2013 acquisitions of Axell and FBH and
the additional part year contribution from Thrane & Thrane, which was
acquired in June 2012. Revenue from these acquisitions was, in part,
offset by the divestment of the non-core emergency locator beacons
businesses in 2012. There was also a favourable net foreign exchange
translation impact, driven by a slight strengthening of the US dollar.
Group organic revenue in 2013 declined by 4% overall, compared to the
prior year. Growth in the Group’s commercial markets was strong at 7%
with a good performance in Aviation Services and increasing revenue
from radio and audio products, antennas and SATCOM products as
large transport aircraft production volumes continued to increase.
US defence/security organic revenue was 11% lower with a significant
decline in short cycle land revenue, particularly surveillance and
tracking and locating products, Life Support products and counter-
IED (improvised explosive device) products.
Non-US defence/security organic revenue fell by 5%, including lower
revenue from the UK FSTA programme.
Technology investment
The Group’s PV investment increased in the year to £88m (2012:
£75m), representing 6.2% (2012: 5.3%) of revenue. This is consistent
with Cobham’s previously announced plans to increase technology
investment in its markets, closely aligning it to growth opportunities.
Organic revenue growth
Defence/Security
(9)%
(2012: (2)%)
Commercial
7%
(2012: 2%)
Group
(4)%
(2012: (1)%)
Total R&D investment, which includes PV investment and customer
funded projects, was up by 19% to £186m (2012: £156m). The
increased level of customer funding is primarily due to the ongoing
significant funded development activity on aerial refuelling
programmes, which is expected to increase in 2014.
Trading profit
Group trading profit was £318m (2012: £332m). The reduction in
trading profit relates primarily to the impact of the decline in revenue
from short cycle US defence/security exposed businesses, most
notably in the Group’s Tactical Communications and Surveillance
business. Total trading profit included the contributions from the
Axell and FBH acquisitions in 2013, as well as the additional part year
contribution from the 2012 Thrane & Thrane SATCOM acquisition.
These positive contributions were partly offset by the negative
impact of the divestment of the non-core emergency locator
beacons businesses in 2012.
The Group’s trading margin in 2013 was 17.7% (2012: 19.0%). Within this, the
trading margin in organic operations fell by 0.9 percentage points. This was
principally due to a combination of lower sales volumes in US defence/
security businesses, increased technology and other organic investments
in the business in line with the Group’s strategy, and a change in the portfolio
mix. These factors were partially offset by the favourable impact of EiD
efficiencies. In addition, the Group’s 2013 and 2012 acquisitions reduced
the Group’s trading margin by 0.4 percentage points.
Group statutory operating profit was lower at £159m (2012: £237m).
In addition to the factors above, this was driven by higher EiD costs of
£56m (2012: £38m), increased amortisation of intangible assets arising
on acquisitions of £104m (2012: £69m) and a goodwill impairment
charge of £63m (2012: £nil) on the Tactical Communications and
Surveillance business, which experienced a significant revenue decline
in the year, particularly in the US. The principal item partially offsetting
the above was a gain of £62m (2012: £1m) on the revaluation of the
existing equity interest in FBH, which arose at the time the Group
acquired the outstanding 50% stake of the joint venture.
Underlying net finance expense and underlying
profit before tax
The Group’s underlying net finance expense was £30m (2012: £32m).
The net interest expense on cash and debt holdings was slightly lower
at £27m (2012: £29m), partly due to the mix of fixed and floating debt
in the year, offsetting higher debt levels in the second half from
acquisitions and adverse foreign exchange movements. There was a
non-cash net finance charge from pension schemes of £3m (2012: £3m).
In 2014, the Group’s non-cash net finance charge from pension
schemes is expected to be £4m.
The Group’s underlying profit before taxation was £288m (2012: £300m).
www.cobham.com
Cobham plc Annual Report and Accounts 2013
23
Strategic Report
Financial Review continued
Reconciliation of underlying profit
£m
Trading profit is calculated as follows:
Results before joint ventures
Share of post-tax results of joint ventures and associates
Operating profit
Adjusted to exclude:
Business restructuring – Excellence in Delivery
Movements in non-hedge accounted derivative financial instruments
Amortisation of intangible assets arising on business combinations
Impairment of goodwill
Revaluation gain arising on equity interests in FBH (2012: Thrane & Thrane)
Total operating reconciling items
Trading profit
Underlying profit before tax is calculated as follows:
Profit before taxation
Total operating reconciling items as above
Unwinding of acquisition related discounting
Underlying profit before taxation
Taxation charge on underlying profit
Underlying profit after taxation
Underlying EPS (pence)
2013
2012
(as restated)
156
3
159
230
7
237
56
(2)
104
63
(62)
38
(11)
69
–
(1)
159
318
127
156
2
288
(57)
231
21.6
95
332
204
95
1
300
(58)
242
22.5
Taxation
The Group’s underlying tax rate is unchanged at 20.0% (2012: 20.0%),
from an underlying tax charge of £57m (2012: £58m). The rate is
calculated by taking the underlying tax charge and dividing it by the
underlying profit before tax of £288m (2012: £300m), excluding the
£3m (2012: £7m) share of post-tax results of joint ventures.
Earnings per Share (EPS)
Underlying EPS at 21.6p (2012: 22.5p) was 4% lower at constant translation
exchange rates, consistent with the Group’s trading profit performance.
Basic EPS was 10.7p (2012: 16.0p).
Capital expenditure was broadly consistent with the previous year
at £61m (2012: £63m).
The Group generated £155m (2012: £241m) of free cash flow. This is stated
after £51m (2012: £32m) of EiD payments, net interest payments of £29m
(2012: £29m) and £38m (2012: £45m) of tax payments. Dividend receipts
from joint ventures fell to £4m (2012: £8m), following the Group taking full
control of the FBH joint venture during the year.
Out of free cash flow, the Group paid dividends of £97m (2012: £93m)
and invested a net £152m (2012: £275m) in acquisitions, primarily the
acquisitions of Axell and FBH and an investment in the FSTA consortium.
Cash flow
Operating cash flow, which is stated after net capital expenditure
but before net interest and tax payments, was £269m (2012: £339m).
The operating cash conversion rate (which is calculated by dividing
operating cash flow by the Group’s trading profit, excluding its share
of the post-tax profits of joint ventures) was solid at 85% (2012: 104%).
Dividends
The Board is recommending a final dividend for 2013 of 7.04p (2012:
6.40p). This, together with the interim dividend of 2.64p (2012: 2.40p),
will result in a total dividend per share for 2013 of 9.68p (2012: 8.80p),
an increase of 10% on the prior year, in line with the Group’s long
standing, progressive dividend policy.
Cash conversion was adversely impacted by a £32m outflow (2012:
£25m inflow) in working capital in the year, which was driven by an
increase in trade and other receivables. This in part reflected strong
trading in December and, encouragingly, the Group’s days sales
outstanding remained broadly consistent with the prior year. Overall,
inventory movements had no impact on cash flow, with a number of
sites achieving year-on-year inventory reductions. However, this was
offset by an increase in work-in-progress relating to funded aerial
refuelling programmes in development. In addition, inventory
increased due to the acquisitions in the year.
The shares will be traded ex dividend on 30 April 2014. The dividend
will be payable on 30 May 2014 to all holders on the register at 2 May
2014, subject to shareholder approval.
Treasury
The Group’s treasury activities are managed centrally by the Group
Treasury function, which reports to the Chief Financial Officer. The
Treasury function operates within written policies and delegation
levels that have been approved by the Board. It is the Group’s policy
that trading in financial instruments is used for financial risk
management purposes only.
24
Cobham plc Annual Report and Accounts 2013
Cash flow
£m
Trading profit (excluding joint ventures)
Depreciation, amortisation and other items
Pension contributions in excess of service and administration cost
(Increase)/decrease in working capital
Net capital expenditure
Operating cash flow
Operating cash flow/trading profit (excluding joint ventures)
Net interest paid
Taxation paid
Dividends received from joint ventures
Free cash flow before restructuring costs
Restructuring costs – EiD
Free cash flow
Dividends paid
Acquisition payments less divestment proceeds, other related costs and loans to joint ventures
Net purchase of treasury shares
Exchange movements
Increase in net debt
2012
(as restated)
325
66
(14)
25
(63)
339
104%
(29)
(45)
8
273
(32)
241
(93)
(275)
(19)
18
(128)
2013
315
61
(14)
(32)
(61)
269
85%
(29)
(38)
4
206
(51)
155
(97)
(152)
(2)
3
(93)
Debt and financing
At the year end, net debt, which comprises short term cash balances
and fixed term borrowings, increased to £453m (2012: £360m). It is
the Group’s policy to hold a significant proportion of its borrowings
in foreign currency, principally US dollars, as a natural hedge against
assets and earnings denominated in those currencies, which gave
rise to modest exchange rate movements at the year end of £3m
(2012: £18m).
The Group has a strong balance sheet, with year end net debt/EBITDA
ratio of 1.2 times, as defined under the Group’s debt covenants, and
interest cover of 11.9 times. Under the terms of these borrowing
facilities, it is required to maintain its ratio of net debt/EBITDA at or
below 3.5 times and its interest cover ratio at or above 3.0 times, and
so the Group remains well within the limits contained within its debt
covenant agreements.
For covenant purposes, net debt is typically expressed at average
foreign exchange translation rates. EBITA, EBITDA and net interest
numbers include pro forma adjustments for joint venture interests,
acquisitions and disposals.
Maturity profile of Group’s outstanding debt facilities
£m
Included within net debt are pound sterling and US dollar cash deposits,
as well as borrowings which are primarily denominated in US dollars
and which are held for the reasons described in the section on foreign
exchange below. At 31 December 2013, the Group held total cash and
short term bank deposits, all with an original maturity of three months
or less, of £201m (31 December 2012: £264m).
The Group’s principal borrowings include:
• A US$360m multi-currency credit agreement, of which US$90m
expires in October 2016 and US$270m which expires in October
2018. Interest is payable at the applicable benchmark rate
of the drawn currencies plus margin, of which US$343m had
been drawn down under this agreement at the year end;
• A EUR70m loan agreement which expires in June 2017. Interest
is payable at the applicable benchmark rate of the drawn
currencies plus margin, of which EUR44m had been drawn
down under this agreement at the year end;
• A DKK525m multi-currency credit agreement which expires in
October 2017. Interest is payable at the applicable benchmark
rate of the drawn currencies plus margin, of which DKK472m
had been drawn down under this agreement at the year end;
• US$359m of senior notes maturing in tranches in 2014, 2016,
2019 and 2020 with an average coupon of 6.25%; and
• US$155m of senior notes maturing in 2017 and 2018, with
an interest rate at the applicable LIBOR rate plus margin.
800
600
400
200
0
Debt covenants
£453m net debt at 31
December 2013
Dec 2013
Dec 2012
2013
2014 2015
2016 2017 2018 2019 2020
Net debt (£m) – balance sheet
Net debt (£m) – average rate
EBITDA (£m)
Net debt to EBITDA (not to exceed 3.5 times)
EBITA (£m)
Net interest (£m)
Interest cover (to exceed 3 times)
(453)
(480)
395
1.2
322
27
11.9
www.cobham.com
Cobham plc Annual Report and Accounts 2013
(360)
(371)
408
0.9
348
30
11.6
25
Strategic Report Financial Review continued
There were no significant movements in the Group’s debt or
facilities during the year. However, in February 2014, the Group
agreed an AUS$90m multi-currency revolving credit agreement
maturing in 2018. Interest is payable on the basis of a margin over
the applicable benchmark.
principally US dollar – denominated interest costs as the Group
generally funds the acquisition of overseas companies using
borrowings denominated in the same currency, which provides
partial hedging of currency denominated profits.
Further details on the Group’s borrowings are given in note 19 to the
Group Financial Statements.
Foreign exchange
Income statement – average rate
US$/£
AUS$/£
EUR/£
DKK/£
Balance sheet – closing rate
US$/£
AUS$/£
EUR/£
DKK/£
2013
2012
1.57
1.62
1.18
8.79
1.66
1.85
1.20
8.97
1.58
1.53
1.23
9.18
1.63
1.57
1.23
9.20
The Group considers that the US dollar, the Australian dollar, the
euro and the Danish krone are its most important foreign currencies.
After taking into account the partial hedging of the Group’s foreign
exchange translation exposure within the income statement, a
combined 10 cent movement in the average rate over one year
for these currencies would result in a £10m impact on Group profit
before tax. The Group estimates that the US dollar would account
for approximately half of this movement.
All foreign exchange hedging transactions are approved under
delegated authority from the Board. A number of financial
instruments are used to manage transactional foreign exchange
exposure, such as forward rate contracts. The Group has a policy
of hedging at least 80% of estimated transactional exposure for
the next 12 months, a proportion of exposures between 12 and
36 months and firm exposures on long term contracts. Details
of the most significant of these instruments are described in notes
23 and 25 of the notes to the Group Financial Statements.
The Group’s aim is to reduce, or eliminate whenever practical,
foreign exchange transaction risk, of which the pound sterling/US
dollar exchange rate is the most important. This is primarily because
many global aerospace and defence contracts are denominated
in US dollars.
Additionally, foreign exchange translation exposure arises on the
earnings of operating companies largely based in the US, Europe
and Australia. These are partially offset by foreign currency –
Some 93% of the Group’s anticipated exposure to the pound sterling/
US dollar exchange rate movements is hedged for 2014 at an average
rate of US$1.59.
Interest rates
The Group has various long and short term borrowings at both fixed
and floating rates of interest. The Group continually monitors its
exposure to movements in interest rates to bring greater stability
and certainty to borrowing costs, with the policy being to assess
Foreign exchange transaction exposure
2014 Total
Hedging in place
Hedging in place
2015
2016 to 2022
$134m
$124m
$38m
$72m
0
30
60
90
120
150
Historical average
effective rate
2010 $1.58: £1
2011 $1.56: £1
2012 $1.59: £1
2013 $1.59: £1
93% hedged for 2014
Avg hedge rate $1.59: £1
Avg hedge rate $1.58: £1
Avg hedge rate $1.56: £1
26
Cobham plc Annual Report and Accounts 2013
Going concern
The Group’s business activities, together with factors likely to affect
its future development, performance and position, are set out in the
Business overview on pages 2 to 21 and the principal risks on pages
28 to 31. In addition, notes 23 and 25 of the notes to the Group
Financial Statements include the Group’s objectives, policies and
processes for managing its capital, financial risk management,
details of financial instruments and hedging activities and its
exposure to credit, liquidity and other risks.
The Group has considerable financial resources together with
long term contracts with a number of customers across different
geographic areas. As a consequence, the Directors believe that
the Group is well placed to manage its business risks successfully.
Accordingly, after making enquiries, the Directors have formed
a judgement at the time of approving the financial statements that
it is their expectation that the Company and the Group as a whole
have adequate resources to continue in operational existence for
the foreseeable future. For this reason, they continue to adopt the
going concern basis in preparing the Group and Parent Company
Financial Statements.
The Strategic Report on pages 2 to 35 has been approved by the
Board of Directors and signed on its behalf by:
Simon Nicholls
Chief Financial Officer
5 March 2014
the proportion of borrowings that are fixed and floating in the
context of prevailing market conditions.
Note 25 to the Group Financial Statements gives more details
on the financial risks facing the Group.
Retirement obligations
The Group operates a number of defined benefit schemes, the most
significant being the Cobham Pension Plan (CPP). At 31 December
2013, the estimated deficit for accounting purposes between the
value of the defined benefit schemes’ assets and the present value
of the future liabilities was £87m before deferred tax (2012: £73m).
The principal movements in the deficit before tax during the year
were as follows:
Pension deficit at 1 January 2013
Interest charge
Actuarial loss relating to buy-in
Other actuarial gains
Net employer funding
Pension deficit at 31 December 2013
£m
(73)
(3)
(39)
13
15
(87)
The principal movement in the pension deficit in the year was the
£39m actuarial loss, relating to the CPP buy-in arrangement. Further
details of this buy-in are set out below.
Other actuarial gains of £13m comprised:
• Strong investment returns on Scheme assets in the year;
• A gain from the triennial assessment of the personal
demographics of Scheme members;
• These were partially offset by an increase in the assumed rate of
salary rises (based on inflation), which increases the Scheme liabilities.
The £15m reduction in the deficit from net employer funding relates
to employer contributions made in the year in excess of the Scheme
service costs and administrative expenses.
During the year, the liabilities relating to the past service of CPP
pensioners were subject to a buy-in arrangement whereby the CPP
transferred assets in exchange for an insurance policy. This has
eliminated the Group’s exposure to interest, inflation and longevity
risks associated with liabilities amounting to £242m. Following the
de-risking activity carried out in 2011 on other, smaller Group schemes,
42% of total defined benefit pension liabilities are covered by insurance
policies at the year end.
The Group’s defined benefit pension schemes have been closed
to new entrants since 2003, with alternative defined contribution
schemes offered in all cases. Cobham remains committed to the
support of the legacy defined benefit pension schemes within the
Group and continues to work with the trustees of those schemes
to ensure that net deficit issues are managed appropriately.
Further details on the Group’s retirement benefit schemes, the
primary assumptions, the amounts recognised in operating profit
and the changes in value of defined benefit schemes during the year
are given in note 24 to the Group Financial Statements.
www.cobham.com
Cobham plc Annual Report and Accounts 2013
27
Strategic Report Principal Risks
2013 saw the further enhancement of the risk management process
The Board sets the policy for managing risks
and recognises the importance of identifying,
actively monitoring, mitigating and managing,
as appropriate, the full range of financial and
non-financial risks facing the business. By
regularly reviewing the risk appetite of the
business, the Board ensures that the Group’s
risk exposure remains appropriate at any point
in the economic cycle and links effectively into
the management of its strategic objectives.
The Board has ultimate accountability for risk
management systems and controls, with the
Risk Committee responsible for overseeing
execution of risk management processes and
procedures throughout the Group. The Audit
Committee has delegated responsibility for
monitoring and reviewing the effectiveness
of the system. More details on the role of the
Audit Committee in this regard are set out
on pages 44 to 47.
The process for monitoring and controlling
risk, illustrated below, emphasises continuous
evaluation and monitoring by Division
Presidents, together with their respective
management teams, including business unit
management and functional management.
The risk framework is structured to ensure
that risks are identified promptly, mitigated
and managed appropriately and that actions
are undertaken that ensure alignment of
performance with the Group’s Strategic Plan.
controls and risk management processes and
procedures, identifying areas for improvement
and reporting to senior management and the
Audit Committee. Due to its independence
and objectivity, Internal Audit is able to provide
reliable assurance on the effectiveness of
the overall governance, risk management
and internal control processes. In addition to
considering the Group’s Internal Audit advice,
the Audit Committee takes account of the
views of our independent External Audit team.
The Group manages risk by operating a
‘Three Lines of Assurance’ risk and control model.
The first line lies with operational management
implementing and maintaining effective internal
controls and risk management procedures.
They are supported by a number of oversight
functions which form the second line. Internal
Audit is the third line, trusted with reviewing
A description of the principal risks in the
context of Cobham’s operations, together
with a description of the potential impact
on the Group if unaddressed, and an outline
of the actions taken to mitigate them,
are set out on pages 29 to 31. The risks are
not intended to be in any particular order.
How we monitor and control risk
Sets strategic objectives;
Agrees the corporate risk register and Group’s risk appetite;
Monitors mitigating controls;
Sets delegation of authority; and
Approves Corporate Framework.
The Board
Risk Committee
Oversight
Audit Committee
Oversight of key risks and ensures
they are appropriately managed;
Monitors performance and changes in
key risks facing the business and provides
regular reports to the Board; and
Agrees key actions to manage risks.
Finance
Risk and Insurance
Legal and Compliance
IT
Corporate Responsibility
and Sustainability (CR&S)
Safety, Health & Environment (SHE)
Human Resources
Business Unit, SBU and Division
Identifies key risks at the entity level; and
Establishes risk and control environment.
Provides strategic management,
policy and procedure setting,
and functional oversight.
Monitors assurance and risk
management systems of control.
Independent Assurance
Internal Audit
Provides independent challenge
and assurance.
Identifying risks and business improvement
actions in the businesses;
Responsible for design of controls to mitigate risk;
Implementing Group policies;
Reporting on progress; and
Providing management assurance.
Three Lines of Assurance
Responsible for setting entity level controls;
Setting direction and tone;
Designing policies;
Introducing best practice;
Monitoring and ensuring compliance;
Providing assurance oversight; and
Monitoring representation letters
and self-assessment process.
Independent challenge;
Audit of key controls;
Formal reporting on assurance;
Audit of ‘Assurance Providers’; and
Entity level control.
28
Cobham plc Annual Report and Accounts 2013
Strategic Report
1
Deterioration in the macroeconomic
environment adversely impacting
our markets
2
Failure to execute on agreed
strategy to return to sustainable
organic revenue growth
Risk
Risk
The Group’s revenue is derived from global defence/security and
commercial markets. The level and type of spending is dependent
on a complex mix of macroeconomic, fiscal and strategic defence
and security imperatives.
The Group’s ability to generate organic revenue and associated profit
growth consistently is the key driver of value creation.
Impact
Impact
Changes in government spending could lead to programme terminations
or delays, or changes in market growth.
Failure to grow leads to an impaired competitive position,
reduced trading margins and a declining return on invested capital.
Deterioration in demand affecting short cycle business or a fundamental
shift in how customers procure products or services could have an adverse
effect on the Group’s future results.
The Group will experience reputational damage and a reduced
ability to invest for future growth.
Mitigation
Mitigation
A review of near and long term market trends is conducted as part
of the Group’s strategic planning process to ensure that actual and
anticipated impacts from macroeconomic environment risks are
managed effectively.
Increased emphasis on identifying adjacent markets in which the
Group’s proven and transferable technologies can be applied.
Effective strategic planning, maintain robust and dynamic strategic
thinking processes to ensure the Group is exposed to growth markets
through the economic cycle.
Continued focus on and investment in programme management to
ensure customer expectations are met underpins the Group’s ability
to grow.
The Group is seeking more balance in its portfolio between its defence/
security and commercial markets, so it can grow through economic cycles.
Appropriate investment in future technologies aligned to identified
market growth areas.
The successful completion of the EiD programme together with a
culture of continuous improvement will enable the Group to have sector
leading operating performance, while reducing costs. This will enable it
to remain competitive in the face of volume declines or price pressures
and retain flexibility to adjust the cost base appropriately to changing
market conditions.
Regular review of market demand data, re-forecasting and adjusting
planning in line with market demand.
The Group remains focused on continuous improvement across
all operations, including EiD, programme management, business
development, functional excellence and strategic workforce planning.
www.cobham.com
Cobham plc Annual Report and Accounts 2013
29
Principal Risks continued
3
Failure to identify and
execute value creating
M&A to supplement
organic growth
4
Inability to attract,
retain and develop
the best talent, leading
to a shortage of key skills
5
Contract risk
and execution
Risk
Risk
Risk
Underpinning the Group’s Strategic Plan
is the identification of appropriate
acquisition targets and the subsequent
execution of value creating transactions.
The success of the Group’s strategy is
dependent on its ability to attract and
retain talent and skills.
The Group designs, develops and delivers
products and services that are often
customised, utilising complex technologies,
under fixed price contracts that are sometimes
long term in nature. This gives rise to the risks
of failure to execute the contract profitably,
the supply of a defective or delayed product,
the incurrence of other contractually related
liabilities, or damage to reputation and
commercial relationships.
Impact
Impact
Impact
Failure to complete appropriate transactions
impacts the Group’s ability to generate
shareholder value.
Lacking all the skills necessary to execute
on growth plans and deliver key customer
programmes leads to reduced customer
confidence in the Group and a degraded
financial outlook.
Failure by Cobham to execute or deliver a
contract gives rise to increased programme
costs, contract penalties, litigation and
other financial liabilities, reduced future
profitability and reputational risk.
Poor operational performance could also
lead to customers withholding new and
existing business from the Group.
Mitigation
Mitigation
Mitigation
The implementation of rigorous M&A
disciplines, aligned with the Group’s strategic
planning process, improves the ability to
successfully execute transactions.
The Group is implementing a Strategic
Workforce Plan, aligned with the Group’s
overall strategy, to ensure it has the right
people with the right skills in the right place.
The Group has a rigorous post-acquisition
review process to ensure that targeted returns
are achieved and lessons learnt shared.
The Group continually monitors whether it
has capable resources in place to manage
M&A projects from origination to integration.
The Group’s capital allocation strategy
includes a willingness to return capital
to investors, in the absence of value
enhancing acquisitions.
It has established an integrated management
training and appraisal programme.
The Group is expanding its graduate
recruitment and apprenticeships programmes.
The Group is committed to providing its
employees with a safe working environment.
A thorough review of the business case
and terms and conditions, and subsequent
variations, prior to signing ensures contract
provisions and risks are fairly allocated
between parties.
The Group has established an EVP, Life
Cycle Management (LCM) and Programme
Management position, to ensure its key
contract and programme management
policies and procedures are applied
consistently and appropriately across
all areas of the business, and to provide
increased focus on improvements
to its programme management and
LCM capabilities.
Monthly reporting of progress against
agreed improvement actions on LCM
to the Group Executive, and semi-annually
to the Audit Committee.
30
Cobham plc Annual Report and Accounts 2013
Strategic Report
6
Long term contract exposures
to inflation, currency and
commodity pricing fluctuations
7
Significant business
interruption
8
Failure to comply with laws,
regulations and restrictions
Risk
Risk
Risk
The Group’s financial results are dependent
on managing macro financial risks, including
inflation, currency and commodity.
The Group’s business could be impacted
by natural disasters affecting its
operational locations, by IT systems
failures or by cyber attack, rendering
critical systems unworkable.
Cobham operates in a highly regulated
environment and is subject to the laws,
regulations and restrictions of many
jurisdictions, including those of the US,
the UK and other countries.
These include anti-bribery provisions,
import and export controls, and
government contracting rules.
Impact
Impact
Impact
Failure to manage financial risks can impact
operating profit through higher costs or
lower revenue and result in the Group failing
to meet its financial results forecast.
Unscheduled interruption to business
activities would result in reduced profits,
loss of customer satisfaction, potential
cost outlays, and reputational impact.
Sanctions for failure by the Group, or
its sales intermediaries, or others acting
on its behalf to comply with these laws,
regulations and restrictions could include
fines, penalties, legal claims, suspension
or debarment of the Group from future
government contracts for a period of time,
as well as having an impact on the Group’s
reputation. Such sanctions could have
an impact on the Group‘s financial position
and future operations.
Mitigation
Mitigation
Mitigation
Currency risks are considered as part of the bid
approval process on large contracts. Cobham
puts currency or other hedges in place for at
least 80% of estimated transactional exposure
for a rolling 12 months, a proportion of
exposures between 12 and 36 months and
firm exposures on long term contracts.
The Group sources and manufactures in
local currency whenever practicable.
The Group manages inflation and commodity
pricing risks through appropriate contractual
terms, with suppliers contracted on an
equivalent basis to match residual risks
where possible.
Minimum/maximum supplier prices are
stipulated where possible to avoid unlimited
exposure, when there is a risk that costs
inflate ahead of revenue. Fixed price quotes
are avoided for commodity related costs.
The Group maintains major incident and IT
failure business continuity plans. All employees
are trained in the relevant procedures.
Cobham continues to drive a culture that
ensures that safety, ethics and integrity
are embodied in all that it does.
IT security and capability are continually
monitored and strengthened when needed.
The Group works closely with insurers to
ensure operating infrastructure and processes
include robust risk improvement activities.
Policies and procedures are included
in the Group’s Corporate Framework, which
is regularly reviewed and audited, including
procedures related to the use of sales and
marketing representatives, anti-bribery
and anti-corruption, gifts and hospitality,
whistleblowing and investigation
of ethics and compliance concerns.
Mandatory training is undertaken on a
variety of compliance related subjects,
including US Government contracting,
anti-bribery and corruption.
www.cobham.com
Cobham plc Annual Report and Accounts 2013
31
Corporate Responsibility and Sustainability
Cobham’s approach to Corporate Responsibility
and Sustainability is designed to engender trust
with its key stakeholders and ensure that the
Company thrives over the long term.
Approach
Cobham believes that acting responsibly and sustainably aligns
with its business strategy and creates value for all key stakeholders.
The Group’s strategy is to make Corporate Responsibility and
Sustainability (CR&S) part of everything it does by:
Objectives and performance
Business ethics and compliance
Strengthen the Group’s ethics and compliance processes
to ensure that employees have clear guidance to support
them in making ethical decisions
1. Pursuing the highest ethical standards in all aspects
of its business;
2. Building a culture in which talented employees can
succeed and are rewarded;
3. Providing a safe working environment;
4. Managing the environmental impacts of the Group’s
products, services and operations.
CR&S covers issues identified by internal and external stakeholders
(shareholders, business partners, regulators, industry bodies,
employees and communities) that support or limit the Group’s
ability to execute its strategy and protect its reputation.
The CEO has overall responsibility for the Group’s approach. He is
supported by the CR&S Committee, which he chairs, in ensuring that
appropriate policies, monitoring and operational systems are in place
to achieve the Group’s objectives. The CEO updates the Board on CR&S
matters. The Board in turn assesses the significance of environmental,
social and corporate governance risks and opportunities to the Group’s
Strategic Plan.
Business ethics
KPI:
100%
of employees have completed the Code of Business
Conduct training
(2012: 99%)
Non-compliance with governmental regulations is recognised
as one of Cobham’s principal risks. For more detail on how
this risk is being managed, see risk eight on page 31.
Cobham pursues the highest ethical standards in all aspects of its
business through its ethics and compliance programme, overseen
by the Business Ethics and Compliance Committee. This creates the
knowledge, structures and processes to drive a culture of integrity
and ethical behaviour.
There is strong alignment between the Group’s CR&S focus and
its strategic priorities. Refer to page 12 for more details on these.
The ethics and compliance programme is supported by mandatory
annual training for all employees.
CR&S
Strategic priorities
Business ethics and compliance
Sustainable supply chain
Talent management
Diversity and inclusion
Health and safety
Environmental sustainability
4
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5
•
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•
•
6
•
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7
•
•
•
•
•
•
Each of the focus areas are discussed in more detail below.
The Code of Business Conduct (the Code) is the cornerstone of
Cobham’s approach to ethics and compliance and is made available
to all employees in the Group’s key languages. A number of other
policies support the Code in driving a culture of safety, ethics and
integrity to help Cobham face the risks posed by the markets in
which it operates, both sector and geographic.
The Code sets out the Group’s expectations – and advice – on ethical
behaviour and how to deal with possible breaches. Cobham fosters
an open reporting culture reinforced by an independent third party
ethics helpline.
Key supporting policies include the Anti-Bribery and Anti-Corruption
(ABAC) Policy. This sets out the policy of zero tolerance towards
bribery and corruption with further direction on gifts, hospitality
and the use of sales intermediaries.
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Cobham plc Annual Report and Accounts 2013
Strategic Report
Sustainable supply chain
Develop a responsible and sustainable supply chain that
prioritises and mitigates material ethical, environmental
and community risks
The Group has a number of controls and processes to mitigate issues
(including human rights) that may arise in regard to the supply chain,
most notably in connection with principal risk seven. Refer to page 31
for more details.
The Group outsources an increasingly significant proportion of
component manufacture to suppliers, and then assembles and tests
finished products in-house. Recognising the various issues that may
arise, Cobham’s strategy is for its supply chain to be responsible and
sustainable, which also includes having regard to human rights
considerations. To achieve this, Cobham has developed, in support
of the Code, a Responsible Supply Chain Management Policy (RSCM),
setting out its expectations for suppliers to have effective ethical,
environmental and community risk management systems appropriate
for the nature and scale of their business. This addresses those risks
most likely to impact suppliers’ ability to meet Cobham’s needs.
Cobham has rolled out the RSCM policy and approach to its principal
locations and is providing training and support on prioritising risks
for key spend categories.
Specifically, Cobham has developed a process to report on conflict
minerals present in its products to those customers required to disclose
under US legislation and in anticipation of similar EU legislation, which
is likely to impact Cobham directly.
Moving forward, Cobham will continue to implement its responsible
supply chain management policy through training and assessment
of its principal locations.
Talent management
Continue to ensure the Group has the right people
with the right skills to execute its strategy
increased awareness of the Cobham employer brand (Innovators with
Insight) in the recruitment marketplace.
The Group’s strategic high potential talent development programmes
range from entry level (apprentices and graduates) to senior and
functional experts aimed at developing a robust internal talent
pipeline. The programmes all include rigorous assessments to ensure
Cobham accesses the brightest and best individuals. Apprentice and
graduate schemes commence with placement based roles to blend
on-the-job training and project activity with formal learning. Many of
Cobham’s UK apprentices achieve recognition through national award
programmes. The graduate programme aims to attract high potential
individuals from targeted universities within priority disciplines.
Cobham has invested in the development of an online Learning and
Development Centre (LDC). The centre provides blended learning
activities that are linked to Cobham’s defined competencies. During
2013, a total of 1,473 hours of learning was completed by 366 employees
within the first three months of the LDC launch. A certified management
programme was developed and piloted through the LDC in 2013. This
will produce a consistent standard and approach to line management
across the Group.
Cobham is implementing a strategic workforce planning process
that will allow the business to better plan its resourcing requirements.
During 2013, the Group developed a global view of its workforce
by functional area and by location.
Moving forward, Cobham is planning to further expand its graduate
development programme into Denmark and South Africa, utilise
the strategic workforce planning data to assess its workforce
requirements against business activity over the next five years,
and launch its certified management programme globally.
High performing apprentices
Cobham has once again been successful in the Brathay Apprentice
Challenge, reaching the 2013 finals. Cobham’s apprentices regularly
receive a variety of external awards for both team and individual
achievements: in 2013, 27% of the apprentice population received
such recognition, improving on the 8% in 2012.
Talent management
KPI:
6.9%
voluntary staff turnover
(2012: 8.7%)
Employee retention and development are recognised as one of the
Group’s principal risks. For more details on how we are managing this,
see risk four on page 30.
As a high-tech engineering and service group, Cobham continues to
require the highest calibre functional expertise and future leadership
to deliver its business strategy. Attracting and retaining the very best
is an increasing challenge as the number of science and engineering
graduates is declining. A dedicated Cobham resourcing team has
www.cobham.com
Cobham plc Annual Report and Accounts 2013
33
Corporate Responsibility and Sustainability continued
Diversity and inclusion
Benchmark the Group’s diversity and inclusion against
publicly available data for its comparator group
Health and safety
Continue to embed health and safety into the Group’s
core business processes
The Group is committed to equal opportunities for all its employees and
aims to ensure the workplace is free from discrimination. Recruitment,
selection and career development are based on competence and job
requirements, irrespective of race, sex, sexual preference, religion or
disability. With regard to employees who become disabled, the policy
is to take all reasonable steps, including retraining, to ensure that they
can remain in employment wherever practicable.
Health and safety
KPI:
326
major accident incidence rate*
(2012: 666)
A lack of diversity and an inability to attract and retain the best talent
are risks to the Group; refer to principal risk four on page 30.
* Per 100,000 employees
Cobham has been monitoring its gender, age and ethnic diversity since
2008. In 2013, it reviewed its diversity and benchmarked itself against
industry peers using publicly available data. The results showed that
Cobham generally equals or exceeds them. Overall, the Group trend
over the past five years has been that the percentage of women in the
total workforce and in management positions has marginally declined,
although recent graduate recruitment includes an increasing intake
of women.
Cobham is committed to providing its employees with a safe working
environment and considers it key to talent retention and recruitment.
Cobham addresses workplace safety, health and environment (SHE)
together through the Code and SHE policy. The Group is committed
to creating a culture in which all employees take responsibility for
themselves, their fellow workers, contractors, visitors and the
general public.
Diversity and inclusion
KPI:
13%
female senior managers*
(2012: 11%)
11%
women on the Board
(2012: 11%)
9%
female senior managers**
(2012: 7%)
27%
female employees
in the Group
(2012: 27%)
* Legal definition (Directors of legal entities)
** Cobham’s definition (Vice Presidents and above)
The policy is implemented through a standardised management
approach. All business units are required to achieve at least a basic
level of performance and follow a programme of continuous
improvement. Assurance is obtained through independent peer
reviews and external audits.
Progress is monitored through an Executive-led steering committee,
which reports to the Group Executive and Board Audit Committee.
SHE considerations are integrated into the annual strategic planning
and standardised business integration processes.
A review of the way in which the Group resources SHE was undertaken
in 2013 and, as a result of this review, actions will be taken to strength
the SHE function over the coming years.
SHP-IOSH awards finalist
Cobham Antenna Systems in Marlow, UK was a finalist in the
prestigious Institute of Occupational Safety and Health Awards
for Safety in Manufacturing following the success of a zero
harm initiative that has improved the site’s SHE culture.
34
Cobham plc Annual Report and Accounts 2013
Strategic Report
As Aviation Services successfully grows, by operating more aircraft or
achieving higher utilisation of the existing fleet, energy consumption
will also increase. Management of the Group’s aviation and non-aviation
emissions are therefore separated. Aviation fuel use intensity (fuel burn
per operational flying hour for all aircraft) is now reported in addition
to facility energy use intensity. Details of the Group’s greenhouse gas
emissions data are included on page 66 of the Directors’ Report.
Moving forward, Cobham will continue to target reduced impacts
from its products, facilities and supply chain on the environment
and to manage the impact of the environment on the Group.
Environmental sustainability
Reduce the Group’s environmental impacts and mitigate
the environment’s impact on the Group
Greenhouse gas emissions
KPI:
51 tonnes
Total Scope 1 carbon dioxide equivalent per £m turnover*
(2012: 54 tCO2e/£m)
27 tonnes
Total Scope 2 carbon dioxide equivalent per £m turnover*
(2012: 30 tCO2e/£m)
228 tonnes
Total Scope 3 carbon dioxide equivalent per £m turnover*
(2012: 214 tCO2e/£m)
* Scope one, two and three are further explained within the Directors’ Report, page 66.
Facility resilience award
The Group has a number of mitigating actions in place to reduce the
risks associated with environmental sustainability. See principal risk
seven on page 31.
Cobham and its insurers, FM Global, have won an Insurance
Partnership of the Year award from Continuity, Insurance and
Risk magazine.
Over the past eight years, Cobham and FM Global have been
working together to ensure the Group’s principal locations reach
and maintain the coveted Highly Protected Risk status through
compliance with FM Global standards.
This level of business continuity management enables our
principal locations to mitigate the risks associated with adverse
weather events such as flooding.
Cobham’s SHE policy sets out its commitment to environmental
sustainability through product stewardship (from resource extraction
to end-of-life), resource efficiency and climate change initiatives. With
respect to the environment, Cobham’s aim is to continuously improve
its resource efficiency (raw materials, energy and natural resources)
and reduce its use of hazardous substances wherever possible.
Cobham often designs products which are smaller, lighter and less
power consumptive than competitors’ products. In doing so, it has
an opportunity to generate significant benefits for its customers and
the environment. This objective is being built into the principal locations’
standardised design review processes.
Hazardous Materials legislation is having an increasing impact on industry
by phasing out certain materials at a pace quicker than viable alternatives
can be identified, tested and certified for use. Cobham is actively
monitoring the impacts of this legislation and engaging regulators to
develop suitable solutions through its industry association memberships.
Climate change is affecting the Group’s regulatory regime and operations
to varying degrees based on geography and market. The principal impacts
relate to product, facility and supply chain resilience. The majority (84%)
of Cobham’s direct Scope 1 and 95% of Cobham’s indirect scope 3
greenhouse gas emissions come from aviation fuel consumption
in the Aviation Services business.
Further detail on Cobham’s CR&S approach, objectives and
performance is available at www.cobhamsustainability.com.
Cobham plc Annual Report and Accounts 2013
35
Board of Directors
1. J Devaney
2. R (Bob) Murphy
3. S Nicholls
Non-executive Chairman
BEng, CEng, FIMechE, FIEE
Age 66
Chief Executive Officer, Executive
Director
Age 56
Chief Financial Officer, Executive Director
BSc (Hons), ACA
Age 49
Appointed: Director February 2010,
Chairman May 2010
Skills and experience: John’s executive career was
built in engineering companies within the Verity
Group. John has previously served as Non-executive
Director of Northern Rock Asset Management
(between 2007 and 2010) and Chairman of Marconi
plc, later renamed Telent. He was President of Perkins
Engines in the mid-1980s, and he went on to be
President of Kelsey-Hayes, the automotive
components manufacturer. He was subsequently
Chief Executive of Eastern Electricity, the largest
regional electricity company in the UK at the time.
Following its acquisition by Hanson, he was appointed
Executive Chairman of Hanson. John retired from his
role as Non-executive Chairman of National Express
Group plc on 31 January 2013.
External appointments: Non-executive Chairman
of NATS, the National Air Traffic Services.
Committee membership: Chairman of the
Nomination Committee.
Appointed: June 2012
Skills and experience: Bob was with BAE Systems
for 13 years from 1999, serving as a member of the
Executive Committee of BAE Systems plc as Executive
Vice President for the global operations of the Product
Sectors business for BAE Systems, Inc. including its
Electronic Systems, Land & Armaments and Platform
Solutions sectors. He has also held a number of other
senior operational and financial roles with BAE Systems.
Prior to this, Bob spent 18 years with General Electric
where he held numerous financial leadership positions,
culminating in his role as CFO of the military engines
operation of the GE Aircraft Engines Group. Previously,
Bob has served on the Board of Trustees for the US
National Defense Industrial Association and the Board
of Visitors for the Clark School of Engineering at the
University of Maryland.
External appointments: None.
Committee membership: Executive
Directors Committee.
Appointed: May 2013
Skills and experience: Simon was CFO of Senior plc,
the FTSE 250 international manufacturing group
providing engineered products for aerospace, defence
and commercial industrial applications, a position he
held from 2008. Previously, Simon was CFO of Hanson
North America and prior to that he was Financial
Controller for Hanson plc for three years. Simon spent
nine years with Price Waterhouse, now PwC, in the UK
and Canada, and four years working in senior financial
positions. Simon served as a Non-executive Director
of AIM listed Hamworthy plc from September 2011
until its takeover in February 2012. Simon is a Chartered
Accountant, holding a Bachelor of Science degree in
Mathematics, Operational Research, Statistics and
Economics from the University of Warwick.
External appointments: None.
Committee membership: Executive
Directors Committee.
Independent Directors
4. M Wareing
5. J Patterson
6. M Ronald
Senior Independent Non-executive
Director CMG, FCA, FCCA, MCSI
Age 60
Independent Non-executive Director
CBE, MBChB, FRCP, Fmed Sci
Age 66
Independent Non-executive Director
CBE, BA, BScEE, MScEE
Age 72
Appointed: December 2010
Skills and experience: Michael worked for KPMG
from 1973 until 2009 when he retired. Between 2005
and 2009, he was International Chief Executive Officer,
KPMG, Chairman, KPMG International Executive Team,
and Chairman, KPMG Iberoamerica Board. He was
formerly the Prime Minister’s Envoy for Reconstruction
in Southern Iraq.
External appointments: Non-executive Director
and Chairman of the Audit Committee of Wolseley plc
and Senior Independent Non-executive Director and
Chairman of the Audit Committee of Intertek Group
plc. Economic Development Adviser to the
Government of Afghanistan.
Committee membership: Chairman of the
Audit Committee and member of the
Nomination Committee.
Appointed: November 2005
Skills and experience: John qualified in medicine in
1971 and obtained a Membership (now Fellowship) of
the Royal College of Physicians in 1974. He joined ICI
(now AstraZeneca) in 1975 and in December 2004 was
appointed to the main Board as Executive Director
responsible for development. He retired as a Director
of ICI in March 2009. He is a former President of the
Association of the British Pharmaceutical Industry, a
former Non-executive Director of Amersham plc and
a former member of the supervisory Board of the UK
Medicines Control Agency.
External appointments: Non-executive Director
of Ferring Holding SA.
Committee membership: Chairman of the
Remuneration Committee and a member of the
Nomination Committee .
Appointed: January 2007
Skills and experience: Mark was, until his retirement
at the end of 2006, Chief Operating Officer of BAE
Systems plc and Chief Executive Officer of BAE Systems,
Inc., its wholly-owned US subsidiary. Previously, he was
Vice-President, Programme Management with Litton
Industries and Chief Operating Officer of AEL Industries.
Mark was a Non-executive Director of ATK Inc.
External appointments: Non-executive Director
of Beechcraft Holdings LLC. and Aeroflex Holdings,
Inc., senior adviser of Veritas Capital LLC. and
a management consultant.
Committee membership: Member of the
Nomination and Remuneration Committees.
36
Cobham plc Annual Report and Accounts 2013
Independent Directors continued
7. M Hagee
8. A Wood
9. D (Jonathan) Flint
Independent Non-executive Director
Age 69
Independent Non-executive Director
MA, MBA
Age 50
Independent Non-executive Director
CBE, MBA, BSc, FREng, FInstP
Age 53
Appointed: December 2008
Skills and experience: Mike served in the US Marine
Corps for almost 39 years ending his career in 2007
as Commandant of the Marine Corps and a member
of the Joint Chiefs of Staff. His numerous military
assignments included Commanding General, 1st Marine
Expeditionary Force, Deputy Director of Operations
at the US European Command and Executive Assistant
to the Director of Central Intelligence. He also served
in a number of diplomatic missions including the
presidential diplomatic mission to Somalia.
External appointments: President and CEO of the
Admiral Nimitz Foundation in Fredericksburg, Texas, US,
Co-Chairman of the National Security Advisory Council
for the Center of US Global Engagement and US Global
Leadership Campaign, Non-executive Director of SGI Corp.,
Kaseman LLC., DynCorp International Inc. and Freedom
Group Inc., and Outside Director on the Government
Security Committee of the Special Security Agreement
of TE SubCom, a TE Connectivity Limited company.
Committee membership: Member of the Audit
and Nomination Committees.
Appointed: July 2011
Skills and experience: Alison is currently engaged
with a mix of not for profit and non-executive activities.
She was formerly Global Director Corporate
Development & Strategy for National Grid plc.
Previously, she was Group Strategic Development
Director for BAE Systems plc responsible for corporate
strategy, mergers and acquisitions and strategic
business development across the UK and US. She
has held three previous Non-executive Directorships:
BTG plc from 2004 to 2008, THUS plc from 2007
to 2008 and GCHQ from 2009 to 2011.
External appointments: Chairman of Aerospace,
Aviation and Defence Knowledge Transfer Network.
Appointed Non-executive Director and Senior
Independent Director of e2v technologies plc,
17 July 2013. Appointed Non-executive Director of
Costain plc, 1 February 2014 and will become Chair
of their Remuneration Committee from 1 April 2014.
Committee membership: Member of the
Remuneration and Nomination Committees.
Appointed: May 2013
Skills and experience: Jonathan is currently Chief
Executive of Oxford Instruments plc, a leading provider
of high technology tools and systems for research and
industry, a position he has held since 2005. Prior to this,
he was the UK Managing Director of Vislink plc and has
also held management positions with BAE Systems and
GEC Marconi Avionics. A physics graduate from Imperial
College London, Jonathan was made a CBE in 2012.
External appointments: Chief Executive of Oxford
Instruments plc. Jonathan was appointed as a
Non-executive Director of Andor Technology plc,
in January 2014.
Committee membership: Member of the Audit
and Nomination Committees.
STRUCTURE OF THE REPORT
The section that follows on corporate
governance is intended to give shareholders
a clear and comprehensive picture of the
Group’s governance arrangements and how
they operated during the year. Page 39 sets
out details of the areas of the Board’s focus
during the year, while descriptions of how
the Group complied with each Principle and
Provision of the UK Corporate Governance
Code are set out on pages 68 and 69.
Board meeting attendance for 2013
Number of meetings attended/held
J Devaney
R Murphy
S Nicholls1
W Tucker2
M Beresford3
M Hagee
J Patterson
M Ronald
M Wareing4
A Wood
D Flint5
9/9
9/9
5/5
4/4
4/4
9/9
9/9
9/9
8/9
9/9
5/5
1 S Nicholls appointed on 1 May 2013.
2 W Tucker retired from the Board on 1 May 2013.
3 M Beresford retired from the Board on 25 April 2013.
4 M Wareing had been hospitalised before the February
meeting, which he could not attend.
5 D Flint appointed on 1 May 2013.
www.cobham.com
Cobham plc Annual Report and Accounts 2013
37
Corporate Governance All Non-executives have confirmed they have sufficient time to meet
their time commitments to the Group. Copies of their appointment
letters are available on request to the Company Secretary and will be
available for inspection at the AGM.
In accordance with the Code, which recommends that all Directors
of FTSE350 companies seek re-election by shareholders on an annual
basis, all Directors currently in office will retire and seek re-election
at the AGM. In addition, Simon Nicholls and Jonathan Flint, who were
appointed to the Board on 1 May 2013, are seeking election by
shareholders at the 2014 AGM for the first time.
The Board has set out in the circular a resolution to elect Simon Nicholls
as an Executive Director and Jonathan Flint as a Non-executive Director
and explains why it believes they should be elected. The Chairman
confirms to shareholders when proposing election or re-appointment
that the individual’s performance continues to be effective and that
the individual continues to demonstrate commitment to the role.
Non-executive Directors are subject to Companies Act provisions
relating to the removal of a Director.
The Chairman is, among other things, responsible for chairing Board
meetings and leading the Board. The CEO’s responsibilities include
development and implementation of the Group’s strategy, operational
performance and corporate social responsibility. He also focuses on
long term growth and development of the Group, its people and
customer relationships. The Board’s policy is that the roles of
Chairman and CEO should be performed by different people.
The Senior Independent Director’s responsibilities include the provision
of an additional channel of communication between the Chairman and
the Non-executive Directors. He also provides another point of contact
for shareholders if they have concerns that communication through the
normal channels of Chairman, CEO or CFO has failed to resolve, or
where these contacts are inappropriate.
Marcus Beresford stood down as Non-executive Director and Senior
Independent Director at the conclusion of the 2013 AGM. The role
of Senior Independent Director was assumed by Michael Wareing
following Marcus’ retirement.
Corporate Governance Report
This part of the Annual Report and Accounts, together with the
Directors’ Remuneration Report set out on pages 48 to 63, describes
how the Company has applied and complied with the principles
contained in the UK Corporate Governance Code published in
September 2012 (the Code). The Code is published by the Financial
Reporting Council and is available from its website www.frc.org.uk.
A high level summary of our compliance with the Code is shown
on pages 68 and 69.
Statement of compliance with the provisions of the Code
The Ordinary Shares are listed on the London Stock Exchange. In
accordance with the Listing Rules of the UK Listing Authority, the
Company confirms that, throughout the year ended 31 December
2013 and at the date of this Annual Report and Accounts, it was
compliant with the provisions of the Code.
Share capital
Details of the share capital of the Company and the powers of
the Directors in relation to allotment, issue and market purchase
of shares are given in the Directors’ Report on page 64.
The Board composition
The Board comprises a Non-executive Chairman (John Devaney),
a CEO (Bob Murphy), a CFO (Simon Nicholls) and six other Non-executive
Directors of whom Mike Wareing is the Senior Independent Director.
All Non-executive Directors are considered to be independent and the
Chairman was considered to be independent on appointment. They
all held office throughout the year except Simon Nicholls and Jonathan
Flint, who both joined the Board on 1 May 2013. Warren Tucker, the
former CFO, stood down from the Board on 1 May 2013. Marcus
Beresford stood down from the Board, having completed nine years
as a Non-executive Director, at the conclusion of the 2013 AGM.
Biographies of the Directors, giving details of their experience and
other significant commitments, are set out on pages 36 and 37.
The wide ranging experience and backgrounds of the Non-executive
Directors enable them to support, debate and constructively challenge
management in relation to both the development of strategy and
the performance of the Group. The attendance of Directors at Board
meetings is set out on page 37 and attendance at principal Board
committee meetings as members of such committees during the year
is set out in the reports from each committee on pages 42, 44 and 48.
Non-executive Directors are appointed for specified terms of three
years, which can be extended by agreement provided that the
individual’s performance continues to be effective. The rules for the
appointment and replacement of Directors are set out in the Company’s
Articles of Association (the Articles), copies of which can be obtained
from Companies House in the UK or by contacting the Company
Secretary. Changes to the Articles must be approved by shareholders
passing a special resolution. The Directors and the Company (in the
latter case by ordinary resolution) may appoint a person who is willing
to act as a Director, either to fill a vacancy or as an additional Director.
38
Cobham plc Annual Report and Accounts 2013
The Board and its proceedings
Dear Shareholder
As I mention in my Chairman’s Statement
earlier in this report, 2013 has been a year of
significant activity. The Board has been busy
refining the strategic objectives and ensuring
the structure is in place to position the business
to achieve the Group’s Strategic Plan.
EiD is transitioning to continuous improvement
initiatives and the streamlining of business
operations continues.
The key focus for the Board during 2013
has been supporting the Executive Directors,
both of whom are relatively new to the Group,
to put in place the strategic enablers needed
to achieve the Group’s Strategic Plan. This
has involved revisiting the constitution of the
senior management team with more emphasis
placed on customer relationships, operational
excellence and the development of our talent.
Our markets in 2014 will continue to challenge
and we will continue to work hard to respond
to those challenges. I trust we can rely on your
support for the foreseeable future.
J Devaney
Chairman
Overview
Role and focus
The Board’s main duties are to:
•
Lead the Group with a view to the creation of strong,
sustainable financial performance and long term
shareholder value;
Ensure that the necessary resources are in place;
• Review and agree Group strategy;
•
• Monitor management performance; and
• Supervise the conduct of the Group’s activities within
a framework of prudent and effective internal controls.
Highlights of 2013
• The Board and senior management devoted additional
time to the further development of the Group’s strategy;
• Talent and succession planning has been high on the agenda,
with various initiatives implemented to ensure we have the
right resources to deliver our strategic objectives;
• Approved the acquisition of the Axell and FB Heliservices
groups of companies;
• Overseen the search and appointment of a new CFO;
• Overseen the restructuring of the senior management group;
Evaluated and approved six large bid submissions above
•
authority limits delegated to the Executive Directors outside
of the regular Board meeting agenda; and
• Monitored the progression of the EiD programme and approved
the transition to a continuous improvement initiative, with
resource within the business to progress this further.
Priorities for 2014
• Review performance against agreed strategic enablers;
• Continued focus on market evaluation and strategic development;
• Continued rebalance of the portfolio towards the
commercial market; and
• Oversight of Strategic Workforce Plan and
organisational realignment.
Board meetings, scheduled in accordance with the annual timetable,
take place five times a year on a face to face basis, four times a year
by telephone and otherwise as required. There is contact between
meetings to progress the Group’s business as required. Meetings were
held at the head office in Wimborne, at the Company’s London office
and at an international operational location (Exeter in the US). In
addition, the Senior Independent Director held a meeting with the
Non-executives in the absence of the Chairman to appraise the
Chairman’s performance. The Chairman has held meetings with
the Non-executives in the absence of the Executive Directors.
The Board’s role is to lead the Group with a view to the creation of strong,
sustainable financial performance and long term shareholder value.
The Board has adopted a schedule of matters reserved for its specific
approval. The schedule provides the framework for those decisions
which can be made by the Board and those which can be delegated
either to committees or otherwise. Among the key matters on which
the Board alone may make decisions are the Group’s business strategy,
its five year plan, its consolidated budget, Group policies, dividends,
acquisitions and disposals, and all appointments to and removals from
www.cobham.com
Cobham plc Annual Report and Accounts 2013
39
Corporate Governance Corporate Governance Report continued
Evaluation year
Observations
Actions taken
2012
2013
The risk management process needs to be strengthened with clear
delineation between the work of the Risk and Audit Committees
and the Board.
More rigour should be placed around paper compilation
and submission.
Senior management objectives need to be visible to the
Board to support talent and succession planning.
Members of the Group Executive should be provided with
opportunities to present to the Board on their areas of the
business to provide more exposure to the Board members.
Continued development of the strategic planning process.
The Risk Committee was strengthened during 2013 with the membership
expanded to include the Group Executive. The risk appetite statement
was considered, approved and published during the year.
The substance of reports was improved and a standard reporting
format adopted, introducing a more timely and efficient process.
Objectives for the Group Executive were presented to the Board for
review. Opportunities for the Board to meet members of the Cobham
high potential programme will continue to be pursued.
Presentations from the Group Executive to be built into the Board
Work Plan for 2014.
A two day Board meeting in 2014 has been added to the Board schedule,
with the business of that meeting devoted purely to strategy. Ongoing
strategic updates form part of the rolling Board agenda.
the Board. Authority is delegated to management on a structured
basis in accordance with the provisions of the Corporate Framework
ensuring that proper management oversight exists at the appropriate
level. Matters delegated in this way include, within defined
parameters, the approval of bids and contracts, capital expenditures
and financing arrangements.
Performance evaluation
The Board conducts an evaluation of its activities on an annual basis.
During 2013, the Board and its committees undertook an internal
evaluation. The evaluation included the circulation of a questionnaire.
The Board considered the output and has approved an action plan
to address issues arising.
The Board has adopted procedures relating to the conduct of its
business, including the timely provision of information, and the
Company Secretary is responsible for ensuring that these are
observed and for advising the Board on corporate governance
matters. The Company Secretary is appointed, and can only be
removed, by the Board.
If a Director were to have a concern which cannot be resolved,
it would be recorded in the Board minutes. On resignation,
Non-executive Directors are invited to provide a written statement
to the Chairman for circulation to the Board if they have concerns.
No such statements were made during 2013.
All potential situational and transactional conflicts of interest
are disclosed, noted and authorised. Procedures are in place
and operating effectively to keep such disclosures up to date.
A table of actions instigated by this and the previous performance
evaluation is included above.
Financial reporting
In the Directors’ view, the Annual Report and Accounts for 2013,
together with the interim management statements, the interim
report and other reports made during the year, present a fair,
balanced and understandable assessment of the Group’s position
and prospects.
The Directors have adopted the going concern basis in preparing
the Annual Report and Accounts as stated in the Financial Review
on page 27.
Shareholder relations
A summary of the 2013 activity by our Investor Relations team
is shown below.
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Preliminary
2012 results
Webcast &
conference
call
Investor
conferences
Interim
Management
Statement*
Interim 2013
results
Webcast &
conference
call
Interim
Management
Statement*
Conference
call
Investor
conferences
Industry
exhibitions
Investor conferences
& industry exhibitions
Investor
conferences
Site visits
Site visit
Site visits
Investor meetings
Investor meetings
*Interim Management Statement is a short quarterly update on the Group’s trading, significant events and financial position.
40
Cobham plc Annual Report and Accounts 2013
A full programme of engagement with investors and analysts,
both in the UK and overseas, is undertaken each year by the CEO,
CFO and Director of Investor Relations, including presentations,
industry exhibitions, roadshows and site visits. Site visits are hosted
by senior members of management within the business units and
are intended to give investors detailed insight and access to the
business’ operations.
The Board is accountable to shareholders for the performance and
activities of the Group and engages in regular dialogue with them. During
the year, the CEO and the CFO held regular meetings with shareholders
to discuss information made public by the Group. A wide range of business
and corporate governance topics were discussed with institutional investors
during the year as part of the investor relations programme. These included
Cobham’s overall performance, the Group’s markets, particularly with
respect to the development of the US Department of Defense budgets,
progress on the Group’s EiD programme, progress against the Group’s
strategic objectives, changes in senior management and cash deployment
including dividends, share buy-backs and mergers and acquisitions.
The Non-executive Chairman and the Senior Independent Director are
available to meet with major shareholders at any time. The Chairman met
with four of the top five shareholders during October 2013 and gave them
an opportunity to raise any concerns they had with communications,
ethics and/or governance. In summary, those met raised no concerns
and were very pleased with business performance. The Chairman of the
Remuneration Committee also consulted with major shareholders during
the year with regards to executive remuneration arrangements.
Presentations were given on the day of the announcement of the
interim and preliminary results. The presentations were accompanied
by a live webcast for shareholders unable to attend in person. Copies
of the associated presentation materials, together with webcasts,
can be accessed at www.cobhaminvestors.com. Presentations
are conducted in accordance with the FCA’s Disclosure Rules on the
dissemination of inside information.
The Board receives a report from the CFO at each of its meetings
on investor relations generally, including significant changes to
shareholdings, meetings with and feedback from shareholders
and research published on the Group. The Board also received
an independent report during the year outlining how institutional
investors regard the Group, its strategy, markets, businesses,
financial position, capital allocation, governance, communications,
valuation and investment standing.
Communication with shareholders also takes place via RNS
announcements, the Group’s website, the Annual Report and
Accounts, the interim management statements and the AGM.
The AGM is attended by all Directors and shareholders have the
opportunity to question the Board on its stewardship of the Group
and to meet the Directors informally. The results of the votes on
the resolutions proposed at the AGM are published on the Group’s
website at www.cobhaminvestors.com.
Responsibility statements
Statements relating to the responsibilities of the Directors are on
page 67 and those relating to the auditors are on pages 73 and 126.
The Board is supported in its work by a number of committees.
The Company Secretary acts as secretary to all Board committees.
Committee chairmen provide oral reports on the work undertaken by
their committees at the following Board meeting. Information relating
to the Nomination and Audit Committees appears below and the
activities of the Remuneration Committee are described in the Directors’
Remuneration Report on pages 48 to 63. All Board committees are
provided with sufficient resources to undertake their duties.
The other principal Board committee is the Executive Directors
Committee. The Executive Directors are members of this Committee
under the chairmanship of the CEO. The purpose is to assist the CEO
in the performance of his duties and its terms of reference include
establishing and implementing internal policies, systems and controls
to ensure that potential inside information is communicated to it,
considered, verified and released to the market where required, the
discharge of obligations arising under the Company’s share plans, the
determination of the remuneration of the Non-executive Directors,
the approval of banking facilities and the approval of bids and contracts.
This Committee met on 28 occasions during the year and, in addition,
as required to respond to business needs and market conditions.
The Group Executive Committee and the other principal
management committees are shown in the table below.
www.cobham.com
Cobham plc Annual Report and Accounts 2013
41
Contract Bid ApprovalMerger & AcquisitionsCorporate Responsibility & SustainabilityBusiness Ethics & ComplianceInternal Audit Sub-committeeTalent BoardPrincipal Board CommitteesManagement CommitteesBoard of DirectorsAudit CommitteeNomination CommitteeRemuneration CommitteeExecutive Directors CommitteeThe Board is ultimately responsible for corporate governance and the Group’s system of internal control, with day to day responsibility resting with management.Group Executive (incorporating the Risk Committee)Safety, Health & EnvironmentCorporate Governance Corporate Governance Report continued
Nomination Committee
Overview
Membership and attendance
J Devaney (Chairman)
M Beresford1
D Flint2
M Hagee
J Patterson
M Ronald
M Wareing3
A Wood
Number of meetings attended/held
4/4
2/2
2/2
4/4
4/4
4/4
3/4
4/4
1 M Beresford retired from the Board (and hence the Nomination Committee)
on 25 April 2013.
2 D Flint joined the Nomination Committee on joining the Board on 1 May 2013.
3 M Wareing had been hospitalised before the February meeting, which he could
not attend.
Other attendees
CEO, by invitation.
Role and focus
The Nomination Committee’s main duties are to:
• Review the structure, size and composition of the Board; and
• Consider succession planning for Directors and other
senior executives.
Highlights of 2013
•
Evaluated the balance of skills, knowledge and experience
of the Board;
• Considered external appointments to subsidiary boards;
• Considered succession planning to ensure the Group is
well positioned for the future;
• Conducted a thorough and comprehensive search for two
new Non-executive Directors, one yet to be appointed; and
• Conducted an effectiveness review.
Priorities for 2014
• Conclude Non-executive Director search to replace
John Patterson who will stand down at the conclusion
of the 2014 AGM.
Dear Shareholder
A key focus during 2013 has been the
appointment of two Directors, one Executive,
one Non-executive. Both of these appointments
were managed in conjunction with Korn/Ferry
Whitehead Mann, recruitment consultants who
have signed up to the voluntary Code of Conduct
for executive search firms. Korn/Ferry provided
a shortlist of candidates for these roles. The
shortlisted candidates were interviewed by
myself and separately by Mike Wareing,
Alison Wood and John Patterson before
meeting the Executive Directors.
As mentioned last year, a fresh look at talent
and succession further down the management
chain has been undertaken during the year
and significant progress made, which has been
described in the talent management section
of the CR&S report on page 33.
J Devaney
Nomination Committee Chairman
42
Cobham plc Annual Report and Accounts 2013
The Committee’s terms of reference, which were reviewed
during the year, are available on the Company’s website at
www.cobhaminvestors.com or on application to the
Company Secretary.
The Committee is cognisant of the need for diversity, including
gender diversity, when considering the composition of the Board.
In recruiting for Board roles, targets have been set around ensuring
a proportion of female applicants are included in the candidate
pool for Non-executive Director positions. For the recent recruitment,
the profile has included the requirement for a diverse geographical
background and commercial market experience. Elsewhere in the
business, diversity in the workforce is taken very seriously and a full
report on current strategy is set out in the diversity and inclusion
section in the CR&S report on page 34.
Directors’ professional development
On appointment, Directors undertake a structured induction programme,
in the course of which they receive information about the operations and
activities of the Group, the role of the Board and the matters reserved for
its decision, the Group’s corporate governance practices and procedures
and their duties, responsibilities and obligations as Directors of a listed
public limited company. This is supplemented by visits to key locations
and meetings with, and presentations by, senior executives.
Training for Directors is available as required and is provided mainly by
means of external courses, internal computer based training, briefing
from specific consultants or in-house presentations. In addition, Directors’
knowledge of the legal and regulatory environment is updated through
the provision of information by the Group’s advisers and by means of
regular updates from the Company Secretary and the legal team.
The current Board composition, in relation to the Non-executive
Directors, as of 31 December 2013, is set out in the table below
identifying the skills and experience of the Board members.
Board succession planning
Succession planning
Succession planning takes place at Board and senior management level on
a regular basis to ensure that the Group is managed by executives with the
necessary skills, experience and knowledge. The Board has a role to play
in overseeing the development of management resources in the Group.
Specifically, the Board wants to see depth and quality in management
and robust processes are in place to help the Board in this task.
Succession planning for Non-executive Directors is based on maintaining
a depth of knowledge and experience on the Board. The Nomination
Committee actively manages Non-executive Director succession, having
regard to anticipated retirement dates for existing Directors, and initiates
focused searches for Non-executive Directors as positions are required.
The current Board composition in relation to the Non-executive
Directors, as of 31 December 2013, in terms of length of service
and current term is shown diagrammatically in the table adjacent.
J Devaney
J Patterson
M Ronald
M Hagee
M Wareing
A Wood
D Flint
2005
2010
2013
2015
2020
2025
1st term
2nd term
3rd term
Independence
Years with
Cobham
Skills
Experience
J Devaney
R Murphy
S Nicholls
D Flint
M Hagee
J Patterson
M Ronald
M Wareing
A Wood
3
1
0
0
5
8
7
3
2
•
•
•
•
•
•
Leadership
Strategy
UK
Corporate
Governance
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Corporate
Engineering
Defence
Finance
US Market
UK Listings
HR
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
www.cobham.com
Cobham plc Annual Report and Accounts 2013
43
Corporate Governance
Corporate Governance Report continued
Audit Committee
Overview
Membership and attendance
M Wareing (Chairman)1
M Beresford2
D Flint3
M Hagee
Number of meetings attended/held
4/5
2/2
3/3
5/5
1 M Wareing had been hospitalised before the February meeting, which he could
not attend.
2 M Beresford retired from the Board (and hence the Audit Committee) on 25 April 2013.
3 D Flint joined the Audit Committee on joining the Board on 1 May 2013.
Other attendees
Individuals who attended and received papers for each Audit
Committee meeting included:
• Chairman (papers received and attends by invitation);
• CEO (papers received and attends by invitation);
• CFO;
• Group Director of Financial Control;
• Head of Internal Audit;
• Company Secretary or her representative; and
• Senior representatives of the Company’s external auditors.
Other senior executives were also invited to certain meetings
to present and discuss specific items. The Committee periodically
meets separately with the Head of Internal Audit and the external
auditors without the presence of executive management and
also separately with the CFO.
Role and focus
The Audit Committee’s main duties are to:
• Monitor the integrity of the Group’s Financial Statements and
any formal announcements relating to its financial performance,
reviewing accounting policies used and judgements applied;
• Consider the effectiveness of the Group’s internal control systems;
• Consider the effectiveness of the Group’s risk management
procedures;
• Monitor and review the effectiveness of the Group’s internal
audit activities;
• Make recommendations as to the appointment, remuneration
and terms of engagement of the external auditors;
• Monitor and review the external auditors’ independence
(including the provision of non-audit services) and objectivity
and the effectiveness of the audit process;
• Review arrangements by which the Group’s employees may
confidentially raise concerns about possible improprieties;
Provide assurance to the Board on whether the Annual
Report and Accounts for 2013 was fair, balanced and
understandable; and
•
• Report to the Board on how it has discharged its responsibilities.
Dear Shareholder
It has been yet another busy year for the Audit
Committee and much has been reviewed and
reported from across the Group.
We have kept abreast of the ongoing consultations
on audit reform and implemented new processes
and reporting to deal with the revised Code
requirements and narrative reporting.
We welcome the Competition Commission decision
to delay their conclusions on audit tendering until
the outcome of the European Commission work is
known. Further comment on the tendering of the
external audit is made below.
Each member of the Committee brings relevant
skills and experience at a senior executive level and
the appointment of Jonathan Flint broadens the
scope of expertise of the Committee. I currently
chair the Audit Committee of two other FTSE
companies and was the International Chief
Executive of KPMG until I retired in September
2009. This provides the Board with assurance that
the Audit Committee meets the Code requirements
that at least one member of the Committee
has significant, recent and relevant financial
experience. The key skills and experience of each
member of the Committee are shown on page 43.
M Wareing
Audit Committee Chairman
44
Cobham plc Annual Report and Accounts 2013
Highlights of 2013
• Monitored and contributed to the debate on external audit
tendering/rotation led by the UK Financial Reporting Council
(FRC), UK Competition Commission and the European
Commission, and considered the impact on the Group;
• Considered how to adapt procedures and implemented
new processes to provide advice to the Board on whether
the Annual Report and Accounts, taken as a whole, is fair,
balanced and understandable and provides all information
necessary to a shareholder to assess the Group’s performance,
business model and strategy; and
• Greater scrutiny given to the Group’s LCM process, EiD controls
and IT controls, including cyber risk.
Priorities for 2014
• Continued oversight of the impact of the defence market
uncertainty on the financial position of the Group;
• Continued monitoring of the external audit tendering/rotation
debate and consideration of the Group’s audit tender timetable
as appropriate; and
• Continued focus on the Group’s governance framework
including LCM, EiD, IT controls and risk management processes.
Allocation of time spent during the year
Set out in the table and the narrative below is a summary of
matters considered by the Committee during 2013. Key issues
covered by the Committee are reported to the subsequent
meeting of the Board and all Board members have access
to copies of the minutes of each meeting.
Feb
Apr
Jul
Nov
Dec
•
•
•
•
•
•
•
•
•
•
•
•
Financial reporting and
significant financial judgements
Full year results and associated
announcements
Half year results and associated
announcements
External audit
Auditors’ full year report
to the Committee
Independence review
of external auditor
Effectiveness review
of external auditor
Review of engagement letter
Appointment recommendation
to the Board
Auditors’ half year report
to the Committee
Annual external audit plan
Chairman’s approval of non-audit fees
Review of audit and non-audit fees
Internal audit
Effectiveness review of internal audit
Internal audit report to the Committee
Risk management
Fraud and whistleblowing report
Risk management report
to the Committee
Review of the risk sections
of the Annual Report
Review of risk management
framework
Annual review of internal controls
Other
Updates on accounting and
corporate governance developments
Terms of reference review
Review of effectiveness
of the Committee
LCM review
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
www.cobham.com
Cobham plc Annual Report and Accounts 2013
45
Corporate Governance
Corporate Governance Report continued
Risk management and internal controls
The Board is responsible for the oversight and application of the Group’s
risk management and internal control systems, the aim of which is to
manage risks that are significant to the fulfilment of the Group’s business
objectives and to contribute to the safeguarding of shareholders’
investment and the Group’s assets. The Board receives reports on a
regular basis from the Audit Committee in relation to the effectiveness
of the Group’s system of internal control and has, accordingly, reviewed
the effectiveness of the Group’s system of internal control in respect
of 2013. The review covered all material controls, including financial,
operational and compliance controls and risk management systems
and is designed to give assurance that the day to day risk management
and internal control policies and procedures, which are embedded in the
business, have operated effectively in the review period. The principal
elements, which are split into three lines of assurance, are outlined in the
diagram shown on page 28. Such a system is designed to manage rather
than eliminate the risk of failure to achieve business objectives, and can
only provide reasonable and not absolute assurance against material
misstatement or loss.
Cobham Code of Business Conduct violations and fraud
The CR&S section of this report, on pages 32 to 35, contains details of
the Cobham Code of Business Conduct and the mechanisms, including
those maintained by independent third parties, by which suspected
violations of the Code are raised and independently investigated. The
Audit Committee received reports providing details of these cases, their
outcome, and any corrective actions taken. The reports also included
details on anonymous reporting rates and the duration of the
investigations. In addition, the Committee also received reports
providing details of any fraud losses.
Financial reporting and significant financial judgements
The Committee reviews whether suitable accounting policies have
been adopted, whether management has made appropriate estimates
and judgements and also seeks support from the external auditors
to assess them.
The Committee reviewed the following main issues for the year
ended 31 December 2013:
Risk management is an integral part of the system of internal control.
Division Presidents are required to ensure that appropriate processes,
including the maintenance of business unit and divisional risk registers,
exist to identify and manage risks and to regularly carry out formal
risk assessments. The Risk Committee undertakes a top level review
of significant risks and the CEO reports regularly to the Board on
their mitigation.
The latest Principal Risks and the risk management process are
highlighted on pages 28 to 31.
The Group operates under a system of internal controls which has been
developed and refined over time to meet its needs and the risks and
opportunities to which it is exposed. This includes a strategic planning
process involving the preparation of the Strategic Plan, a comprehensive
budgeting system with an annual budget which is approved by the Board,
the regular revision of financial forecasts for the year, the monitoring
of financial performance and the appropriate delegation of authorities
to operational management. Delegations and other operational controls
are contained in the Corporate Framework and the Group Finance
Manual. Specifically with regard to the financial reporting process and
the preparation of the Group Financial Statements, the system includes
an annual and semi-annual representation letter from all business units.
Included in those letters are written acknowledgements that financial
reporting is based upon reliable data and that the results are properly
stated in accordance with Group policies.
The Committee believes that the current arrangements comprising
the half yearly risk assessment process, a rotational programme
of internal financial and other control reviews by the internal audit
function, other experienced internal teams, external experts and
business reviews carried out by the CEO and CFO and a process
of self-assessment of internal financial controls by all business
units provide appropriate coverage of the Group’s activities.
Where weaknesses have been identified, plans for remedying
them are developed and progress monitored.
Issue
Committee action
Conclusion (with reasoning)
Carrying value of
investments and
potential impairments.
Reviewed internal papers
covering the basis and
quantum of valuation.
The accounting for
revenue recognition.
The accounting for
contract profitability,
including the recognition
of contract loss
provisions.
The control environment
of the Group to mitigate
the risk of management
override of internal
controls.
Considered accounting
policies and external
audit reviews.
Considered accounting
policies, management
reports, detailed contract
appraisals, legal advice,
and internal/external
audit reviews.
Reviewed the summary
of management letters
of representation and
results of internal and
external audit reviews.
Satisfied that these were
reasonable and appropriate,
and that the disclosures
made were appropriate.
Satisfied that accounting
was reasonable and
appropriate.
Considered that
accounting and provisions
were appropriate.
Satisfied that the system
of internal controls
was reasonable
and appropriate.
At the request of the Board, the Committee considered whether
the 2013 Annual Report and Accounts was fair, balanced and
understandable and whether it provided the necessary information
for shareholders to assess the Group’s performance, business model
and strategy. It was satisfied that, taken as a whole, the 2013 Annual
Report and Accounts is fair, balanced and understandable. This
assessment was underpinned by the following:
• Comprehensive guidance issued to contributors at operational level;
• A verification process dealing with the factual content of the reports;
• Comprehensive reviews undertaken at different levels in the
Group that aim to ensure consistency and overall balance; and
• Comprehensive review by the senior management team.
External auditors
External audit processes
During the year, PricewaterhouseCoopers LLP (PwC) undertook
external audit and certain non-audit work. The Audit Partner, Stuart
Watson, together with the Audit Director, attended as representatives
of the external auditors at each Audit Committee meeting. Stuart
46
Cobham plc Annual Report and Accounts 2013
also attended the 2013 AGM. PwC provided the Committee with
information and advice as well as relevant reports on the financial
statements and controls.
in February 2014 and overall the feedback was positive.
The Committee is, therefore, satisfied that PwC continues
to provide an effective audit service.
In July 2013, the Committee reviewed and approved the terms, areas
of responsibility and scope of the December 2013 year-end audit as
set out in the external auditors’ engagement letter. During the year,
PwC provided audit related services such as regulatory and statutory
reporting. PwC is expected to report to the Committee any material
departures from Group accounting policies and procedures that it
identifies during the course of its audit work. None were found or
reported in the financial year.
The Independent Auditors’ report to the members of the Company
can be found on pages 70 to 73, and pages 125 and 126.
Independence and objectivity
The Committee and the external auditors have safeguards to avoid the
possible compromise of the auditors’ objectivity and independence.
These include a policy regarding the supply of audit and non-audit
services and a policy on the employment of external audit staff.
Non-audit services, as defined from time to time in the policy, can be
provided subject to pre-approval by the Committee where the cost
of any individual engagement exceeds a pre-defined limit and the cost
does not exceed the overall limit set out in the policy.
The total fees paid to PwC in the year ended 31 December 2013 (together
with a comparison to fees paid in the year ended 31 December 2012) are
set out in the following table. Further disclosure of the non-audit fees paid
during the year can be found in note 5 to the Group Financial Statements.
The Committee has recommended that a resolution be proposed
at the AGM to re-appoint the external auditors and to allow the
Board to set their remuneration.
External audit tendering
PwC have been the auditors of Cobham plc for many years.
During the last two years, the Committee has been monitoring and, through
its Chairman, contributing to the debate on external audit tendering. The
Committee has given preliminary consideration to the potential impact
of the requirements by the FRC and the UK Competition Commission
regarding audit firm tendering, which are welcomed. However, the Committee
notes that the European Commission has proposed potentially conflicting
guidelines in this area and that the Competition Commission has revised
its administrative timetable to enable it to consider the implications
of the European Commission proposals. We will continue to monitor
developments in this area and await the outcome of the consultations.
The Committee considered tendering for the provision of the external
audit service during 2013. The Committee concluded that, in light of the
above continuing regulatory uncertainty and the need to properly plan
for a full audit tender process, a tender of the external audit should be
delayed, subject to the continued satisfactory performance of PwC,
until the finalisation of the European Commission and Competition
Commission guidelines. It is, however, our intention to consider carrying
out a formal tender process once the regulatory position is clear.
Audit
fees
Non-audit
fees
Total fees
paid
Non-audit
fees as a %
of audit fees
There are no contractual obligations restricting the Company’s
choice of external auditors.
Year
£m
2013
2012
2.1
2.0
1.7
1.1
3.8
3.1
81%
55%
The nature of services received from and fees paid to the external
auditors during the year include tax compliance and HR advisory services.
PwC also provides specific assurance to the Committee on the
arrangements and safeguards it has in place to maintain its
independence and objectivity, including an internal process to
pre-approve provision of non-audit services and the use of separate
teams where non-audit services are being provided to the Group.
The external auditors follow regulatory requirements to maintain
the objectivity of the audit process, which stipulate in relation to the
senior engagement auditor, a five year rotation policy. Stuart Watson
was appointed as lead audit partner in 2009 and has now come to
the end of his tenure with Cobham. Stuart will be succeeded by
Pauline Campbell. The Committee is satisfied that the external
auditors remain independent.
Auditor appointment and effectiveness
The Committee conducts an annual review of the performance
of the external auditors, including feedback from the finance teams
at each of the operating companies. This review was conducted
Internal audit
During the year, prior to each of the five scheduled Committee
meetings, the Chairman of the Committee met with the Head of
Internal Audit and his reports were reviewed and discussed in detail.
The Committee considered the results of the internal audits and
the adequacy of management’s response to matters raised in them,
including the time taken to resolve any such matters.
In February 2014, the Committee conducted an annual review of
the effectiveness of the Group’s internal audit function, including
its terms of reference, its audit plans, its general performance and
its relationship with the external auditors. The Committee is satisfied
that the internal audit function continues to provide an effective
internal audit service.
M Wareing
Audit Committee Chairman
5 March 2014
www.cobham.com
Cobham plc Annual Report and Accounts 2013
47
Corporate Governance Directors’ Remuneration Report
We have undertaken a review of our remuneration report to respond
to regulatory requirements and in preparation for the first binding vote
on our remuneration policy. We have set out where we may need to
exercise our discretion and it is important to recognise that no change
to our existing, shareholder agreed, policy has been implemented.
Finally, as I will be retiring from the Board and therefore my role of the
Chairman to the Remuneration Committee, we appointed one of my
fellow committee members to the role. Alison Wood will be taking up
her new role as Chair of the Committee immediately following the AGM.
I hope that we can rely on your vote in favour of the Annual Report
and Accounts on remuneration and our Directors’ remuneration policy
for future years.
Dr J Patterson
Remuneration Committee Chairman
Overview
Membership and attendance
J Patterson (Chairman)
J Devaney1
M Ronald
A Wood
Number of meetings attended/held
4/4
1/2
4/4
4/4
1 During the year, the Committee membership was reduced to three Non-executive
Directors. The Company Chairman ceased to be a member of the Committee
with effect from 25 September 2013, although he continues to attend meetings
by invitation of the Remuneration Committee Chairman as appropriate.
No individual is present in meetings relating to decisions around their own remuneration.
The Committee’s terms of reference are available on the Company’s website or on
application to the Company Secretary.
Other attendees
Executive Vice President HR, Vice President Compensation
and Benefits, Deloitte LLP, CEO (attends by invitation).
Role and focus
The Remuneration Committee’s main duties are to:
• Make recommendations to the Board on the Group’s policies
on Executive Directors’ remuneration and ensure alignment
to the Group’s Strategic Plan; and
• Determine, on the Board’s behalf, the specific remuneration
packages of the Chairman, Executive Directors, Group Executive
and Company Secretary.
Priorities for 2014
• Secure positive support for the remuneration policy and
oversight to ensure it continues to support the achievement
of the Group’s Strategic Plan, the demonstration of the
required behaviours and the retention of high potential,
high performance, key skilled resource; and
• Review how advice is provided by the Committee.
Dear Shareholder
2013 was a year of change for the Group. It was the first full year for our
new CEO which saw the completion of his relocation to the UK from
the US, although he was employed on and will remain on US terms and
conditions. In addition, we managed the change of CFO with Warren
Tucker handing over to Simon Nicholls during the course of the year.
Cobham has a diverse portfolio of businesses and, while some of the
businesses performed very well, those exposed to defence in general
and the US defence market in particular, had a difficult year. The
short term effect was to depress EPS, one of our longer term reward
parameters. However, the Group has won a number of significant
long term contracts and the management team is making good
progress in reshaping the Group. These changes have been recognised
by the market, leading to a 33% TSR achieved in the year and the good
free cash flow (which is a key annual reward parameter) has allowed
us to cover a 10% increase in the dividend.
The salary of the CEO was increased in line with the whole employee
group, while the outgoing CFO received no base salary increase.
The Annual Incentive Plan paid out 41% of the maximum to Bob
Murphy and 39% (pro rata) to Simon. Warren was awarded 8/12
of his maximum annual bonus against a set of time and individual
performance criteria at his agreed departure date.
Long term incentive awards were made to the Executive Directors
in line with our normal practice, neither of whom have been with
Cobham long enough for any of their LTIPs to mature. Warren
was not awarded any LTIPs in the year, while his maturing 2011
Performance Share Plan was significantly reduced at 9% of the award.
All elements of the Executive Director remuneration packages
are detailed in the body of the report. Of note this year are the
non-recurring payments driven by the departure of Warren and the
recruitment of Simon, which are shown in the single figure table on
page 55. Warren did not receive any payments for loss of office, but
did receive a pro-rated annual bonus payment based on personal
performance and was treated as a good leaver under the Performance
Share Plan. Simon received a buy-out award upon appointment in
respect of remuneration foregone at his previous employer. The
value of this award was equivalent to the expected value of the
remuneration foregone and will vest over the same time horizons.
48
Cobham plc Annual Report and Accounts 2013
The Directors’ Remuneration Policy
While we have not made any changes to our remuneration policy, this is the first time we have publicly articulated our policy in preparation
for a binding vote. The table below sets out the remuneration policy that the Company intends to apply following the AGM on 24 April 2014,
which will become binding from that date, subject to shareholder approval.
Remuneration and policy (the policy table)
Element
Base
pay
Other
benefits
Retirement
benefits
Current
performance measures
Not applicable
Purpose and
link to strategy
Operation
Maximum
potential value
To provide fixed
remuneration which
is market competitive
to attract and retain
executives of the
quality required to
deliver the Group’s
strategy, while taking into
account an individual’s
experience and personal
contribution to the
Group’s Strategic Plan.
Reviewed annually and paid monthly
with changes typically effective from
1 March.
Consideration is given to a wide range
of factors including:
• Individual and Company performance;
• General pay increases across the
wider workforce;
• The size and scope of the role; and
• Pay levels of comparable roles in
companies of a similar size and
complexity to the Company.
To avoid setting the expectations of
Executive Directors and other employees,
no maximum salary is set under the
Remuneration Policy.
However, base salary increases for the
Executive Directors are applied in line with
the outcome of the annual review and will
typically be in line with the average increase
for the wider workforce.
Increases may be made either above or
below that received by the wider workforce
to take account of individual circumstances,
which may include but are not limited to:
• A change in the scope of the role or increase
in responsibility;
• A significant change in the size and
complexity of the Group; and
• An individual’s development or
performance in role (e.g. a newly
appointed executive director being
moved to be aligned with the market
over time).
To provide fixed
remuneration which
is market competitive
to attract and retain
executives of the
quality required to
deliver the Group’s
strategy, while taking
into account an individual’s
experience and personal
contribution to the
Group’s Strategic Plan.
The Company provides various market
competitive benefits to Executive Directors,
which may include: a company car
(or cash equivalent), travel allowance,
private medical and dental insurance,
travel accident policy, life assurance
and long term disability benefit.
Where appropriate, other benefits may
be provided to take account of individual
circumstances, such as but not limited to:
expatriate allowances, relocation expense,
housing allowance and education support.
No maximum level of benefit is set under
the remuneration policy and the
Remuneration Committee sets the level it
considers appropriate taking into account
relevant market levels based on the nature
and location of the role.
None
Level of benefits set are in line with those
paid to other senior executives and with
regard to the market.
To provide fixed
remuneration which
is market competitive
to attract and retain
executives of the
quality required to
deliver the Group’s
strategy, while taking
into account an individual’s
experience and personal
contribution to the
Group’s Strategic Plan.
The Company may make a payment
into a pension scheme (e.g. a defined
contribution plan) and/or make a cash
allowance payment set as a percentage
of salary.
Set at a level which the Remuneration
Committee considers appropriate taking
into account relevant market levels based
on the nature and location of the role.
None
Contributions of up to 30% of base salary
may be made to take account of a change
in the scope of the role or increase in
responsibility.
The contribution levels for 2014 are below
this level (20% of salary) as disclosed in the
annual report on remuneration.
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Cobham plc Annual Report and Accounts 2013
49
Corporate Governance Directors’ Remuneration Report continued
Purpose and
link to strategy
Operation
Maximum
potential value
Current
performance measures
Element
Annual
Incentive
Plan (AIP)
Performance is
assessed over a
single financial
year based on a
combination
of financial and
individual metrics
which are aligned
to the strategic
objectives of
the Company.
The majority
of the bonus
is assessed against
key financial
performance
metrics of the
business and the
balance based
on individual
performance.
For target
performance,
up to 50% of the
maximum bonus
opportunity will
be received.
Performance is
assessed over more
than one financial
year, usually at least
three years against
key financial metrics
aligned to the Group’s
Strategic Plan.
A matching award
of 0.5:1 Ordinary
Share is received for
achieving threshold
performance.
Drives and rewards
annual performance
against selected financial
and operational KPIs and
individual objectives that
are directly linked to the
Group’s Strategic Plan.
The maximum opportunities for 2014,
as disclosed in the annual report on
remuneration, are 120% of salary for
the CEO and 100% of salary for the CFO.
The maximum bonus opportunity for
any Executive Director will not exceed
150% of salary. Any opportunity above
the 2014 levels noted above will only be
made where the Committee considers
there to be a commercial rationale that
may include but is not limited to:
• A change in the scope of the role or
increase in responsibility;
• A reduction to other elements of the
remuneration package; and
• A significant change in the size and
complexity of the Group.
Any increases above the current
opportunities will also normally be
subject to shareholder consultation.
Measured over a one-year performance
period with pay-out levels determined
by the Committee following the year-end.
The Committee may adjust the bonus
pay-out, either up or down, should the
formulaic outcome be considered not to
reflect underlying business performance.
75% of any bonus is paid in cash and
up to 25% of any bonus is mandatorily
deferred into Company shares for a
period of three years.
Up to a further 25% of any bonus may
be voluntarily deferred into shares in the
Company for a period of three years under
the BCP (see below).
Clawback provisions are in place which
give the Committee discretion to reduce
awards or require repayment of cash paid
to a participant in relation to annual
incentives within the preceding 12 months
for material misstatement of financial
results, reputational damage to the Group,
contravention of internal ethics standards
or gross misconduct of the individual.
Deferred share awards may be released
early on a change of control in line with
the plan rules.
The Committee may make a dividend
equivalent payment (Dividend Equivalents)
to reflect dividends that would have been
paid over the deferral period on shares that
vest. This payment may be in the form of
additional shares or a cash payment equal
to the value of those additional shares.
Bonus
Co-investment
Plan (BCP)
This plan
forms part
of the LTI
programme.
Incentivise sustainable
profitable growth and
sector outperformance
aligned with the Group’s
Strategic Plan.
Reward share price
and dividend growth,
providing alignment with
shareholders’ interests.
Individuals may receive a matching award
under the BCP in respect of any bonus
deferred subject to the achievement
of performance conditions.
The Committee may adjust the level
of the matching award vesting, either
up or down, should the formulaic outcome
be considered not to reflect underlying
business performance.
Supports retention and
promotes share ownership.
Dividend Equivalents may be made as
detailed above under the AIP but in
respect of the performance period.
The maximum matching award is 1:1
on any net bonus deferred up to 50%
of the bonus earned.
The matching award of shares is provided
against the gross bonus invested.
Clawback provisions are in place as detailed
above under the AIP.
Upon a change of control, awards will vest
to the extent specified by the Remuneration
Committee after taking into account those
factors it thinks are relevant. These may
include but are not limited to the extent
to which the performance conditions have
been satisfied and the period elapsed since
the date of grant.
50
Cobham plc Annual Report and Accounts 2013
Operation
Maximum
potential value
Awards are made under the rules
of the PSP, which were approved
by shareholders at the 2007 AGM.
Conditional share awards or nil-cost
options of up to 150% of base salary
may be granted annually.
Element
Performance
Share
Plan (PSP)
This plan
forms part
of the LTI
programme.
Purpose and
link to strategy
Incentivise sustainable
profitable growth and
sector outperformance
aligned with the Group’s
Strategic Plan.
Reward share price
and dividend growth,
providing alignment
with shareholders’ interests
over the longer term.
Supports retention and
promotes share ownership.
Executive
Share
Option
Scheme
(ESOS)
Incentivise sustainable
profitable growth and
sector outperformance
aligned with the Group’s
Strategic Plan.
This scheme
forms part
of the LTI
programme.
Reward share price
and dividend growth,
providing alignment with
shareholders’ interests.
Supports retention and
promotes share ownership.
All employee
share schemes
Provides all employees,
including Executive
Directors the opportunity
to voluntarily invest
in Company shares.
Awards are made on an annual basis
and will vest subject to performance
after a period of at least three years.
The Committee may adjust the level
of vesting, either up or down, should
the formulaic outcome be considered
not to reflect underlying business
performance.
Dividend Equivalents may be made
as detailed above under the AIP but
in respect of the performance period.
Change of control provisions apply
as detailed in the BCP section above.
Clawback provisions are in place
as detailed above under the AIP.
Awards are made under the rules of the
ESOS, which are currently proposed for
updated approval at the 2014 AGM.
Awards under the ESOS are not currently
made to Executive Directors. No awards
will be made in any year in which an
Executive Director receives an award
under the PSP.
The Committee may adjust the level
of vesting, either up or down, should
the formulaic outcome be considered
not to reflect underlying business
performance.
Options can become exercisable on a
change of control of the Company, or with
the consent of the acquiring company, a
grant of equivalent rights may be made.
The Company operates a SAYE scheme
and SIP scheme, which are both HMRC
approved plans.
In accordance with the plan rules, which
were approved by shareholders at the
2007 AGM, the individual limit of 150% of
salary can be exceeded in exceptional
circumstances involving the recruitment or
retention of a senior employee by approval
of the Committee.
Annual awards may be made with an
aggregate market value of 200% of salary.
Current
performance measures
Performance is
assessed over more
than one financial
year, usually at least
three years against
key financial metrics
aligned to the Group’s
Strategic Plan.
The threshold level
of vesting may be
up to 16.7% of the
maximum award.
Performance would
be assessed over
more than one
financial year, usually
at least three years
against key financial
metrics aligned to the
Group’s Strategic Plan.
Maximum limits are set in line with the
HMRC savings limit for approved plans.
None
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Cobham plc Annual Report and Accounts 2013
51
Corporate Governance Directors’ Remuneration Report continued
Notes to the policy table
Policy for the remuneration of employees generally
The Company values its wider workforce and aims to provide a
remuneration package that is based on a mixture of Group and
personal performance. As the Group is worldwide and operates in
different countries, employees are appropriately remunerated taking
account of the market in the employees’ jurisdiction of employment.
The following key principles of the remuneration policy outlined
above are applied consistently across the employee population:
• To offer a level of remuneration that is appropriate to attract,
retain, motivate and reward employees to deliver the Group’s
Strategic Plan without paying more than is necessary; and
• To seek to remunerate fairly, competitively and consistently
for each role with due regard to the marketplace, internal
consistency and the Group’s ability to pay.
When determining remuneration arrangements for Executive
Directors, the Committee takes into consideration, as a matter of
course, the pay and conditions of employees throughout the Group.
In particular, the Committee paid specific attention to the level of
salary increases and the size of the annual bonus pool in the wider
population, with particular reference to the year on year change to
these figures. No consultation with employees takes place in relation
to determining the Directors’ Remuneration Policy.
Performance measures and targets setting
The annual bonus is assessed against both financial and individual
targets determined by the Committee. This incentivises Executives
to focus on delivering the key financial goals of the Company as well
as specific strategic objectives for each Director, which are aligned
to delivering the Group’s Strategic Plan and ensuring Executives
exhibit the right behaviours. Targets are set on an annual basis
taking into account the budget forecast and at a level which the
Committee considers to be stretching.
Long term performance measures under the BCP and PSP are
chosen by the Committee to be aligned with the long term strategy
of the business. They are selected to be aligned with the interests
of shareholders and incentivise the delivery of strong, sustainable,
financial performance. Targets are set at the time of grant taking
into account internal and external forecasts and the market
environment. Where TSR is selected as a performance measure,
no awards will vest for below median performance.
Application of remuneration policy
The best way to demonstrate how our policy works is to provide
examples of pay-outs under different scenarios.
The charts below illustrate the application of the remuneration
policy set out in the policy table for each Executive Director
for 2013 under different scenarios:
CEO – R Murphy
Maximum
35%
26%
39%
Total
£3.1m
Target
Minimum
63%
24% 13%
Total
£1.7m
100%
Total
£1.1m
£m
0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
CFO – S Nicholls
Base salary, benefits and pension
AIP
LTIs
Maximum
34%
26%
40%
Total
£1.5m
Target
61% 24% 15%
Total
£0.8m
Minimum
100%
Total
£0.5m
£m
0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Base salary, benefits and pension
AIP
LTIs
Assumptions
Maximum
performance
(Maximum)
On-target
performance
(Target)
Below threshold
performance
(Minimum)
Total fixed pay as minimum below, plus:
Assumes 100% pay-out under the AIP (120%
of base salary for R Murphy, 100% for S Nicholls).
Assumes 100% pay-out under the BCP Equivalent
to 1 to 1 share match based on 50% investment
of maximum AIP, noted above, mandatory and
voluntary, (R Murphy only).
Assumes 100% pay-out under the PSP (150% of
base salary for both).
Total fixed pay as minimum below, plus:
Assumes 50% pay-out under the AIP (60%of
base salary for R Murphy, 50% for S Nicholls).
Assumes 50% pay-out under the BCP (aligned with
threshold performance). Equivalent to 0.5 to 1 share
match based on 50% investment of target AIP, noted
above, mandatory and voluntary, (R Murphy only).
Assumes 16.7% pay-out under the PSP (aligned with
threshold performance).
Fixed elements of remuneration only – base salary,
benefits and pension only (salary payable through the
year under report and benefits and pension equivalent to
that included in the single figure calculation on page 55):
refer to the notes below that table for the detail.
Note:
As required by the regulations, the scenarios do not include any share price
growth assumptions or take into account any dividends that may be paid.
52
Cobham plc Annual Report and Accounts 2013
Policy table for the Chairman and Non-executive Directors
Component
Approach of the Company
Chairman fees
Non-executive
Director fees
Benefits
The Remuneration Committee and the Senior
Independent Director determine the fees of the
Chairman and set the fees at a level that reflects
the skills, knowledge and experience of the individual,
while taking into account appropriate market data.
The fee is set as a fixed annual fee and may be
paid wholly or partly in cash or Company shares.
The Executive Directors Committee determines the
fees of the Non-executives. Fees are set taking into
account the size and complexity of the business and
the expected time commitment and contribution
for the role.
Fees are structured as a basic fee with additional
fees payable for membership and/or chairmanship
of a committee or other additional responsibilities.
The fee is set as a fixed annual fee and may be paid
wholly or partly in cash or Company shares.
An additional allowance may be provided in respect
of additional travelling time required to attend Board
meetings for those Directors who are based outside
of the UK.
Approach to recruitment remuneration
When determining the remuneration package for a new Executive
Director, the Committee will apply the following principles:
• The package will be market competitive to attract and retain
individuals of the calibre required to lead the business and deliver
our strategic goals;
• Typically, the remuneration package will be aligned in accordance
with the Company’s remuneration policy set out above. However,
should business needs require, the Remuneration Committee has
the discretion to include other remuneration elements which are
not included in the remuneration policy, subject to the overall limit
on variable remuneration set out below. The Committee does not
intend to use this discretion to make non-performance related
incentive payments (for example, a golden hello). Any movement
from the policy outlined in the table above would only be considered
where there is a commercial rationale for doing so, which will be
disclosed in the following annual remuneration report; and
• To secure an appointment the Remuneration Committee may
need to make awards to buy out an external candidate’s
remuneration arrangements that are forfeit as a result of leaving
their previous employer. In doing so, the Committee will take into
account all relevant factors which may include the form and time
horizon of awards, any performance conditions attaching to the
awards and the likelihood of awards vesting. The Committee will
typically seek to buy out awards on a comparable basis to those
forfeit, with the intention that the value awarded would be no
higher than the expected value of the forfeit arrangements.
The maximum level of variable remuneration that may be granted to
a new Executive Director on appointment (excluding any buy out of
forfeit awards discussed above) will be 375% of salary, being aligned
with the sum total of the stated policy for all variable remuneration
for current Executive Directors:
•
•
For any internal candidates, remuneration commitments made
prior to the appointment as Director may continue to be
honoured, notwithstanding compliance with the remuneration
policy set out above; and
The remuneration package for a newly appointed Non-executive
Director would be in line with the structure set out in the policy
table for Non-executive Directors.
Any share awards referred to in this section will be granted as far as
possible under the Company’s existing share plans, if necessary, and
subject to the limits referred to above, recruitment awards may be
granted outside these plans as currently permitted under the listing
rules which allow for the grant of awards to facilitate, in exceptional
circumstances, the recruitment of a Director.
Service contracts and payment for loss of office
The Board’s policy for current and new Executive Directors is that
service contracts have a notice period that should not exceed one
year. However, it recognises that it may be necessary in the case of
new executive appointments to offer a longer initial notice period,
which would subsequently reduce to one year.
Non-executive Directors have letters of appointment to the Company
whereby their appointment may be terminated by a maximum of one
month’s written notice.
The current Executive Directors’ service contracts are terminable
on 12 months’ notice by either party and can be terminated for cause,
which is defined in the contract. The Company may elect to terminate
Executive Directors’ service contracts by making payments in lieu of
notice which will not exceed 12 months’ salary and benefits, which can
also include, but are not limited to, pension, outplacement and legal fees.
Payments in respect of AIP may also be payable on the date of leaving
in cases such as ill health or retirement. These will be pro-rated to
reflect the proportion of the financial year worked and subject to
performance achieved. In the case of voluntary termination, the AIP
may be paid for the period worked until resignation and for any part
of the notice period that the departing Executive continues to work,
subject to the achievement of objectives, set at the Committee’s
discretion. The Company recognises and endorses the obligation
of departing Directors to mitigate their own losses.
The treatment of unvested shares under the BCP, PSP and ESOS will be
as set out in the relevant plan rules. The table below provides details
of the treatment that would apply under the plan rules depending on
the reason for cessation of employment. To the extent that an award
does not vest in accordance with these terms, the award will lapse.
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Cobham plc Annual Report and Accounts 2013
53
Corporate Governance Award will vest at the time and to the extent determined by the Committee
after taking into account the extent to which the performance target to which
it is subject has been met and the extent that the relevant period has elapsed
at the date of cessation of employment.
Award will lapse unless the Committee determines to preserve and vest all
or part of the award on any terms it thinks fit.
Award will become exercisable at the time and to the extent determined by
the Committee after taking into account the extent to which the performance
target to which it is subject has been met and the extent that the relevant
period has elapsed at the date of cessation of employment. Awards are
exercisable within six months of date of cessation of employment, with the
exception of death where this period is 12 months.
Award will lapse unless the Committee determines to preserve and vest all
or part of the award on any terms it thinks fit.
Payments in relation to existing remuneration arrangements
The Committee reserves the right to make any remuneration
payments and payments for loss of office (including exercising
any discretions available to it in connection with such payments),
notwithstanding that they are not in line with the policy set out
above where the terms of the payment were agreed:
• Before the policy came into effect; or
• At a time when the relevant individual was not a Director of the
Company and, in the opinion of the Committee, the payment
was not in consideration for the individual becoming a Director
of the Company.
For these purposes, ‘payments’ includes the Committee satisfying
awards of variable remuneration; and, in relation to an award over
shares, the terms of the payment are agreed at the time the award
is granted.
Directors’ Remuneration Report continued
Plan
PSP and BCP
Reasons for leaving
Treatment
Good leaver provisions – death, ill health, injury or
disability, redundancy or retirement.
Voluntary resignation/any other reason.
ESOS
Good leaver provisions – death, ill health, injury or
disability, redundancy or retirement.
Voluntary resignation/any other reason.
Where a buy-out award is made under the listing rules, the leaver
provisions would be determined at the time of the award.
The Committee reserves the right to make additional exit payments
where such payments are made in good faith in discharge of an
existing legal obligation (or by way of damages for breach of such
an obligation) or by way of settlement or compromise of any claim
arising in connection with the termination of a Director’s office
or employment.
In doing so, the Committee will recognise and balance the interests
of shareholders and the departing Executive Director, as well as
the interests of the remaining Directors. Where awards which are
permitted to vest are subject to performance conditions, these
would only be assessed at the end of the relevant period(s).
For Non-executive Directors, discretion is retained to terminate
with or without due notice or paying any payment in lieu of notice
dependent on what is considered to be in the best interests of the
Company in the particular circumstances.
Statement of consideration of shareholder views
The Committee is committed to regular and transparent communication
with shareholders. We believe this ensures we understand shareholders’
views on our arrangements and are able to take their comments into
consideration when reviewing our remuneration policy.
At the end of 2012, a review of the current remuneration package
was undertaken to simplify arrangements, rebalance the performance
metrics in line with current strategy and to provide clearer line of
sight against targets for those participants in the incentive plans.
Major shareholders and representative bodies were consulted
following this review and we received a supportive response.
54
Cobham plc Annual Report and Accounts 2013
The Annual Report on Remuneration
Single total figure of remuneration for each Director (audited information)
Executive Directors
The single figure table below is completed for each person who served as an Executive Director of the Company at any time during the financial
year, together with comparatives.
Single total figure table
£k
R Murphy
2013
2012
S Nicholls
2013
W Tucker
2013
2012
Salary
and fees
Taxable
benefits
Annual
Incentive
Plan
Long term
incentives
Pensions
680
313
267
296
441
294
195
11
17
18
280
182
104
296
191
687
–
–
65
335
117
63
53
120
150
Total
2,058
753
435
794
1,135
Additional disclosures in respect of the single total figure of remuneration (audited information)
Salary and fees
Bob Murphy’s employment terms and conditions are based on US law and his salary payments are made in US dollars and have been converted
to UK pounds using the average annual conversion rate of $1.5657:£1, the same conversion rate as is used elsewhere in the accounts. Bob’s 2012
salary was $1,040,000 (pro rata) as reported in the Annual Report and Accounts 2012. On 1 March 2013, his salary was increased by 3%, in line with
the pay increases made across the business, to $1,071,200.
Simon Nicholls was appointed on a salary of £400,000 per annum; the amount shown in the above table is pro-rated from his 1 May 2013 start date.
Warren Tucker’s base salary was not increased in the 2013 annual pay review.
Taxable benefits
The benefit figures are as follows:
Benefit
Car allowance
Private petrol allowance
Relocation expenses
Private medical insurance, disability cover and life insurance
Expatriation allowance
Allowance to cover financial/tax advice
R Murphy
£k ($k)
7 (11)
–
100 (157)
40 (62)
128 (200)
19 (30)
S Nicholls
£k
W Tucker
£k
10
–
–
1
–
–
11
4
–
1
–
1
As disclosed last year, Bob Murphy was entitled to be reimbursed up to $624,000 (60% of his base salary) for the reasonable costs associated
with his relocation from the US to the UK. The actual cost of his relocation was $812,522, split over 2012 and 2013. Bob’s actual relocation
expenses were reasonable and customary, and in line with relocation expenses paid to other senior executives in the Group. On this basis,
the Committee exercised its discretion to approve the payment of the full cost of Bob’s relocation from the US to the UK.
Andy Stevens, who retired from his position as a member of the Board in August 2012, was reimbursed business expenses totalling £3,632 during 2013.
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Cobham plc Annual Report and Accounts 2013
55
Corporate Governance Directors’ Remuneration Report continued
2013 AIP
AIP payments made for the 2013 performance year are calculated as follows:
Metric
Trading profit
Free cash flow (before restructuring)
Weighting
Performance
Full year target
£m
70%
30%
Threshold
Target
Maximum
Threshold
Target
Maximum
308.5
321.9
335.3
203.4
224.8
234.8
Actual
£m
314.8
205.3
Note:
Trading profit and cash flow metrics are adjusted for the impact of acquisitions and disposals during the year. Performance conditions are
set at standard translation exchange rates. The actual results are normalised to these rates for assessment purposes. Trading profit and free
cash flow are discussed in more detail in note 3 to the Group Financial Statements and in the KPI definitions on page 140. The above results
achieve a business performance factor (BPF) of 0.65.
R Murphy
S Nicholls
Target bonus
(% of salary)
BPF as per
table above
120
100
0.65
0.65
Individual
performance
factor
1.05
1.2
% of salary
achieved
41
39
Amount
of AIP to be
paid £k ($k)
280 (438)
104
% subject
to mandatory
deferral
25
25
% of which
can be
voluntarily
deferred
25
N/A
The individual performance factor is made up of personal objectives including achievements against financial and profitable growth metrics,
customer satisfaction, operational excellence, safety, talent development, and inventory control.
During 2013, Warren Tucker stood down from his role as Executive Director and CFO of the Company and was replaced by Simon Nicholls,
with effect from 1 May 2013. Warren remained with the Company until 31 August 2013 to ensure an efficient and effective handover was
given to his successor, to provide advice on various transactions the Company was considering and assist with the delivery of the half year
results. He was paid 8/12 of the maximum annual incentive he would have been entitled to had he stayed with the Company until the normal
incentive payment date, based on performance against his personal objectives only.
Long term incentives
Warren Tucker’s LTI amount relates to the awards granted under the PSP in 2011. Vesting was dependent on performance over the three
financial years ended 31 December 2013. The performance achieved against the performance targets is shown below:
Performance
condition
1/2 TSR
1/2 EPS
Level
Performance
Maximum (maximum)
Threshold (target)
TSR equal to peer
group TSR index
TSR equal to or
greater than peer
group TSR index
plus 10%
Threshold (target) EPS growth of 3% per
annum over the
period of the vest
EPS growth equal to
or greater than 11%
during the year
Maximum (maximum)
% of award
vesting at
that level
16.7%
100%
16.7%
100%
Performance
achieved
Index (9.4%) per
annum/0% vest
Total %
vest
3.2% per
annum/18.2% vest
9.1% vest
56
Cobham plc Annual Report and Accounts 2013
The award held by Warren Tucker was as follows:
PSP 2011
Total
No of
shares
awarded
262,285
No of
shares
vested
23,868
23,868
Value of
shares
vesting
£k
65.4
65.4
The PSP will vest at 9.1% on 10 March 2014 based on the performance conditions measured over the three financial years ended 31 December
2013 and outlined on page 56. As the awards had not vested at the date of this report, the average share price for the last three months of the
financial year of 273.8 pence has been used to determine the value for the purposes of the single total figure.
The Committee used its discretion and treated Warren Tucker as a good leaver under the relevant plan rules in recognition of his agreement
to remain on the Board for a period of 18 months beyond his desired departure date to allow CEO succession and until a successor was found
for the CFO role. Warren was not granted any awards under LTI arrangements during 2013.
Warren Tucker’s 2012 vested long term incentives and SAYE and SIP holdings were disclosed in the Annual Report and Accounts 2012 and
are included in the 2012 long term incentive plan figure above, as appropriate.
Bob Murphy’s long term incentives figure above covers the vesting of three awards made to him as buy-out awards to compensate for
forfeited equity from his previous employers as a result of leaving to join Cobham. The three awards, which were disclosed in full in the
Annual Report and Accounts 2012, are set out below:
Awards vesting
126,779
72,305
72,305
Date of vest
29 April 2013
29 April 2013
16 December 2013
Valuation
(pence per share)
248.3
248.3
266.7
All shares have been valued at the mid-market quotation (MMQ) price on the date of vesting.
Pensions
The Company contributes to Bob Murphy’s retirement plan at the rate of 20% of his base salary. This is comprised of participation in two plans:
• A qualified 401k plan, which has limits on the level of contribution that can be made to it; and
• An executive retirement plan, non-qualifying.
During 2012, he had reached the contribution level in the 401k plan by contributions made by his previous employer. Therefore, his pro-rated
contributions of £62,686 were paid in full to the executive retirement plan.
£k
Contributions to 401k plan
Contributions to executive retirement plan
Total
2013
10
107
117
2012
–
63
63
Simon Nicholls’ pension figure is a combined amount of £33,333 to an executive defined contribution plan and £20,000 paid as a cash
allowance in lieu of additional defined contribution arrangements. Together these payments represent a rate of 20% of his base salary.
Warren Tucker’s pension figure is a combined amount of £49,400 paid into a defined benefit pension scheme. The defined benefit pension
scheme retirement age for funding purposes is 60; however, the Director may retire from age 55. A further £70,944 was paid as cash allowance
in lieu of a defined contribution top-up arrangement.
The Company has obtained written confirmation from each Director that they have disclosed all other items in the nature of remuneration.
www.cobham.com
Cobham plc Annual Report and Accounts 2013
57
Corporate Governance Directors’ Remuneration Report continued
Non-executive Directors (audited information)
The 2013 remuneration, current fees and the details of the terms of appointment of the current and past Non-executive Directors,
including the Chairman, are stated below:
Full year fees*
Actuals payable
£k
Commencement
date
Expiry
date
J Devaney (Chairman) 1 February 2010
M Beresford
J Patterson
M Ronald
M Hagee
M Wareing
A Wood
D Flint
Total Non-executive
Director remuneration
*Members of the Nomination Committee do not receive any additional fees.
24 April 2016
25 April 2013
31 October 2014
24 April 2016
2 December 2014
1 December 2016
1 July 2014
1 May 2016
1 March 2004
1 November 2005
8 January 2007
3 December 2008
1 December 2010
1 July 2011
1 May 2013
Base
fee
270
55
55
55
55
55
55
55
Committee
fee
Senior
Independent
Director
–
5
12.5
2.5
5
10
2.5
2.5
–
10
–
–
–
10
–
2013
270
23
68
63
65
72
58
38
657
2012
470
70
68
63
65
65
55
–
856
Notes:
1. Non-executive Directors only receive fees under their service agreement and do not have any other taxable benefits, annual or long term
incentives or pension arrangements provided by the Company.
2. Difference between full year fee and actual is explained by an individual commencing or retiring during the year or prior year or by the
payment of a fee of £5,000 per annum in respect of travelling time for the two Directors based in the US.
3. The Company has obtained written confirmation from each Director that they have disclosed all other items in the nature of remuneration.
4. The fee for the Senior Independent Director shown above has been pro-rated for length of service in that role.
Total aggregate Directors’ fees for the year, including the Executive Director fees as per the single figure table above, amount to £3,944,000.
58
Cobham plc Annual Report and Accounts 2013
Scheme interests awarded during the financial year (audited information)
The following table sets out the awards made under the long term incentive plans to Executive Directors during the year.
R Murphy
Type of
award
Performance
Share Plan
(performance
share award)
Basis of which
award is made
Date of
award
150% of base salary
14 March 2013
Face value
of award
£1,078,523
Performance
period
Performance
conditions
1 January 2013 to
31 December 2015
Bonus Co-investment
Plan (performance
share award)
Mandatory 25% of
retained, earned AIP
28 March 2013
£18,449
1 January 2013 to
31 December 2015
S Nicholls
Performance
Share Plan, nil-cost
options (performance
share award)
150% of base salary
15 August 2013
£600,000
1 January 2013 to
31 December 2015
Buy-out award
(performance
share award)
15 August 2013
Loss of value of
vested equity forfeit
from former employer;
see note 4 below
£254,053
15 August 2013 to
1 May 2016
Equal split between
TSR, EPS and cash
conversion; see note
5 below giving details
of the performance
conditions.
Economic profit
measure is considered
to be price sensitive
and is not disclosed
until the year of
vesting.
Equal split between
TSR, EPS and cash
conversion; see note
5 below giving details
of the performance
conditions.
Continued
employment with
a member of the
Cobham Group
at the date of the vest.
Notes to the table for scheme interests awarded during the year:
1. All awards have been made in accordance with the relevant scheme rules.
2. Warren Tucker was not awarded any scheme interests during 2013.
3. The face value has been calculated by multiplying the number of shares awarded by the MMQ price of those shares for the three
trading days immediately preceding the date of the award.
4. This award is in recognition of the loss of value in vested equity forfeit from his former employer and vests in three tranches matched
to when Simon Nicholls would have received the equity releases, with the final vest on 1 May 2016.
5. Performance conditions for the PSP are set out in the table below:
Performance
condition
1/3 TSR
1/3 EPS
1/3 Cash Conversion
Level
Below threshold (minimum)
Threshold (target)
Maximum (maximum)
Below threshold (minimum)
Threshold (target)
Maximum (maximum)
Below threshold (minimum)
Threshold (target)
Maximum (maximum)
Performance
% of award
vesting
at that level
TSR less than peer group TSR index
TSR equal to peer group TSR index
TSR equal to or greater than peer group TSR index plus 10%
EPS growth less than 3%
EPS growth of 3% during the year
EPS growth equal to or greater than 10% during the year
Cash conversion less than 90% during the year
Cash conversion of 90% during the year
Cash conversion equal to or greater than 90% during the year
–
16.7%
100%
–
16.7%
100%
–
16.7%
100%
EPS and cash conversion are defined in the KPI definitions on page 140.
www.cobham.com
Cobham plc Annual Report and Accounts 2013
59
Corporate Governance Directors’ Remuneration Report continued
TSR peer group
The companies in the TSR comparator group for awards granted in 2013 are:
Harris
BAE Systems
ITT Industries
Esterline
L-3 Communications
Finnmeccanica
Meggitt
Flir Systems
Northrop Grumman
QinetiQ
Raytheon
Rockwell Collins
Smiths Group
Teledyne Technologies
Thales
Ultra Electronics
Statement of Directors’ shareholding and share interests (audited information)
Executive Directors’ share interests
The interests of the Executive Directors in share awards or share options are shown below (note: there are no options which have vested
but not yet been exercised):
Director/award
R Murphy
Buy-out award 2012
PSP 2012
PSP 2013
BCP 2013
Total
S Nicholls
Buy-out award 2013
PSP 2013
Total
Share awards
subject to
performance
conditions
Share awards
subject to
continued
employment
Unvested
options
subject to
performance
awards
451,917
453,924
7,564
913,405
–
72,305
72,305
–
86,442
86,442
204,151
204,151
Warren Tucker’s only remaining share interests are shown in the table at the top of page 57.
During the year, the following gains on the exercise of ESOS or PSP nil-cost options were made by the Executive Directors:
Director/award
W Tucker
ESOS 2004 Approved
ESOS 2004
ESOS 2005
ESOS 2006
ESOS 2007
ESOS 2008
ESOS 2008
ESOS 2009 Approved
ESOS 2009
Total
No of
options
exercised
Date of
exercise
Option
exercise price
(pence per share)
Market value at
exercise date
(pence per share)
Gain on exercise
of share option
(£k)
2006
2006
2007
2008
2009
2010
2010
2011
2011
22,260
133,600
180,070
186,154
178,826
84,356
106,094
3
176,211
1,067,574
31 May 2013
31 May 2013
31 May 2013
31 May 2013
31 May 2013
31 May 2013
9 August 2013
9 August 2013
9 August 2013
134.7
134.7
133.7
185.3
204.5
201.5
201.5
184.0
184.0
285.8
285.8
285.8
285.8
285.8
285.8
294.8
294.8
294.8
33.6
201.9
273.9
187.1
145.5
71.1
99.0
0
195.2
1,207.3
All the options noted above have already been recognised as vesting in the years noted above. The decision as to when to exercise an option
is considered an investment decision by the Executive Director and accordingly any increase or decrease in the amount realised on the
exercise date, as compared to the vesting date, is not included within any further measurement of remuneration.
Non-executive Directors are required, within six months of election to the Board, to acquire and hold a shareholding of 5,000 Ordinary Shares.
60
Cobham plc Annual Report and Accounts 2013
The interests of the Non-executive Directors and their families in Ordinary Shares were:
M Beresford
J Patterson
M Ronald
M Hagee
J Devaney
M Wareing
A Wood
D Flint
1.1.13
15,000
5,000
5,000
5,000
30,000
20,000
5,000
–
31.12.13
15,000
5,000
5,000
5,000
30,000
20,000
5,000
5,000
Ownership guidelines require the Executive Directors to maintain Ordinary Shares. These guidelines state for the CEO to the value of at
least two years’ salary and for the CFO to the value of at least one year’s salary and to retain a minimum of 50% of net vested PSP and BCP
matching shares until the relevant shareholding level is met. There is no timeframe over which the guidelines are required to be met and
there is no requirement for Directors to hold these shares after leaving the Company. Both Directors have complied with the guidelines
but have yet to meet their targets due to the length of their tenure.
Share ownership
requirement
(% of annual
salary)
No of shares
owned outright
(including
connected
persons)
200%
100%
2013
80,027
–
Director
R Murphy
S Nicholls
No of shares
beneficially
owned – (BCP
Invested Shares)
2012
–
N/A
2013
7,564
–
No of shares
beneficially
owned – (SIP
Partnership
Shares)
2013
N/A
–
2012
–
N/A
Ownership
requirements
met
Tenure
in role
2012
N/A
N/A
2013
35%
0%
18 months
7 months
Interests at 5 March 2014, being a date no more than one month prior to the date of the Notice convening the AGM, were the same as at
31 December 2013.
The market price of the Ordinary Shares as at 31 December 2013 was 274.5 pence per share and the closing price range during the year was
211.2 pence to 307.7 pence.
Dilution
The Company’s share schemes are currently funded through shares purchased in the market and have been since November 2010, prior to which
they were funded through new issue shares. Funding of awards through new issue shares is subject to an overall dilution limit of 10% of issued share
capital in any ten year period. Of this, 5% may be used in connection with the Company’s discretionary share schemes. As of 31 December 2013,
13.1m (1.21%) and 8.6m (0.79%) shares have been issued pursuant to awards made in the previous ten years in connection with all share schemes
and discretionary schemes respectively. Awards that are made, but then lapse or are forfeit, are excluded from the calculations.
Payments to past Directors (audited information)
Payments to past Directors, after their termination date, in respect of unvested long term incentives during the year have been made to Andy
Stevens as follows:
PSP 2011
Total
No of shares
awarded
No of shares
vested
Value of shares
vesting
£k
227,245
20,679
20,679
56.6
56.6
The PSP will vest at 9.1% on 10 March 2014 based on the performance conditions measured over the three financial years ended 31 December
2013 and outlined on page 56. As the awards had not vested at the date of this report, the average share price for the last three months of the
financial year of 273.8 pence has been used to determine the value.
These payments have been made because Andy Stevens has been treated as a good leaver under the relevant plan rules. The good leaver
provisions allow the Remuneration Committee some element of discretion, which they exercised in this case as Andy Stevens retired from
office on the grounds of ill health.
Andy Stevens’ BCP award did not vest due to performance conditions not being achieved.
www.cobham.com
Cobham plc Annual Report and Accounts 2013
61
Corporate Governance Directors’ Remuneration Report continued
Payments for loss of office (audited information)
There were no loss of office payments made during the year.
Performance graph and table
The graph below illustrates the TSR performance (share price growth
plus dividends) of the Company against the FTSE350 Index over the
past five years. The graph shows the value of £100 invested over the
five year period ending 31 December 2013. The FTSE350 Index was
chosen as it is a recognised broad equity market index of which the
Company was a member during 2013 and is currently, as at 5 March
2014, ranked at 111th.
5 year TSR performance Cobham vs FTSE350
£
200
180
160
140
120
100
80
60
40
20
0
31 Dec
2008
31 Dec
2009
31 Dec
2010
31 Dec
2011
31 Dec
2012
31 Dec
2013
Cobham
FTSE 350
Source: Kepler Associates
The table below shows historic CEO total remuneration, calculated
on the same basis as that used in the single figure of remuneration
table above.
CEO
single figure
of total
remuneration
£k
Annual bonus
payout against
maximum
opportunity %
£k
2.058
753
1,283
1,916
1,478
1,496
34.3% (280)
48.5% (182)
45.0% (267)
92.5% (555)
33.5% (201)
93.0% (567)
Long term
incentive vesting
rates against
maximum
opportunity %
£k
N/A
N/A
58.0% (202)
85.0% (546)
87.0% (471)
100.0% (238)
Year
2013
2012
2011
2010
2009
CEO
R Murphy
R Murphy
A Stevens
A Stevens
A Stevens
A Cook
Percentage change in remuneration of CEO
For 2014, UK salary increases were around 2.7%. Salary increases
for the Executive Directors were 3% for both Bob Murphy and Simon
Nicholls. The UK payroll has been chosen for comparison as the UK
is the location of the head office.
The following table shows the year on year change in respect of
the three remuneration elements shown in the table for the CEO
as compared with that of UK employees generally:
Remuneration element
CEO
Average employee per capita figure
Salary
Benefits
AIP
3.0%
(25%)
(23%)
2.7%
23%
(41%)
Relative importance of spend on pay
The chart below displays the relative expenditure of the Company
on various matters, as required (in the case of Group employees’
pay and shareholder distributions) by the relevant remuneration
regulations:
£
600
500
400
300
200
100
0
566.0
538.7
230.8 241.6
Underlying
profit
after tax
Aggregate
employment
costs of
Group employees
2013
2012
96.6
92.5
88.0
75.4
Dividends
PV
The aggregate employment cost of Group employees is detailed in
note 5 to the Group Financial Statements and includes employer social
security payments. Group underlying profit after tax is shown above as
this is profit attributable to the owners of the Group; refer to note 3.
Dividends are shown in note 8. PV relates to the amount of profit the
Group spends on research and development; refer to note 5.
62
Cobham plc Annual Report and Accounts 2013
Statement of implementation of remuneration policy
in the following financial year
Set out below is an explanation on the way the approved policy will
be implemented in the current year compared with the reported year.
While proposals from the Committee take account of the advice
received, the ultimate decision is made by the Committee and
ratified by the Board in the absence of any advisers.
2013 voting at the Annual General Meeting
At the AGM held on 25 April 2013, shareholders approved the
Directors’ Remuneration Report for the year ended 31 December
2012. Below is the result in respect of the resolution, which required
a simple majority (i.e. 50%) of the votes cast to be in favour in order
for the resolution to be passed.
Votes for
17,664,913
%
90.2
Votes withheld 1,158,730
By order of the Board
Votes against
1,918,552
%
9.8
Dr J Patterson
Chairman, Remuneration Committee
5 March 2014
Element of Directors’ remuneration policy Change
Base pay
Other benefits/retirement benefits
AIP
BCP
PSP
Current salaries for the CEO and the
CFO effective from 1 March 2014
are £704,477 ($1,103,000) and
£412,000 respectively.
No change.
No change. 2014 AIP opportunity is
120% of salary for CEO and 100% for CFO.
No change. Applicable to the CEO only,
2014 performance will be assessed
against stretching economic profit
targets, which are considered price
sensitive as they are indicative of
performance expectations and are
not disclosed until the year of vesting.
No change. Awards to the value of
150% of salary will be made in March
2014. Performance will be equally
weighted between EPS growth, relative
TSR against a comparator group
(see page 60) and cash conversion.
Advisers to the Remuneration Committee
The Committee received advice during the year from Deloitte LLP.
Additional advice was received from the Executive Vice President
Human Resources, Vice President Compensation and Benefits and
the Company Secretary. The Committee is satisfied that the advice
it has received has been objective and independent due to Deloitte’s
compliance with the Code of Conduct of the Remuneration
Consultants Group and the external experience of Committee
members. Deloitte’s performance is considered by the Committee
as part of its performance evaluation. Total fees for advice provided
to the Committee during the year amounted to £64,800, and were
provided on a time/cost basis.
Adviser
Deloitte LLP
Appointed by
Remuneration
Committee in
November 2009
Jones Day
Remuneration
Committee
Other services
provided to
the Company
Take-on controls
Tax
IT audits
Not applicable
Services provided
to the Committee
Remuneration
strategy
Incentive design
Market data
Legal advice
Legal advice
(total fees
£8,000)
www.cobham.com
Cobham plc Annual Report and Accounts 2013
63
Corporate Governance Directors’ Report
The Directors present their report and the audited Group
and Parent Company Financial Statements of Cobham plc
for the year ended 31 December 2013. The Company is
registered in England and Wales under company number
30470. The Company’s registered office is Brook Road,
Wimborne, Dorset, BH21 2BJ, UK.
Dividends
An interim dividend of 2.64 pence per Ordinary Share of 2.50 pence
each in the capital of the Company (Ordinary Shares) (2012: 2.40
pence) was paid in November 2013. The Directors are recommending
a final dividend of 7.04 pence per Ordinary Share (2012: 6.40 pence)
payable on 30 May 2014 to ordinary shareholders on the register as
at 2 May 2014, making a total ordinary dividend for the year of 9.68
pence (2012: 8.80 pence).
Details of the total dividend paid out is covered in note 8.
Directors’ indemnity arrangements
The Directors have the benefit of a directors’ and officers’ liability
insurance policy and the Company has entered into qualifying third
party indemnity arrangements with them, as permitted by the
Companies Act 2006. The policy was in force at the year-end and
continues in force at the date of this report. The Directors are
permitted to take independent legal advice at the Company’s
expense within set limits in furtherance of their duties.
Directors’ interests
None of the Directors is or was materially interested in any significant
contract during or at the end of the financial year, particulars of
which are required to be disclosed by the Listing Rules of the UK
Listing Authority.
Details of Directors’ share interests and of their rights to subscribe
for shares are shown in the Directors’ Remuneration Report on
pages 48 to 63.
Share capital
The Company has one class of Ordinary Shares which carry no right
to fixed income, representing 99.9% of the total issued share capital.
In addition, 19,700 non-redeemable 6% second cumulative Preference
Shares have been issued which represent 0.1% of total issued share capital.
The Directors have been authorised to allot and issue Ordinary
Shares. These powers are exercised under authority of resolutions
passed at the Company’s AGM. No Ordinary Shares were issued
during the current or prior year.
At the AGM held on 25 April 2013, the Company was authorised
to purchase up to 107,857,590 Ordinary Shares. This authority will
expire at the conclusion of the 2014 AGM. A special resolution will
be put to shareholders at the AGM to renew the authority to make
market purchases of the Company’s shares up to a maximum
of 10% of the share capital of the Company.
64
Cobham plc Annual Report and Accounts 2013
Subject to applicable statutes, and to the rights conferred on the
holders of any other shares, shares may be issued with such rights
and restrictions as the Company may by ordinary resolution decide or
(if there is no such resolution or so far as the resolution does not make
specific provision) as the Board may decide. Holders of Ordinary Shares
are entitled to attend and speak at general meetings of the Company,
to appoint one or more proxies and, if they are corporations, corporate
representatives and to exercise voting rights. Holders of Ordinary
Shares may receive a dividend and, on a liquidation, may share in
the assets of the Company. Holders of Ordinary Shares are entitled
to receive the Company’s Annual Report and Accounts. Subject to
meeting certain thresholds, holders of Ordinary Shares may requisition
a general meeting of the Company or the proposal of a resolution
at an AGM.
The shareholders of the 6% second cumulative Preference Shares
are entitled to receive a fixed cumulative preference dividend at
the rate of 6% per annum in priority to the payment of dividends
on the Ordinary Shares. In addition, on a return of assets on the
liquidation or otherwise of the Company, the assets available for
distribution are to be applied first in repaying to the holders of the
6% second cumulative Preference Shares the amounts paid up on
their shares.
Voting rights and restrictions on transfer of shares
The rights and obligations attaching to the Ordinary Shares and
6% second cumulative Preference Shares of £1 each in the capital
of the Company are set out in the Articles.
On a show of hands at a general meeting of the Company, every
holder of shares present in person or by proxy and entitled to vote
has one vote and on a poll every member present in person or by
proxy and entitled to vote has one vote for every £1 in nominal value
of the shares of which he or she is the holder. None of the Ordinary
Shares carry any special rights with regard to control of the Company.
There are no restrictions on transfers of shares other than:
• Certain restrictions which may from time to time be imposed
•
by laws or regulations;
Pursuant to the Company’s Code for Securities Transactions
including the requirement on the Directors and designated
employees to obtain approval to deal in the Company’s shares; and
• Where a person with an interest in the Company’s shares has
been served with a disclosure notice and has failed to provide the
Company with information concerning interests in those shares.
The Company is not aware of any arrangements between
shareholders that may result in restrictions on the transfer
of securities or voting rights.
Major interests in shares
As at 31 December 2013, the Company had been notified of the
following interests in the Ordinary Shares:
Number of shares at the
date of notification
% at date of
notification
Prudential plc group
of companies
Sprucegrove Investment
Management
Invesco Limited
BlackRock, Inc.
Schroders plc
54,277,614
54,070,021
53,893,724
52,888,997
56,388,880
5.03
Below 5
4.99
Below 5
5.228
Since the year-end and up to 5 March 2014, being a date not more
than a month prior to the date of the AGM Notice, the Company had
received no notices of interests in the Ordinary Shares in accordance
with DTR 5.
Financial instruments
Notes 16, 23 and 25 to the Group Financial Statements and note 12 to
the Parent Company Financial Statements contain disclosures relating
to the use of financial instruments. The Group uses derivative
financial instruments in its management of financial risks and does
not trade in financial instruments or use complex financial
instruments.
People
Information concerning diversity in the workforce and the employment
of disabled persons is shown in the CR&S Report on pages 32 to 35.
Research and development
The Group continues to invest in the important area of research and
development; further details can be found on page 23. During the
year, the Group expended £88.0m (2012: £75.4m) on non-customer
funded research and development.
Events after the balance sheet date
Note 33 to the Group Financial Statements contains information
in respect of post balance sheet events.
Political donations and expenditure
No contributions were made to political organisations during the
current or prior year.
Significant arrangements – change of control
Individual operating companies in the Group have contractual
arrangements with third parties in support of the Group’s business
activities which may take effect, alter or terminate upon a change
of control of the Group following a takeover bid. Such contractual
arrangements include supply of equipment, goods and services
to third parties, such as research, design and production. Such
contracts and arrangements may be deemed to be essential to one
or more of the operating companies but there are no contracts or
arrangements considered to be essential to the operation of the
business of the Group as a whole, apart from the following:
• The Company has entered into a number of credit agreements
with banks, and has issued senior notes under private placements.
The total amount owing under such agreements at the year-end
date is shown in note 19 to the Group Financial Statements. All
agreements contain clauses such that, in the event of a change
of control, the Company can offer to or must repay all such
borrowings together with accrued interest, fees and other
sums owing as required by the individual agreements.
• Under the Sentinel contract, entered into in March 2006, the
Company must seek approval for any material change in the
shareholding of the Company. There is an ancillary aircraft lease
agreement under which a change of control may result in the
termination of the lease if such event is likely to have a material
adverse effect on the Company’s ability to perform its
obligations under the lease.
• Under the FSTA shareholders agreement entered into in June 2008,
a change of control of the Company may result in a required sale
of the Company’s shares in FSTA to the other shareholders.
Further information relating to change of control appears within the
remuneration policy table in the Directors’ Remuneration Report on
pages 50 and 51.
Employee share schemes – rights of control
If required to do so by the Company, the trustee of the Cobham
Share Incentive Plan (the Plan) will, on receipt of notice from the
Company of any offer, compromise arrangement or scheme which
affects shares held in the Plan, invite participants to direct the
trustee on the exercise of any voting rights attaching to the shares
held by the trustee on their behalf and/or direct how the trustee
shall act in relation to those shares.
The trustee will not vote in respect of any shares held in the Plan
in respect of which it has received no directions nor will the trustee
vote in respect of any shares which are unallocated under the Plan.
The trustees of the Employee Benefit Trust (which, as at
31 December 2013, hold 9,728,809 Ordinary Shares to be used
for settlement of option and share awards under the Company’s long
term incentive schemes and all employee share option schemes)
waive all rights to vote in respect of any shares they
hold within the Trust.
www.cobham.com
Cobham plc Annual Report and Accounts 2013
65
Corporate Governance Directors’ Report continued
Greenhouse gas emissions
The majority of Cobham’s total greenhouse gas emissions (85%) come
from its aviation activity (figure 1), mostly being from the Aviation
Services business. Growth in this business yields an increase in
Cobham’s absolute emissions (figure 1) and emissions intensity (figure 2).
Figure 1 – Aviation and non-aviation emissions
(tCO2e) for Scopes 1, 2 & 3
Scope 1
400,000
300,000
200,000
100,000
Scope 3
Scope 2
Aviation
Non-aviation
Aviation
Non-aviation
Total
tCO2e
77,066
N/A
384,860
461,926
%
84
–
95
85
tCO2e
14,277
48,276
21,640
84,193
%
16
100
5
15
tCO2e
91,343
48,276
406,500
546,119
*Scope 1
*Scope 2
Scope 3
Total
Figure 2 – Aviation and non-aviation emissions
(tCO2e/£m) for Scopes 1, 2 & 3
Scope 3
Scope 2
Scope 1
tCO2e/£m
Scope 1
Scope 2
Scope 3
0
50
100
150
200
250
Aviation
Non-aviation
Year
2012
2013
2012
2013
2012
2013
Aviation
Non-aviation % Total change
49
43
N/A
N/A
206
216
5
8
30
27
8
12
(5)
(10)
7
Definitions:
Scope 1 comprises direct emissions from owned plant and equipment including aviation fuel,
natural gas, heating oil, non-automotive diesel, fugitive emissions, solvent emissions and
automotive fuel.
Scope 2 comprises indirect emissions from purchased renewable and non-renewable electricity.
Scope 3 comprises indirect emissions from non-owned plant and equipment including aviation
fuel and business travel (train, air and car).
66
Cobham plc Annual Report and Accounts 2013
Methodology and data verification
Cobham collects data annually on greenhouse gas emissions from
its wholly-owned operational subsidiaries. Cobham uses the World
Business Council for Sustainable Development (WBCSD) & World
Resources Institute (WRI) Greenhouse Gas (GHG) Protocol method
to report its greenhouse gas emissions and defines its emissions
boundary as those under its direct operational control.
Reported data excludes joint ventures not under Cobham’s
operational control, sites with less than five people, sites leased to
tenants, vacant properties being disposed of, and any business units
that have been closed or divested during the course of the year for
which there is less than six months of reported data. A further seven
locations were omitted by our business units from reporting in error,
although our assessment is that these are not material.
100% of Cobham’s wholly-owned operations have been reviewed internally
to identify omissions and significant variations from the prior year.
Data assurance
We engaged KPMG LLP to undertake a limited assurance engagement,
reporting to Cobham plc, using the assurance standards ISAE 3000 and
ISAE 3410 over the data that has been highlighted in this report with‘*’.
Their full statement is available at www.cobhamsustainability.com
and they have provided an unqualified opinion on the data. The level of
assurance provided for a limited assurance engagement is substantially
lower than a reasonable assurance engagement. In order to reach
their opinion they performed a range of procedures which included
interviews with management, examination of reporting systems, four
site visits to our operations in the UK, Australia and US as well as specific
data testing at these sites and Head Office. A summary of the work they
performed is included within their assurance opinion.
Limited external assurance was provided on the Group’s Scope 1 and
Scope 2 GHG data for 2013. Non financial performance information,
greenhouse gas quantification in particular, is subject to more inherent
limitations than financial information. It is important to read the
selected CR&S information contained within the CR&S report in the
context of the full limited assurance statement and the reporting
guidelines set out in the footnotes to the data tables on ‘Energy &
Climate’ at www.cobhamsustainability.com.
Further detail on Cobham’s CR&S approach, objectives and
performance is available on pages 32 to 35.
Annual General Meeting
The Company’s AGM will be held at 12 noon on Thursday, 24 April
2014 at the offices of UBS Investment Bank, 1 Finsbury Avenue,
London EC2M 2PP.
The Company arranges for the Notice of AGM and related papers to
be sent to shareholders at least 20 working days before the meeting.
By order of the Board
L Colloff
Company Secretary
5 March 2014
Statement of Directors’ Responsibilities
Directors’ responsibility statement
Each of the Directors, whose names and functions are listed on
pages 36 and 37, confirm that, to the best of their knowledge:
• The Group Financial Statements, which have been prepared
in accordance with the IFRS as adopted by the EU, give a true
and fair view of the assets, liabilities, financial position and profit
of the Group; and
• The Strategic Report includes a fair review of the development
and performance of the business and the position of the Group,
together with a description of the principal risks and
uncertainties that it faces.
Directors’ declaration in relation to relevant audit information
In the case of each Director in office at the date the Directors’
Report is approved, that:
a. So far as the Director is aware, there is no relevant audit
information of which the Group’s auditors were unaware; and
b. He or she has taken all the steps that he or she ought to have
taken as a Director in order to make himself or herself aware of
any relevant audit information and to establish that the Group’s
auditors are aware of that information.
The responsibility statement was approved by the Board of Directors
on 5 March 2014 and signed on its behalf by:
R Murphy
Chief Executive Officer
S Nicholls
Chief Financial Officer
The Directors are responsible for preparing the Annual Report and
Accounts, the Directors’ Remuneration Report and the Group Financial
Statements in accordance with applicable laws and regulations.
Company law requires the Directors to prepare financial statements
for each financial year. Under that law, the Directors have prepared
the Group Financial Statements in accordance with International
Financial Reporting Standards (IFRS) as adopted by the EU, and the
Parent Company Financial Statements in accordance with United
Kingdom Generally Accepted Accounting Practice (United Kingdom
Accounting Standards) and applicable law. Under company law, the
Directors must not approve the financial statements unless they are
satisfied that they give a true and fair view of the state of affairs of
the Group and the Company and of the profit or loss of the Group
and the Company for that period.
In preparing those financial statements, the Directors are required to:
Select suitable accounting policies and then apply them consistently;
•
• Make judgements and accounting estimates that are reasonable
•
•
and prudent;
State whether IFRS, as adopted by the EU, and applicable UK
Accounting Standards have been followed, subject to any material
departures disclosed and explained in the Group and the Parent
Company Financial Statements respectively; and
Prepare the Group and Parent Company Financial Statements
on the going concern basis unless it is inappropriate to presume
that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records
that are sufficient to show and explain the Company’s transactions
and disclose with reasonable accuracy at any time the financial
position of the Company and the Group and to enable them to ensure
that the Group Financial Statements and the Directors’ Remuneration
Report comply with the Companies Act 2006 and, as regards the
Group Financial Statements, Article 4 of the IAS Regulation. They
are also responsible for safeguarding the assets of the Company
and the Group and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity
of the Group’s website (www.cobham.com). Legislation in the UK
governing the preparation and dissemination of financial statements
may differ from legislation in other jurisdictions.
The Directors consider that the Annual Report and Accounts, taken
as a whole, is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Group’s
performance, business model and strategy.
www.cobham.com
Cobham plc Annual Report and Accounts 2013
67
Corporate Governance
Compliance with the UK Corporate Governance Code
For the year ended 31 December 2013, the Board believes that the Company
has complied with the principles and provisions of the UK Corporate
Governance Code. A full version of the UK Corporate Governance Code
can be found on the Financial Reporting Council’s website at www.frc.org.uk.
Further details on how compliance is achieved can be found in the
Corporate Governance and Directors’ Remuneration Reports.
A
Leadership
A1 The Board’s role
The Board meets nine times a year in order
to review the Company’s performance and
strategy against set objectives. The Board’s
role is to lead the Group with a view to the
creation of strong, sustainable financial
performance and long term shareholder
value, to approve the Group’s Strategic
Plan and to monitor management
performance against plan.
The Board has adopted a clear schedule
of matters reserved for its specific
approval, including a framework for those
decisions which can be delegated to
committees or otherwise.
Further details can be found in the
Corporate Governance Report.
A2 A clear division of responsibilities
The Board’s policy is that the roles of the
Chairman and CEO should be performed
by different people. The division of
responsibilities is documented and clearly
understood. The Chairman is responsible
for the leadership and effectiveness
of the Board, and the CEO is responsible
for leading the day-to-day management
of the Company within the strategy set
by the Board.
A3 Role of the Chairman
The Chairman sets the agenda for
meetings, manages the meeting timetable
and facilitates open and constructive
dialogue during the meetings.
A4 Role of the Non-executive Directors
The Chairman promotes an open
and constructive environment in the
boardroom and actively invites the
Non-executive Directors’ views.
The Senior Independent Director, Michael
Wareing, held a meeting with the Non-
executives in the absence of the Chairman
to appraise the Chairman’s performance.
The Chairman has held regular meetings
with the Non-executives in the absence
of Executive Directors, providing
an opportunity for any concerns
to be discussed.
B
Effectiveness
B1 The Board’s composition
The composition of the Board is reviewed
regularly by the Nomination Committee to
ensure that there is an appropriate mix of
skills on the Board and a range of diverse
experience. Board members’ biographies
are provided on pages 36 and 37, which
identify the experience each Director
brings to the Board. A table identifying
the skills and experience of the Board
members may be found on page 43.
The Board determines, through the
Nomination Committee, the independence
of its members. Conflicts of interest are
also monitored and updated at least
annually and more frequently as and
when required.
The Board currently consists of nine
individuals, the Chairman, two Executive
Directors, and six independent
Non-executive Directors.
B2 Board appointments
The appointment of new Directors to the
Board is led by the Nomination Committee.
The Nomination Committee terms of
reference, as published on the Company
website, document the responsibility
regarding Board appointments. The
Committee consists of all six Non-executive
Directors and the Chairman. Further details
of the appointments undertaken during
the year and succession planning can be
found on page 43.
B3 Time commitments
The time commitments of Non-executive
Directors are defined on appointment and
regularly evaluated. The Chairman gives
consideration to new directorships which
may impact existing time commitments.
B4 Training and development
On appointment, Directors undertake
a structured induction programme, which
is supplemented by visits to key locations
and meetings with senior executives. Further
training for Directors is offered when taking
a new role on a Committee, and is otherwise
available as required and may be provided
through tailored programmes.
Further details can be found in the
Directors’ professional development
section on page 43.
B5 Provision of information
and support
The Chairman, in conjunction with the
Company Secretary, ensures that all
Board members receive accurate and
timely information.
68
Cobham plc Annual Report and Accounts 2013
through the year, which are usually
attended by the CEO and the CFO.
Further details can be found in the
Corporate Governance Report on
pages 40 and 41.
E2 Constructive use of the AGM
The Board values the AGM as an important
opportunity to engage with investors.
Attendees at the AGM have the opportunity
to ask questions to the Board and to speak
to individual Directors following the formal
business of the meeting.
B6 Board and committees
performance evaluation
The Board and the Board Committees
undertook an internal evaluation in 2013.
Details of the process undertaken and
a table of actions instigated by this
evaluation are included on page 40.
B7 Re-election of the Directors
All Directors were subject to shareholder
re-election at the 2013 AGM.
C
Accountability
C1 Financial and business reporting
The Statement of the Directors’
Responsibilities is set out on page 67,
and the Independent Auditors’ Reports
are on pages 70 to 73, and pages 125
and 126.
The Company’s business model is explained
on pages 4 and 5.
C2 Risk management and
internal control systems
The Board sets the Company’s risk appetite
and annually reviews the effectiveness
of the Company’s risk management and
internal control systems. The activities
of the Audit and Risk Committees, which
assist the Board with its responsibilities
in relation to risk management, reporting
and assurance, are set out on page 46.
C3 Role and responsibilities
of the Audit Committee
Details of the composition of the Audit
Committee, and how the Committee has
discharged its responsibilities during the
year, are provided in the Audit Committee
Report on pages 44 to 47.
D
Remuneration
D1 Levels and elements
of remuneration
The Board believes that the Group’s
Remuneration Policy continues to enable
the Group to attract, retain and motivate
the executive talent required for the delivery
of its business strategy, while linking closely
to the long term performance of the Group
and the interests of shareholders. For
further information, see the Directors’
Remuneration Policy on pages 49 to 54.
D2 Development of remuneration
policy and packages
The membership of the Remuneration
Committee is made up of Non-executive
Directors only. The terms of reference
for the Remuneration Committee are
reviewed annually and are available on
the Company website.
The Remuneration Committee has
delegated authority for setting the
remuneration of Executive Directors and
the Chairman. The fees payable to the
Non-executive Directors are determined
by the Board, on recommendation from
the Executive Directors Committee.
E
Relations with shareholders
E1 Shareholder engagement
and dialogue
Effective communication and
engagement with investors are of
paramount importance to the continued
success of the Company. The Company
maintains a relationship with shareholders
through a series of roadshows completed
www.cobham.com
Cobham plc Annual Report and Accounts 2013
69
Corporate Governance Independent Auditors’ Report to the Members of Cobham plc
Report on the Group Financial Statements
Our opinion
In our opinion the Group Financial Statements defined below:
• Give a true and fair view of the state of the Group’s affairs
as at 31 December 2013 and of the Group’s profit and cash
flows for the year then ended;
• Have been properly prepared in accordance with International
Financial Reporting Standards (IFRSs) as adopted by the
European Union; and
• Have been prepared in accordance with the requirements
of the Companies Act 2006 and Article 4 of the IAS Regulation.
This opinion is to be read in the context of what we say in the
remainder of this report.
What we have audited
The Group Financial Statements, which are prepared by Cobham plc,
comprise:
• The Consolidated Income Statement and Statement of
Comprehensive Income for the year ended 31 December 2013;
• The Consolidated Balance Sheet as at 31 December 2013;
• The Consolidated Statement of Changes in Equity and Cash
Flow Statement for the year then ended; and
• The notes to the Group Financial Statements, which include
a summary of significant accounting policies and other
explanatory information.
The financial reporting framework that has been applied in their
preparation comprises applicable law and IFRSs as adopted by the
European Union.
Certain disclosures required by the financial reporting framework
have been presented elsewhere in the Annual Report and Accounts
(Annual Report), rather than in the notes to the Financial Statements.
These are cross-referenced from the financial statements and are
identified as audited.
What an audit of Financial Statements involves
We conducted our audit in accordance with International Standards
on Auditing (UK and Ireland) (ISAs (UK & Ireland)). An audit involves
obtaining evidence about the amounts and disclosures in the financial
statements sufficient to give reasonable assurance that the financial
statements are free from material misstatement, whether caused by
fraud or error. This includes an assessment of:
• Whether the accounting policies are appropriate to the Group’s
circumstances and have been consistently applied and
adequately disclosed;
• The reasonableness of significant accounting estimates made
by the Directors; and
• The overall presentation of the financial statements.
In addition, we read all the financial and non-financial information
in the Annual Report to identify material inconsistencies with the
audited Group Financial Statements and to identify any information
that is apparently materially incorrect based on, or materially
inconsistent with, the knowledge acquired by us in the course
of performing the audit. If we become aware of any apparent
material misstatements or inconsistencies, we consider the
implications for our report.
70
Cobham plc Annual Report and Accounts 2013
Overview of our audit approach
Materiality
We set certain thresholds for materiality. These helped us to
determine the nature, timing and extent of our audit procedures
and to evaluate the effect of misstatements, both individually
and on the financial statements as a whole.
Based on our professional judgement, we determined materiality
for the Group Financial Statements as a whole to be £14m which
is approximately 5% of underlying profit before taxation. We
used underlying profit before taxation to exclude amortisation
of intangible assets acquired in business combinations and to
remove the effect of volatility such as exceptional costs.
We agreed with the Audit Committee that we would report to them
misstatements identified during our audit above £0.5m as well as
misstatements below that amount that, in our view, warranted
reporting for qualitative reasons.
Overview of the scope of our audit
The Group is structured along four reported segments, being
Aerospace and Security, Defence Systems, Mission Systems and
Aviation Services. The Group Financial Statements are a consolidation
of 59 reporting units within these segments, comprising the Group’s
operating businesses and centralised functions.
In establishing the overall approach to the Group audit, we
determined the type of work that needed to be performed at the
reporting units by us, as the Group engagement team, or subsidiary
audit teams from other PwC network firms operating under our
instruction. Where the work was performed by subsidiary audit
teams, we determined the level of involvement we needed to have
in the audit work at those reporting units to be able to conclude
whether sufficient appropriate audit evidence had been obtained as
a basis for our opinion on the Group Financial Statements as a whole.
Accordingly, of the Group’s 59 reporting units, we identified 22
which, in our view, required an audit of their complete financial
information, either due to their size, their risk characteristics or
because some are covered on a rotational basis over a two or three
year cycle. Specific audit procedures on certain balances and
transactions were performed at a further 15 reporting units. Audit
procedures were performed at principal manufacturing locations,
both significant Aviation Services reporting units and new
acquisitions in the year.
Where subsidiary audit teams performed work at the reporting unit
level on behalf of the Group audit team, this work was performed to
lower materiality levels appropriate to the individual units (which are
typically subject to local audit requirements). These materiality levels
ranged from £0.7m to £4.5m.
The reporting units in scope covered 92% of the Group’s underlying
profit before taxation and 89% of the Group’s revenue. This, together
with additional procedures performed at the Group level, gave us
the evidence we needed for our opinion on the Group Financial
Statements as a whole.
Group Financial Statements
Areas of particular audit focus
In preparing the financial statements, the Directors made a number of subjective judgements, for example in respect of significant
accounting estimates that involved making assumptions and considering future events that are inherently uncertain. We primarily focused
our work in these areas by assessing the Directors’ judgements against available evidence, forming our own judgements, and evaluating
the disclosures in the financial statements.
In our audit, we tested and examined information, using sampling and other auditing techniques, to the extent we considered necessary to
provide a reasonable basis for us to draw conclusions. We obtained audit evidence through testing the effectiveness of controls, substantive
procedures or a combination of both.
We considered the following areas to be those that required particular focus in the current year. This is not a complete list of all risks or areas
of focus identified by our audit. We discussed these areas of focus with the Audit Committee. Their report on those matters that they
considered to be significant issues in relation to the financial statements is set out on page 46.
Area of focus
How the scope of our audit addressed the area of focus
The Group has significant goodwill and intangible
asset balances arising from acquisitions. The
Directors formally assess the carrying value
of these assets on an annual basis.
We focused on this area because it involves
complex and subjective judgements by the
Directors about the future results of the
business. As a result of the Directors’ assessment,
an impairment charge of £63m was recorded; see
note 11 of the Group Financial Statements.
In evaluating whether any impairment was necessary to the carrying value of
goodwill and intangible assets, our audit work involved obtaining evidence
regarding its recoverable amount and how it compared to the amount at
which it is currently recorded. We evaluated the Directors’ future cash flow
forecasts, including comparing them with the latest Board approved strategic
plans and looked at historic performance. We challenged the Directors’ key
assumptions within these plans, including the discount rate and growth rates.
We also performed sensitivity analysis around those key assumptions. Having
ascertained the extent of change in those assumptions that either individually
or collectively would be required for the asset to be impaired, we considered
the likelihood of such movement in those key assumptions arising. For the asset
impaired in the year we checked the calculation of the impairment charge.
The Group has a number of significant, complex
development and production contracts which
span more than one accounting period.
We have reviewed the basis of profit recognition on the Group’s key
contracts. We evaluated the accounting in the context of the Group
accounting policies and contract terms.
We focused on this area as the assessment
of contract performance over a long duration
is often subjective and dependent upon engineering
assessments as well as financial estimates.
Impairment
assessment
Accounting
for contract
profitability,
including the
recognition
of contract
loss provisions
We have assessed the design of controls in place over key contracts,
including the adequacy and frequency of programme reviews performed
by management.
We examined the assumptions behind estimated costs to complete,
challenging the reasonableness of these in light of supporting evidence.
We evaluated the reasonableness of estimated revenue for customer claims
submitted to recover additional costs incurred, including considering legal
advice received where appropriate.
We tested manual journals posted to revenue to check whether there was
any indication of fraud.
We tested the timing of revenue recognition of transactions close to the
period end to establish whether they were recorded in the correct period.
We tested the basis of revenue recognition on key development contracts,
evaluating the revenue recognised against contract terms and evidence
of customer acceptance of specific milestones reached.
We assessed the overall control environment of the Group.
We tested manual journal entries. We examined the significant accounting
estimates and judgements relevant to the financial statements for evidence
of bias by the Directors that may represent a risk of material misstatement
due to fraud. We also incorporated an element of unpredictability into our
testing plans.
Cobham plc Annual Report and Accounts 2013
71
Revenue
recognition
ISAs (UK & Ireland) presume there is a risk of
fraud in relation to revenue recognition as most
businesses, including the Group, face this risk.
We focused on cut-off around the year-end
because material revenue transactions can
occur close to that date and the recognition of
significant milestones on development contracts
which often involve some judgement surrounding
the achievement of those milestones.
ISAs (UK & Ireland) require that we consider this,
because management in all businesses are in
a position of authority that means they can
override internal controls established to prevent
fraud or error.
Risk of
management
override
of internal
controls
www.cobham.com
Independent Auditors’ Report continued
Going concern
Under the Listing Rules, we are required to review the Directors’
statement, set out on page 27, in relation to going concern. We
have nothing to report having performed our review. As noted
in the Directors’ statement, the Directors have concluded that
it is appropriate to prepare the Group’s financial statements using
the going concern basis of accounting. The going concern basis
presumes that the Group has adequate resources to remain in
operation, and that the Directors intend it to do so, for at least one
year from the date the financial statements were signed. As part
of our audit, we have concluded that the Directors’ use of the
going concern basis is appropriate. However, because not all future
events or conditions can be predicted, these statements are not a
guarantee as to the Group’s ability to continue as a going concern.
Opinions on matters prescribed by the Companies Act 2006
In our opinion:
• The information given in the Strategic Report and the Directors’
Report for the financial year for which the Group Financial
Statements are prepared is consistent with the Group Financial
Statements; and
• The information given in the Corporate Governance Report
Corporate governance statement
Under the Companies Act 2006, we are required to report to you,
if, in our opinion, a corporate governance statement has not been
prepared by the Parent Company. We have no exceptions to report
arising from this responsibility.
Under the Listing Rules, we are required to review the part of the
corporate governance statement relating to the Company’s compliance
with nine provisions of the UK Corporate Governance Code (the Code).
We have nothing to report having performed our review.
On page 67 of the Annual Report, as required by the Code Provision C.1.1,
the Directors state that they consider the Annual Report taken as a whole
to be fair, balanced and understandable and provides the information
necessary for members to assess the Group’s performance, business
model and strategy. On page 46, as required by C.3.8 of the Code, the
Audit Committee has set out the significant issues that it considered in
relation to the financial statements, and how they were addressed. Under
ISAs (UK & Ireland), we are required to report to you if, in our opinion:
• The statement given by the Directors is materially inconsistent
with our knowledge of the Group acquired in the course of
performing our audit; or
set out on pages 38 to 47 in the Annual Report with respect to
internal control and risk management systems and about share
capital structures is consistent with the financial statements.
• The section of the Annual Report describing the work of the
Audit Committee does not appropriately address matters
communicated by us to the Audit Committee.
Other matters on which we are required to report
by exception
Adequacy of information and explanations received
Under the Companies Act 2006, we are required to report to you
if, in our opinion, we have not received all the information and
explanations we require for our audit. We have no exceptions
to report arising from this responsibility.
Directors’ remuneration
Under the Companies Act 2006, we are required to report to you
if, in our opinion, certain disclosures of Directors’ remuneration
specified by law have not been made, and under the Listing Rules
we are required to review certain elements of the report to
shareholders by the Board on Directors’ remuneration. We have
no exceptions to report arising from these responsibilities.
We have no exceptions to report arising from this responsibility.
Other information in the Annual Report
Under ISAs (UK & Ireland), we are required to report to you if,
in our opinion, information in the Annual Report is:
• Materially inconsistent with the information in the audited
Group Financial Statements; or
• Apparently materially incorrect based on, or materially
inconsistent with, our knowledge of the Group acquired
in the course of performing our audit; or
Is otherwise misleading.
•
We have no exceptions to report arising from this responsibility.
72
Cobham plc Annual Report and Accounts 2013
Group Financial Statements
Responsibilities for the financial statements and the audit
Our responsibilities and those of the Directors
As explained more fully in the Statement of Directors’ Responsibilities
set out on page 67, the Directors are responsible for the preparation
of the Group Financial Statements and for being satisfied that they
give a true and fair view.
Our responsibility is to audit and express an opinion on the Group
Financial Statements in accordance with applicable law and ISAs
(UK & Ireland). Those standards require us to comply with the
Auditing Practices Board’s Ethical Standards for Auditors.
This report, including the opinions, has been prepared for and only
for the Company’s members as a body in accordance with Chapter 3
of Part 16 of the Companies Act 2006 and for no other purpose. We
do not, in giving these opinions, accept or assume responsibility for
any other purpose or to any other person to whom this report is
shown or into whose hands it may come save where expressly
agreed by our prior consent in writing.
Other matter
We have reported separately on the Parent Company Financial
Statements of Cobham plc for the year ended 31 December 2013
and on the information in the Directors’ Remuneration Report that
is described as having been audited.
Stuart Watson
(Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
5 March 2014
www.cobham.com
Cobham plc Annual Report and Accounts 2013
73
Consolidated Income Statement
For the year ended 31 December 2013
£m
Revenue
Cost of sales
Gross profit
Selling and distribution costs
Administrative expenses
Share of post-tax results of joint ventures and associates
Operating profit
Finance income
Finance costs
Profit before taxation
Taxation
Profit after taxation for the year
Attributable to:
Owners of the parent
Non-controlling interests
Earnings per Ordinary Share
Basic
Diluted
Trading profit is calculated as follows:
£m
Operating profit
Adjusted to exclude:
Business restructuring – Excellence in Delivery
Movements in non-hedge accounted derivative financial instruments
Amortisation of intangible assets arising on business combinations
Impairment of goodwill
Revaluation gain arising on equity interests in FBH (2012: Thrane & Thrane)
Other business acquisition and divestment related items
Trading profit
Underlying EPS
The definitions of trading profit and underlying EPS are shown in note 1.
74
Cobham plc Annual Report and Accounts 2013
Note
4
6
6
7
9
2012
(as restated)
2013
1,789.7
(1,220.9)
568.8
(84.7)
(328.4)
3.1
158.8
5.3
(37.5)
126.6
(12.1)
114.5
1,749.4
(1,173.3)
576.1
(81.1)
(264.9)
7.4
237.5
6.8
(40.3)
204.0
(32.2)
171.8
114.3
0.2
114.5
171.7
0.1
171.8
10.70p
10.65p
15.98p
15.93p
Note
2013
2012
(as restated)
158.8
237.5
56.1
(2.2)
103.9
63.0
(62.1)
0.1
317.6
37.9
(11.1)
68.9
–
(1.0)
(0.2)
332.0
21.60p
22.48p
3
Consolidated Statement
of Comprehensive Income
For the year ended 31 December 2013
£m
Profit after taxation for the year
Items that will not be reclassified subsequently to profit or loss
Remeasurements of defined benefit retirement benefit obligations
Actuarial loss on other retirement benefit obligations
Tax effects
Items that may subsequently be reclassified to profit or loss
Net translation differences on investments in overseas subsidiaries
Reclassification of cash flow hedge fair values
Movements in hedge accounted derivative financial instruments
Tax effects
Total other comprehensive expense for the year
Total comprehensive income for the year
Attributable to:
Owners of the parent
Non-controlling interests
Note
2013
2012
(as restated)
114.5
171.8
24
24
7
27
23
23
7
(25.6)
–
4.1
(21.5)
(11.1)
4.5
0.6
(1.2)
(7.2)
(13.7)
(0.5)
2.0
(12.2)
(24.0)
7.2
(3.1)
(3.2)
(23.1)
(28.7)
(35.3)
85.8
136.5
85.6
0.2
85.8
136.4
0.1
136.5
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Cobham plc Annual Report and Accounts 2013
75
Group Financial Statements Consolidated Balance Sheet
As at 31 December 2013
£m
Assets
Non-current assets
Intangible assets
Property, plant and equipment
Investment properties
Investments in joint ventures and associates
Trade and other receivables
Other financial assets
Deferred tax
Derivative financial instruments
Current assets
Inventories
Trade and other receivables
Current tax receivables
Derivative financial instruments
Cash and cash equivalents
Assets classified as held for sale
Liabilities
Current liabilities
Borrowings
Trade and other payables
Provisions
Current tax liabilities
Derivative financial instruments
Liabilities classified as held for sale
Non-current liabilities
Borrowings
Trade and other payables
Provisions
Deferred tax
Derivative financial instruments
Retirement benefit obligations
Note
2013
2012
11
12
13
14
17
16
22
23
15
17
23
10
18
19
20
21
23
18
19
20
21
22
23
24
1,162.2
350.8
9.9
3.1
22.2
6.1
9.9
5.1
1,569.3
315.9
317.7
0.8
6.6
200.7
8.2
849.9
(344.5)
(370.3)
(34.4)
(112.2)
(4.6)
(5.2)
(871.2)
(309.6)
(38.0)
(8.6)
(52.9)
(7.4)
(87.3)
(503.8)
1,102.1
304.8
10.7
15.8
47.1
–
9.8
3.4
1,493.7
306.4
281.0
7.5
3.7
264.2
15.1
877.9
(307.3)
(349.9)
(36.3)
(119.2)
(6.6)
(3.2)
(822.5)
(316.8)
(39.1)
(10.9)
(44.2)
(10.3)
(73.4)
(494.7)
Net assets
1,044.2
1,054.4
76
Cobham plc Annual Report and Accounts 2013
£m
Equity
Share capital
Share premium account
Other reserves
Retained earnings
Total equity attributable to the owners of the parent
Non-controlling interests in equity
Total equity
Net debt
Note
2013
2012
26
27
28.9
126.6
55.2
832.7
1,043.4
0.8
1,044.2
28.9
126.6
64.2
834.1
1,053.8
0.6
1,054.4
10
(453.4)
(359.9)
The financial statements on pages 74 to 124 were approved by a duly appointed and authorised committee of the Board on 5 March 2014
and signed on its behalf by:
R Murphy
Directors
S Nicholls
www.cobham.com
Cobham plc Annual Report and Accounts 2013
77
Group Financial Statements
Consolidated Statement of Changes in Equity
For the year ended 31 December 2013
£m
Total equity at 1 January 2012
Profit for the year (as restated)
Items that will not be reclassified subsequently to profit or loss (as restated)
Items that may subsequently be reclassified to profit or loss
Total comprehensive income for the year
Net purchase of treasury shares
Dividends (note 8)
Share based payments (note 28)
Dividend equivalents paid on vesting of PSP and BCP awards
Release of hedge reserve
Transfers of other reserves to retained earnings
Tax effects (note 7)
Total equity at 31 December 2012
Profit for the year
Items that will not be reclassified subsequently to profit or loss
Items that may subsequently be reclassified to profit or loss
Total comprehensive income for the year
Net purchase of treasury shares
Dividends (note 8)
Share based payments (note 28)
Release of hedge reserve
Transfers of other reserves to retained earnings
Tax effects (note 7)
Total equity at 31 December 2013
Share
capital
Share
premium
account
Other
reserves
(note 27)
Retained
earnings
Total
equity
attributable
to owners
of the parent
Non-
controlling
interests in
equity
Total
equity
28.9
126.6
83.8
779.3
1,018.6
0.5
1,019.1
–
–
–
–
–
–
–
–
–
–
–
28.9
–
–
–
–
–
–
–
–
–
–
28.9
–
–
–
–
–
–
–
–
–
–
–
126.6
–
–
–
–
–
–
–
–
–
–
126.6
–
–
(23.1)
(23.1)
–
–
6.8
(0.1)
2.8
(6.5)
0.5
64.2
–
–
(7.2)
(7.2)
–
–
(1.7)
1.5
(4.2)
2.6
55.2
171.7
(12.2)
–
159.5
171.7
(12.2)
(23.1)
136.4
(18.7)
(92.5)
–
–
–
6.5
–
(18.7)
(92.5)
6.8
(0.1)
2.8
–
0.5
834.1 1,053.8
114.3
(21.5)
–
92.8
114.3
(21.5)
(7.2)
85.6
(1.8)
(96.6)
–
–
4.2
–
(1.8)
(96.6)
(1.7)
1.5
–
2.6
832.7 1,043.4
0.1
–
–
0.1
171.8
(12.2)
(23.1)
136.5
–
–
–
–
–
–
–
(18.7)
(92.5)
6.8
(0.1)
2.8
–
0.5
0.6 1,054.4
0.2
–
–
0.2
114.5
(21.5)
(7.2)
85.8
–
–
–
–
–
–
(1.8)
(96.6)
(1.7)
1.5
–
2.6
0.8 1,044.2
78
Cobham plc Annual Report and Accounts 2013
Consolidated Cash Flow Statement
For the year ended 31 December 2013
£m
Operating profit (as restated for prior year)
Non-cash items:
Share of post-tax profits of joint ventures and associates
Revaluation gain arising on equity interests
Depreciation and amortisation including impairment
(Profit)/loss on sale of property, plant and equipment
Business acquisition and divestment related items
Movements in non-hedge accounted derivative financial instruments
Pension contributions in excess of service cost and administration cost (as restated for prior year)
Share based payments
Operating cash movements:
Increase in inventories
(Increase)/decrease in trade and other receivables
Decrease in trade and other payables
Decrease in provisions
Tax paid
Interest paid
Interest received
Net cash from operating activities
Cash flows from investing activities
Dividends received from joint ventures
Purchase of property, plant and equipment
Purchase of intangible assets
Capitalised expenditure on intangible assets
Proceeds on disposal of property, plant and equipment
Investment in other financial assets
Loans repaid by/(issued to) joint ventures
Investment in loan notes
Acquisition of subsidiaries net of cash or debt acquired
Contingent consideration paid
Proceeds from vesting of warrants in acquired business
Proceeds of business divestments
Net cash used in investing activities
Cash flows from financing activities
Dividends paid
Purchase of treasury shares
Proceeds on allocation of treasury shares
New borrowings
Repayment of borrowings
Net cash used in financing activities
Net decrease in cash and cash equivalents
Exchange movements
Cash and cash equivalents at start of year
Cash and cash equivalents at end of year
Note
2013
158.8
(3.1)
(62.1)
235.1
(1.1)
(1.6)
(2.2)
(14.5)
(1.7)
(0.3)
(26.2)
(0.3)
(3.9)
(37.6)
(33.7)
5.0
210.6
3.7
(58.0)
(11.7)
–
8.0
(6.1)
2.1
(18.3)
(126.0)
(2.5)
–
0.5
(208.3)
(96.6)
(15.3)
13.5
67.0
(7.7)
(39.1)
(36.8)
(14.4)
250.2
199.0
29
23
24
28
32
11
29
8
10
A reconciliation of cash and cash equivalents to the Consolidated Balance Sheet and movement in net debt is detailed in note 10.
www.cobham.com
Cobham plc Annual Report and Accounts 2013
2012
237.5
(7.4)
(1.0)
129.2
0.6
(6.6)
(11.1)
(14.3)
6.8
(3.6)
34.4
(1.0)
(1.4)
(45.2)
(35.3)
6.6
288.2
7.5
(48.2)
(13.8)
(1.4)
1.0
–
(36.9)
–
(282.7)
(3.0)
8.4
47.4
(321.7)
(92.5)
(26.3)
7.5
184.5
(113.1)
(39.9)
(73.4)
(8.3)
331.9
250.2
79
Group Financial Statements Notes to the Group Financial Statements
Management judgement and estimation uncertainty
The preparation of financial statements in conformity with IFRS
requires the use of estimates and judgements that affect the
application of accounting policies and reported amounts of assets,
liabilities, revenue and expenses.
These estimates and judgements are continually evaluated and
are based on historical experience and other factors, including
expectations of future events that are believed to be reasonable
under the circumstances. The current economic conditions have
been considered when evaluating accounting estimates and
judgements, including the application of the going concern basis
of preparation. Although estimates are based on management’s best
knowledge of the amount, event or actions, actual results ultimately
may differ from those estimates.
The Board considers that the key assumptions concerning the future,
and other key sources of estimation uncertainty at the balance sheet
date, which have a significant risk of causing a material adjustment
to the carrying amounts of assets and liabilities in the next financial
year, are as follows:
Intangible assets recognised on acquisition
On completion of a business combination, the cost is allocated
by recognising the identifiable assets, liabilities and contingent
liabilities acquired at fair value. Intangible assets are recognised
where they are separable or arise from contractual or legal rights,
and have a fair value that can be measured reliably. For the Group,
these intangible assets usually comprise contractual arrangements,
customer relationships and technology based assets, but can also
include acquired patents, software rights and licences and
development costs.
In establishing the fair value for intangible assets recognised on
acquisition and their estimated useful lives, the Group takes account
of the individual circumstances of the entity acquired. Factors
considered include trading data, the value and duration of contracts
acquired and the strength, duration and degree of exclusivity of
relationships with customers. Valuation estimates are also used,
including the estimation of likely external royalty rates that could
be associated with technology and branding assets and attributable
future cash flows.
Impairment of goodwill
A review of the carrying value of goodwill is completed at least once
a year to ensure that it is not impaired. This requires estimation of the
value in use of the cash generating units (CGUs) to which the goodwill
is allocated. Estimating the value in use requires the Group to make an
estimate of the expected future cash flows from the CGUs and also to
choose a suitable discount rate in order to calculate the present value
of those cash flows. Further details are given in note 11.
1. Accounting Policies
General information
These financial statements are the consolidated financial statements
of Cobham plc (the Company), a public company limited by shares,
registered and domiciled in the United Kingdom and its subsidiaries
(the Group).
Basis of preparation
These consolidated financial statements have been prepared in
accordance with International Financial Reporting Standards (IFRS)
as adopted by the EU, International Financial Reporting Interpretation
Council (IFRIC) interpretations and those parts of the Companies
Act 2006 applicable to companies reporting under IFRS.
These financial statements have been prepared on a going concern
basis under the historical cost convention, as modified by the
revaluation of derivative financial instruments and assets held
for sale which are held at fair value.
Principal accounting policies
The principal accounting policies, which have been consistently
applied unless otherwise stated, are as set out below.
Accounting developments
New standards and amendments to standards which have been
adopted with effect from 1 January 2013 and which impact these
financial statements are as follows:
• The implementation of IFRS 13, Fair Value Measurement has
required some amendments to disclosures on financial instruments
but has not affected the fair value measurements used.
• The amendment to IAS 19, Employee Benefits has been applied
retrospectively. This resulted in a reduction in the prior year
reported profit after tax of £1.6m; further details are provided
in note 2.
• The amendment to IAS 1, Financial Statement Presentation has
impacted the presentation of items within Other Comprehensive
Income (OCI), grouping items on the basis of whether they can,
or cannot, be subsequently reclassified to profit or loss.
In addition, the following standards, amendments to standards and
interpretations have been adopted with effect from 1 January 2013.
However no changes to previously published accounting policies
or other adjustments were required on their adoption.
• Amendment to IAS 12, Deferred tax: Recovery
of Underlying Assets
• Amendment to IFRS 7, Financial Instruments: Disclosures –
offsetting Financial Assets and Financial Liabilities
• Amendments to IFRS 1, First time adoption – Government
Grants and Hyperinflation
• Annual Improvements 2011
•
IFRIC 20, Stripping Costs in the Production Phase
of a Surface Mine
80
Cobham plc Annual Report and Accounts 2013
Taxation
The Group is subject to taxes in numerous jurisdictions. Significant
judgement is required in determining the worldwide provision for tax.
There are many transactions and calculations for which the ultimate tax
determination is uncertain during the ordinary course of business. The
Group recognises liabilities based on estimates of whether additional
taxes will be due. Where the final tax outcome of these matters is
different from the amounts that were initially recorded, such differences
will impact the current and deferred tax provisions and the income
statement in the period in which such determination is made.
Retirement benefits
The Group Financial Statements include costs and liabilities in relation
to retirement benefit obligations. A number of assumptions are made
in assessing the costs and present value of the pension assets and
liabilities, which include the long term rate of increase of salary costs,
discount rate, inflation, and mortality rates. The Group uses published
indices and independent actuarial advice to select the values of
critical assumptions, which are disclosed in note 24.
Provisions
Where appropriate, the consolidated financial statements include
provisions for the estimated outcome of commercial disputes and
other claims, including those with long term contract partners. The
Directors take account of the advice of experts in quantifying the
expected costs of future adverse outcomes. Due to the inherent
uncertainty associated with such disputes and any related legal
proceedings, the timing and determination of the amount of any
payments under such claims could differ from the amounts provided.
Definitions
Underlying measures
To assist with the understanding of earnings trends, the Group
has included within its published financial statements non-GAAP
measures including trading profit and underlying earnings results.
These are considered by the Board to be the most meaningful
measures under which to assess the true operating performance
of the Group.
All underlying measures include the operational results of all
operations including those available for sale until the point of sale.
Trading profit
This has been defined as operating profit from continuing operations
excluding the impacts of business acquisition and divestment related
activity and business restructuring costs as detailed below. Also excluded
are changes in the marking to market of non-hedge accounted derivative
financial instruments, impairments of intangible assets, and items
deemed by the Directors to be of an exceptional nature.
Business acquisition and divestment related items excluded from
trading profit and underlying earnings include the amortisation
of intangible assets recognised on acquisition, the revaluation
gain arising on the original equity interests in FBH, adjustments to
businesses held for sale, the writing off of the pre-acquisition profit
element of inventory written up on acquisition, other direct costs
associated with business combinations and terminated divestments,
and adjustments to contingent consideration related to previously
acquired businesses.
Business restructuring costs relate to the restructuring of the Group’s
portfolio which are incremental to normal operations. These relate
exclusively to the ongoing design and implementation of Standard
Operating Frameworks within the principal locations, initial
development costs of a new ERP computer system, together with
site consolidation, consequential asset write downs and workforce
reduction costs arising from additional streamlining under the
two year extension of the EiD programme to the end of 2015.
Underlying earnings
Underlying earnings are defined as trading profit less net underlying
finance costs, which excludes the unwinding of acquisition related
discounting, and after deducting associated taxation and non-
controlling interests.
Net debt
Net debt is defined as the net of borrowings less cash and cash
equivalents at the balance sheet date.
Free cash flow
Free cash flow is defined as net cash from operating activities plus
dividends received from joint ventures, less cash flows related to the
purchase or disposal of property, plant, equipment and intangible
assets but excluding payments relating to M&A related activities.
Operating segments
The chief operating decision making body for the Group has been
identified as the Board. It reviews the Group’s internal reporting in order
to assess performance and allocate resources. Details of the composition
and purpose of the Board can be found on pages 38 and 39.
The Group reports four operating segments whose revenue and results
are reported to the Board. These are Aerospace and Security, Defence
Systems, Mission Systems and Aviation Services. All operating
segments meet the definition of reportable segments as defined
in IFRS 8. The principal activities of these segments are described
on pages 14 to 21.
The Board assesses the trading performance of operating segments
based on revenue and trading profit as defined above. Finance income,
finance costs and taxation are not segmented and are reviewed by the
Board on a Group basis. Segment net assets are disclosed voluntarily
in note 4 and include intangible assets, property, plant and equipment,
investment properties, inventory, trade and other receivables, trade
and other payables and provisions. They do not include tax, net debt,
derivative financial instruments, contingent consideration payable
or retirement benefit obligations.
Basis of consolidation
The Group Financial Statements include the financial statements
of the parent company, Cobham plc, and of all its subsidiaries made
up to the end of the financial period.
Subsidiaries are all entities over which the Company has control,
which is defined as the power to govern the financial and operating
policies of an entity so as to obtain benefits from its activities.
Subsidiaries are fully consolidated from the date on which control is
transferred to the Company until the date that control ceases. On
derecognition, any amounts previously recognised in OCI in respect
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Cobham plc Annual Report and Accounts 2013
81
Group Financial Statements Notes to the Group Financial Statements continued
of that entity are accounted for as if the Group had directly disposed
of the related assets or liabilities. This may mean that amounts
previously recognised in OCI are reclassified to profit or loss.
Revenue recognition
Revenue is measured at the fair value of the right to consideration,
net of returns, rebates and other similar allowances.
Joint ventures are entities where control is shared with one or more
third parties. Associates are entities where the Group has significant
influence but do not meet the definition of a subsidiary or joint
venture. Joint ventures and associates are not consolidated but
are accounted for using the equity method. The Group Financial
Statements include the Group’s share of the post-acquisition change
in net assets and the post-tax profit or loss of jointly controlled
entities and associates from the date that joint control or significant
influence commences until the date this ceases.
Revenue from the sale of goods not under a long term contract is
recognised when the significant risks and rewards of ownership and
effective control of the goods have been passed to the customer,
recovery of the consideration is probable, and the amount of
revenue and costs can be measured reliably. In the case of contracts
with a long duration, including contracts with a funded development
phase, revenue is recognised based upon the fair value of work
performed to date assessed with reference to completed contract
milestones which have been accepted by the customer.
All intra-group transactions, balances, income and expenses are
eliminated on consolidation.
Foreign currencies
The presentation currency of the Group is sterling. Most Group
companies, including the parent company, use their local currency
as their functional currency. Transactions in currencies other than
the functional currency are translated at the exchange rate ruling
at the date of the transaction. Monetary assets and liabilities
denominated in non-functional currencies are retranslated at the
exchange rate ruling at the balance sheet date and any exchange
differences arising are taken to the Consolidated Income Statement.
For consolidation purposes, the assets and liabilities of foreign
operations are translated at the closing exchange rates. Income
statements of such undertakings are consolidated at the average
rates of exchange as an approximation for actual rates during the
year. Exchange differences arising on these translations are
accounted for in OCI and the translation reserve.
Business combinations
Businesses acquired are accounted for using the acquisition method
of accounting with effect from the date control passes. The cost
of an acquisition is measured as the fair value of the consideration
transferred. This is the fair value of the assets transferred (typically
cash), the liabilities assumed and any equity interests issued by the
Group, including contingent or deferred amounts.
Where a business combination is completed in stages, any previously
held interests are remeasured to fair value at the date at which control
is achieved. Any resulting gain or loss is recognised in the Consolidated
Income Statement. Acquisition related costs are expensed as incurred.
Identifiable assets acquired and liabilities and contingent liabilities
assumed in a business combination are measured initially at their
fair values at the acquisition date. The excess of the consideration
transferred over the fair value of the Group’s share of the identifiable
net assets acquired is recorded as goodwill.
Contingent consideration includes amounts which may become
payable in connection with completed acquisitions, based upon
future operating results of the businesses acquired. It is accounted
for as a financial liability measured at fair value on a recurring basis
and changes in the fair value are accounted for as gains or losses
recognised through profit or loss and excluded from trading profit
and underlying earnings.
82
Cobham plc Annual Report and Accounts 2013
Long term contract accounting as described in IAS 11, Construction
Contracts is not generally applicable to the longer term contracts for
sales of goods entered into by Group companies. Where long term
contract accounting is applicable, revenue is recognised on a percentage
of completion basis whereby a portion of the contract revenue is
recognised based on contract costs incurred to date compared with
total estimated costs at completion.
Revenue for services is recognised as the services are rendered with
reference to the proportion of the service delivered to date. For
‘cost-plus’ contracts (typically with government departments and
agencies), revenue is recognised to the extent of reimbursable costs
incurred, plus a proportionate amount of the estimated fee earned.
For contracts where revenue is determined on a unit activity basis,
revenue is recognised on the basis of activity undertaken in the period.
Revenue excludes intercompany sales, value added tax and other
sales taxes.
Taxation including deferred taxation
The tax expense is the sum of current tax and deferred tax.
Current tax is based on taxable profit for the year, which differs from
profit before taxation as reported in the income statement. Taxable
profit excludes items of income and expense that are taxable or
deductible in other years and also excludes items that are never
taxable or deductible. The Group’s liability for current tax is calculated
using rates that have been enacted or substantively enacted at the
balance sheet date.
Deferred tax is accounted for using the balance sheet liability method
in respect of temporary differences arising between the tax bases
of assets and liabilities and their carrying values in the consolidated
financial statements.
Deferred tax is calculated using the tax rates and laws that have been
enacted or substantively enacted by the balance sheet date and that are
expected to apply to the period when the asset is realised or the liability
is settled. Tax is charged or credited to the income statement except
when it relates to items recognised in OCI or directly in equity, in which
case the deferred tax is also dealt with in OCI or in equity respectively.
Deferred tax assets are recognised to the extent that it is probable that
taxable profits will be available against which deductible temporary
differences can be utilised. The carrying amount of deferred tax assets
is reviewed at each balance sheet date and reduced to the extent that
it is no longer probable that sufficient taxable profits will be available
to allow all or part of the assets to be recovered.
Deferred tax is provided on temporary differences arising on investments
in subsidiaries, except where the timing of the reversal of the temporary
difference is controlled by the Group and it is probable that the temporary
difference will not reverse in the foreseeable future.
Tax assets and liabilities are offset when there is a legally enforceable
right to offset current tax assets against current tax liabilities and
when the deferred taxes relate to the same fiscal authority.
Dividends
Dividends are recognised as a liability in the period in which they are
fully authorised.
Intangible assets
Goodwill
Goodwill represents the excess of the cost of acquisition over
the Group’s interest in the fair value of the identifiable assets and
liabilities of a business at the date of acquisition. Goodwill acquired
is allocated at acquisition to the CGUs that are expected to benefit
from that business combination. CGUs represent the lowest level
within the Group at which the goodwill is monitored for internal
management purposes.
Goodwill arising on business combinations is capitalised and
reviewed for impairment at least annually. Any impairment is
recognised immediately in the income statement and cannot
be subsequently reversed.
On divestment of a business the attributable amount of goodwill
is included in the determination of the profit or loss on divestment.
This includes any exchange differences reclassified to the income
statement from the translation reserve.
Other intangible assets
Intangible assets other than goodwill which are acquired by the Group
are stated at cost less accumulated amortisation and impairment
losses. These include customer relationships, technology and
software, trademarks, licences and patents. The only internally
generated intangible assets are development costs which are
capitalised as described below and internally developed software
where asset recognition criteria are met. Internally developed
software is included within other intangible assets.
All other intangible assets are amortised over the asset’s estimated
useful life on a straight-line basis as follows:
Customer relationships
5 to 15 years
Technology based assets
5 to 15 years
Development costs
2 to 10 years
Other intangible assets
6 months to 10 years
Useful lives are assessed for each asset on an individual basis, taking
into account the specific characteristics of the asset.
Research and development
Development costs are capitalised when it can be demonstrated
that the conditions for capitalisation as described in IAS 38,
Intangible Assets are met, paying particular attention to the
requirements for the product to be technically feasible and capable
of generating a financial return. At that point, further costs are
capitalised as an intangible asset until the intangible asset is readily
available for use and is then amortised as described above. All
development costs not capitalised are written off as incurred
together with all research costs.
Property, plant and equipment
Freehold and leasehold land and buildings, plant and machinery,
and fixtures, fittings, tools and equipment are held at historic cost
less accumulated depreciation and any recognised impairment
losses. Cost comprises the purchase price and any costs directly
attributable to the asset.
All property, plant and equipment other than land and assets under
construction is depreciated on a straight-line basis to the estimated
residual values over the estimated useful lives. These lives are as follows:
Freehold buildings
Leasehold properties
Plant and machinery
Fixtures, fittings, tools and
equipment
50 years
Period to next break clause
3 to 15 years
3 to 15 years
Estimated residual values and the estimated useful lives are reviewed
annually and adjusted where necessary. Freehold land is not
depreciated, but is reviewed for impairment at least annually.
Assets under construction are held at cost and transferred
to the appropriate category of property, plant and equipment
once construction is complete and they enter into service. They
are depreciated from this point in accordance with the policies
described above.
Assets held under finance leases are depreciated over their expected
useful lives on the same basis as owned assets or, where shorter,
the term of the relevant lease.
The gain or loss arising on the disposal or retirement of an asset is
determined as the difference between the sales proceeds and the
carrying amount of the asset and is recognised in the income statement.
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Cobham plc Annual Report and Accounts 2013
83
Group Financial Statements Notes to the Group Financial Statements continued
Aircraft overhaul expenditure
Major overhaul expenditure on owned aircraft is capitalised
when incurred and the resultant property, plant and equipment is
depreciated over its useful economic life. Major overhaul costs that
are contractually required on aircraft held under operating leases
are provided for over the period between the scheduled
maintenance events.
Investment properties
Investment properties, which are properties held to earn rentals
or for capital appreciation, are stated at cost in the balance sheet.
They are depreciated on a straight-line basis to their estimated
residual value over their estimated useful lives of up to 50 years.
Rental income is recognised as revenue on a straight-line basis.
Impairment losses
The carrying amounts of the Group’s non-financial assets are
reviewed at least annually to determine whether there is any
indication of impairment. In addition, intangible assets with an
indefinite useful life, such as goodwill, are tested for impairment
annually and whenever there is an indication that the asset may
be impaired.
Where there is an indication of impairment, the asset’s recoverable
amount is estimated. The recoverable amount is the higher of fair
value less costs to sell and value in use. In assessing value in use, the
estimated future cash flows are discounted to their present value
using a pre-tax discount rate that reflects current market assessments
of the time value of money and the risks specific to the asset for
which the estimates of future cash flows have not been adjusted.
An impairment loss is recognised where the recoverable amount
of an asset is lower than its carrying amount. All impairment losses
are recognised in the income statement.
An impairment loss (other than arising on goodwill) is reversed only
after a change in the estimates used to assess recoverable amount
is identified and only to the extent that the asset’s carrying amount
does not exceed the carrying amount that would have been determined,
net of depreciation or amortisation, if no impairment loss had been
recognised. Any reversal is recognised in the income statement.
Leasing
Leases are classified as finance leases whenever the terms of the
lease transfer substantially all the risks and rewards of ownership
to the lessee. All other leases are classified as operating leases.
Assets held under finance leases are recognised as assets of the
Group at their fair value or, if lower, at the present value of the
minimum lease payments, each determined at the inception of
the lease. The corresponding liability to the lessor is included in
the balance sheet as a finance lease obligation. Lease payments
are apportioned between finance charges and reduction of the
lease obligation so as to achieve a constant rate of interest on
the remaining balance of the liability. Finance charges are charged
directly to the income statement.
Rentals payable under operating leases are charged to the income
statement on a straight-line basis over the term of the relevant lease.
Benefits receivable as an incentive to enter into an operating lease
are also spread on a straight-line basis over the lease term.
Inventories
Inventories are stated at the lower of cost and net realisable value.
Cost comprises direct materials and, where applicable, direct labour
costs and those overheads that have been incurred in bringing the
inventories to their present location and condition. Cost is calculated
using the first-in, first-out method. Net realisable value represents the
estimated selling price less all estimated costs of completion and
costs to be incurred in marketing, selling and distribution. Provision is
made where necessary for obsolete, slow moving and defective items.
Non-current assets and disposal groups held for sale
Non-current assets and disposal groups classified as held for sale
are stated at the lower of carrying amount and fair value less costs
to sell. No depreciation is charged in respect of non-current assets
classified as held for sale.
Non-current assets and disposal groups are classified as held for sale
if their carrying amount will be recovered through a sale transaction
rather than through continuing use. This condition is regarded as met
only when the sale is highly probable and expected to be completed
within a year of the balance sheet date. The asset or disposal group
should be available for immediate sale in its present condition and
actively marketed at a price that is reasonable in relation to its
current fair value.
Fair values
The fair value of an asset or liability is the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the balance sheet date.
Fair value measurements are used on a recurring basis except where
used in the measurement of net assets classified as held for sale,
where accounting standards require the use of fair values only
in certain circumstances. Non-recurring fair values are also used
in the valuation of assets and liabilities in a business combination.
The fair values of derivative financial instruments have been
determined by the use of valuation techniques, primarily discounted
cash flows, based on assumptions that are supported by observable
market prices or rates.
The fair value of contingent consideration is determined based on
the estimated payment, discounted to present value and using the
entity’s own data and unobservable inputs such as the anticipated
rate of annual revenue growth, profit margins and discount rates.
The estimated payment is calculated using the income approach,
considering different scenarios of the relevant profit measure
(commonly EBITDA).
For financial assets and liabilities which are not held at fair value in
the balance sheet, the carrying values of these items are assumed
to approximate to fair value due to their short term nature.
84
Cobham plc Annual Report and Accounts 2013
Non-financial assets and liabilities measured at fair value include net
assets classified as held for sale and fair values are also used in
assessing the assets and liabilities acquired in a business combination.
These fair value measurements are based on observable market
prices or rates. For non-financial assets, the fair value takes into
account the highest and best use of the asset.
There have been no changes to the valuation techniques used during
the period. The Group’s policy is to recognise transfers in and transfers
out of fair value hierarchy levels as at the date of the event or change
in circumstances that caused the transfer, although there have been
no such transfers during the current or comparative periods.
Financial instruments
Financial assets and financial liabilities are recognised on the Group’s
balance sheet when the Group becomes a party to the contractual
provisions of the instrument. Financial assets and liabilities are
initially recognised at fair value at trade date.
Financial assets
The classification of financial assets depends on the purpose
for which the assets were acquired. Management determines
the classification of an asset at initial recognition and re-evaluates
the designation at each reporting date.
Assets held at fair value through profit or loss are those categorised
as held for trading under IAS 39 and are classified as current assets
or non-current assets dependent upon maturity. Such financial assets
are subsequently carried at fair value.
Loans and receivables are non-derivative financial assets with fixed
or determinable payments which are not quoted in an active market.
These are classified as current or non-current assets dependent upon
maturity and included within trade and other receivables. Loans and
receivables also includes cash and cash equivalents. The fair value of
these financial assets is adjusted for transaction costs that are directly
attributable to the acquisition or issue of the asset. Subsequent to
initial recognition, loans and receivables are carried at amortised cost
using the effective interest method.
Available for sale financial assets are those non-derivative financial
assets either designated by management as available for sale or not
falling into any other category. Financial assets so categorised include
equity instruments which do not have a quoted price in an active
market and hence are measured at cost.
None of the Group’s material financial assets fall into the held to
maturity category, which is defined as non-derivative financial assets
with fixed maturity dates that the Group intends to hold to maturity.
Financial liabilities
Financial liabilities are categorised on initial recognition as held for
trading under IAS 39 and are held at fair value through profit or loss,
or other liabilities, which are held at amortised cost. All financial
liabilities are classified as current or non-current liabilities dependent
upon the maturity date of the instruments.
Derivative financial instruments are categorised as held for trading
unless they are designated as hedges.
The fair value of financial liabilities held at cost (not at fair value
through profit or loss) is adjusted for transaction costs that are
directly attributable to the acquisition or issue of the liability. Financial
liabilities at fair value through profit or loss are subsequently carried
at fair value. Financial liabilities not at fair value through profit or loss
are stated at amortised cost using the effective interest method.
Trade and other receivables
Trade and other receivables are stated at their amortised cost, reduced
by appropriate allowances for estimated irrecoverable amounts.
Allowances for irrecoverable amounts are made when there is
evidence that the Group may not be able to collect the amount due.
All trade receivables which are more than six months overdue are
provided for based on estimated irrecoverable amounts determined
by reference to past default experience. Amounts which are less than
six months overdue are provided where recovery of the balance due
is considered to be doubtful.
The impairment recorded is the difference between the carrying value
of the receivables and the present value of the estimated future cash
flows. Any impairment required is recorded in the income statement
in administrative expenses. The balance may be written off in full
generally where receivables are in excess of 12 months old. At that
time, any amounts previously provided for impairment are released.
Cash and cash equivalents
Cash and cash equivalents comprise cash balances and bank deposits
with an original maturity of three months or less. Bank overdrafts that
are repayable on demand and form an integral part of the Group’s
cash management are included as a component of cash and cash
equivalents for the purpose of the Consolidated Cash Flow Statement.
Bank borrowings
Interest bearing bank loans and overdrafts are recorded at the
amount of proceeds received, net of direct issue costs. Borrowing
costs, net of amounts capitalised, including premiums payable on
settlement or redemption and direct issue costs, are charged to the
income statement and are added to the carrying amount of the
instrument to the extent that they are not settled in the period in
which they arise. Borrowing costs that are directly attributable to
relevant property, plant and equipment are capitalised as part of the
cost of that asset.
Trade payables
Trade payables do not carry any interest and are stated at their
nominal value.
Derivative financial instruments and hedge accounting
As explained in note 25, the Group’s activities expose it to the
financial risks of changes in foreign currency exchange rates and
interest rates. The Group uses foreign exchange contracts and
interest rate swap contracts to reduce these exposures and does not
use derivative financial instruments for speculative purposes. Other
derivative financial instruments may be used from time to time to
hedge other exposures such as inflation risks.
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Cobham plc Annual Report and Accounts 2013
85
Group Financial Statements Notes to the Group Financial Statements continued
The Group has documented its risk management objectives and
strategy for undertaking various hedge transactions, and utilises
hedge accounting principles in relation to interest rate swaps.
These are designated as cash flow hedges which mitigate the Group’s
exposure to changes in interest rates arising on floating rate debt.
From time to time, the Group may also use interest rate swaps
to manage its exposure to changes in the fair value of fixed rate
borrowings; however there are no such contracts outstanding
at the present time.
Foreign exchange contracts entered into to mitigate foreign exchange
impacts of trading in non-functional currencies, and inflation swaps
entered into to mitigate inflation risks, are not accounted for using
hedge accounting. Foreign currency borrowings are used to hedge
the effects of changes in the Group’s net investment in foreign
operations. These borrowings either provide a natural economic
hedge through the use of intercompany debt or are designated as fair
value hedges of the foreign currency risk attributable to the foreign
equity investment and are treated as net investment hedges.
Derivative financial instruments are initially recognised at fair value
on the date the contract is entered into and are subsequently
remeasured at their fair value. The method of recognising the
resulting gain or loss depends on whether the derivative is
designated as a hedging instrument and, if so, the nature of the
item being hedged.
Where hedge accounting is applied, the relationship between
hedging instruments and hedged items is documented at the
inception of the transaction. The Group also documents its
assessment, both at hedge inception and on an ongoing basis,
of whether the derivatives used in hedging transactions are highly
effective in offsetting changes in cash flows (or fair values if
appropriate) of hedged items.
Where interest rate swaps are designated and qualify as cash flow
hedges, the effective portion of changes in fair value is recognised
in OCI through the hedge reserve. The gain or loss relating to
the ineffective portion is recognised immediately in the income
statement. Amounts accumulated in equity are reclassified to finance
income or finance costs in the income statement in the periods
when the hedged item affects profit or loss.
When a cash flow hedging derivative expires or is sold, or when
a hedge no longer meets the criteria for hedge accounting, any
cumulative gain or loss existing in the hedge reserve in equity
at that time remains in equity and is recognised in the income
statement when the forecast transaction is ultimately recognised in
the income statement. If a hedged transaction is no longer expected
to occur, the net cumulative gain or loss recognised in the hedge
reserve in equity is immediately transferred to the income statement
in that period.
Where net investment hedging applies, the exchange differences
arising on the borrowings designated as fair value hedges are
recognised in OCI and through profit and loss on disposal of the
foreign operation.
The fair value of a hedging derivative is classified as a current asset
or liability except when the remaining maturity of the hedged item
is more than 12 months.
Where hedge accounting is not applied, the movements in fair value
of the derivative instruments are included in the income statement as
part of operating profit. The fair value of such derivatives is classified
as a current or non-current asset or liability dependent upon the
expected realisation of the assets or settlement of the liabilities.
Provisions
A provision is required when the Group has a present legal or
constructive obligation as a result of a past event and it is probable
that settlement will be required and where the amount can be
reliably measured. No provision is recognised where the existence
of an obligation is possible but will only be confirmed by uncertain
future events.
Provisions for warranty costs are recognised at the date of sale
of the relevant products, at management’s best estimates of the
expenditure required to settle the Group’s liabilities, based on past
experience and industry averages for defective products.
Contract loss provisions are recognised for onerous contracts when
the expected benefits to be derived by the Group from a contract
are lower than the unavoidable cost of meeting its obligations under
the contract.
Aircraft maintenance provisions are established in respect of significant
periodic maintenance costs, where maintenance activity is required
on leased operational aircraft or engines on a cycle greater than
12 months. Costs are charged to the income statement on the basis of
utilisation of the aircraft and are credited to the provision. The provision
is then utilised by absorbing the actual costs incurred in carrying out the
maintenance activity. Maintenance carried out on a cycle of 12 months
or less is charged to the income statement as incurred.
Provisions also arise in connection with leased aircraft, where contracts
contain specific conditions regarding the configuration of the aircraft
on its return to the lessor at the end of the lease. The estimated cost
associated with fulfilling these requirements is charged to the income
statement on an aircraft utilisation basis. The provision is utilised on
actual return of the aircraft or on incurring the expenditure required
to return the aircraft to the state of maintenance required by the lease
before return of the aircraft to the lessor.
Provisions for claims made against the Group and commitments made
under performance guarantees are recognised at management’s best
estimates of the expenditure required to settle the Group’s liabilities.
Provisions are discounted at an appropriate risk-free rate when the
impact is material.
86
Cobham plc Annual Report and Accounts 2013
Pensions
The Group operates a number of defined benefit and defined
contribution schemes.
For defined benefit schemes, current service costs and costs related
to the administration of the schemes are charged to operating profit.
Gains and losses on settlements and curtailments arising on a business
divestment are included in profit on divestment. Past service costs are
recognised immediately in the income statement. The interest on net
assets or liabilities is shown within finance income and costs. Actuarial
remeasurements are recognised immediately in OCI.
Defined benefit schemes are funded, with the assets of the scheme
held separately from those of the Group, in separate trustee
administered funds. Pension scheme assets are measured at fair value
and liabilities are measured on an actuarial basis using the projected
unit method and discounted at a rate equivalent to the current rate
of return on a high quality corporate bond of equivalent currency
and term to the scheme liabilities. The actuarial valuations are
obtained at least triennially and are updated at each balance sheet
date. The resulting net defined benefit asset or liability is presented
separately on the face of the balance sheet.
For defined contribution schemes, the amounts charged to the income
statement in respect of pension costs and other post-retirement
benefits are the contributions payable in the year. Differences between
contributions payable in the year and contributions actually paid are
recorded as either accruals or prepayments in the balance sheet.
Share capital
Ordinary share capital is classified as equity. Financial liabilities and
equity instruments are classified according to the substance of the
contractual arrangements entered into. An equity instrument is any
contract that evidences a residual interest in the assets of the Group
after deducting all of its liabilities.
Preference share capital is classified as a liability if it is redeemable on
a specific date or at the option of the preference shareholders or if
dividend payments are not discretionary. Dividends on preference
share capital classified as liabilities are recognised in the income
statement as finance costs.
Treasury shares
When ordinary share capital recognised as equity is acquired by the
Company, the shares are held as treasury shares. The consideration
paid, including commissions and taxes, is deducted from retained
earnings and total equity. The proceeds of any treasury shares
subsequently sold or re-issued, net of commission and taxes, are
recognised as an increase in retained earnings and total equity.
Share based payments
For grants made under the Group’s equity settled share based
payment schemes, amounts which reflect the fair value of options
awarded as at the time of grant are charged to the income statement
over the relevant vesting periods, taking into account the Directors’
best estimate of the number of awards expected to vest. The Group
reviews and updates the vesting estimate, which includes progress
against non-market related performance conditions, at each balance
sheet date.
The valuation methodology for all schemes is based on the
Black-Scholes model, modified where required to allow for the
impact of market related performance criteria and taking into
account all non-vesting conditions.
Future accounting developments
A number of new standards, amendments to existing standards and
interpretations have been published that are mandatory for future
accounting periods. Those endorsed by the EU for use from
1 January 2014 are as follows:
IFRS 10, Consolidated Financial Statements
•
IFRS 11, Joint Arrangements
•
IFRS 12, Disclosures of Interests in Other Entities
•
IAS 27 (revised 2011), Separate Financial Statements
•
•
IAS 28 (revised 2011), Associates and Joint Ventures
• Amendments to IFRS 10, IFRS 11 and IFRS 12: Transitional
Guidance
• Amendments to IFRS 10, IFRS 12 and IAS 27: Investment Entities
• Amendment to IAS 32, Financial Instruments: Presentation
on Offsetting Financial Assets and Financial Liabilities
• Amendments to IAS 36, Recoverable Amount Disclosures
for Non-financial Assets
• Amendments to IAS 39, Novation of Derivatives and
continuation of Hedge Accounting
IFRIC 21, Levies (not endorsed at 31 December 2013)
•
None of these have been adopted early by the Group and none
are expected to have an impact on the Group’s financial reporting.
There are also a number of new standards and amendments to
existing standards including Annual Improvements which, once
endorsed by the EU, will be effective from 1 January 2015. IFRS 9,
Financial Instruments will be adopted once endorsed for use by the
EU. Management will assess the impact of these changes on the
future reporting of the Group’s operations at the appropriate time.
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Cobham plc Annual Report and Accounts 2013
87
Group Financial Statements
Notes to the Group Financial Statements continued
2. Prior year restatement
Changes to IAS 19, Employee Benefits have resulted in some
changes to the accounting for pension schemes. The implications
of these changes are explained in this note.
The amendment to IAS 19 replaced an interest charge on pension
liabilities and a credit for the expected return on investments held
during the year with a single interest charge on net liabilities. The
amendment was required to be applied retrospectively, which means
that the numbers reported in 2012 have been updated in these
financial statements as if these new rules were in place last year.
As investments are generally expected to provide returns that
are greater than a typical interest rate this change had the effect
of increasing the net interest cost for 2012 by £0.9m.
In addition, administrative costs incurred by the Group’s pension
schemes, which amounted to £1.1m in 2012, are now charged to
administrative expenses within the Consolidated Income Statement.
These were previously dealt with as part of the finance cost related
to pension schemes.
These changes do not impact the valuation of the assets or liabilities
of the scheme. Actuarial losses, accounted for within OCI, are
restated to maintain the net liabilities as previously reported.
These adjustments are tax effected and the change in profit after
taxation impacts on Earnings per Share and underlying measures.
The Consolidated Statement of Changes in Equity, the Consolidated
Cash Flow Statement and various notes to the financial statements
are also affected.
The impacts on the 2012 financial statements can be summarised as follows:
£m
As reported
Adjustment
As restated
Consolidated Income Statement
Administrative expenses (see note below)
Operating profit (see note below)
Finance income – adjustment for expected return on pension scheme assets
Finance costs – adjustment for interest on pension scheme liabilities
Profit before taxation
Taxation
Profit after taxation
Profit attributable to owners of the parent
Earnings per Ordinary Share
Basic
Diluted
Consolidated Statement of Comprehensive Income
Profit after taxation
Remeasurements of defined benefit retirement benefit obligations
Tax effects
Total comprehensive income
Underlying measures
Trading profit (adjustment allocated to Head Office in segment information)
Net underlying finance costs
Underlying profit before taxation
Taxation charge on underlying profit
Underlying profit after tax attributable to owners of the parent
Underlying EPS
Consolidated Cash Flow Statement
Operating profit
Pension contributions in excess of service cost and administration cost
Net cash from operating activities
(263.8)
238.6
33.4
(66.0)
206.0
(32.6)
173.4
173.3
(1.1)
(1.1)
(26.6)
25.7
(2.0)
0.4
(1.6)
(1.6)
(264.9)
237.5
6.8
(40.3)
204.0
(32.2)
171.8
171.7
16.13p
16.08p
(0.15p)
(0.15p)
15.98p
15.93p
173.4
(15.7)
(0.8)
136.5
333.1
(30.9)
302.2
(58.9)
243.2
22.63p
238.6
(15.4)
288.2
(1.6)
2.0
(0.4)
–
(1.1)
(0.9)
(2.0)
0.4
(1.6)
(0.15p)
171.8
(13.7)
(1.2)
136.5
332.0
(31.8)
300.2
(58.5)
241.6
22.48p
(1.1)
1.1
–
237.5
(14.3)
288.2
£2.9m reported in the 2012 Annual Report and Accounts on a separate line in the Income Statement ‘Business divestments and similar
income’ has been combined into administrative expenses, with a consequential change to operating profit.
88
Cobham plc Annual Report and Accounts 2013
3. Underlying measures
Underlying measures, defined in note 1 on page 81, are derived from operating profit as set out below:
£m
Operating profit
Business restructuring – Excellence in Delivery
Movements in non-hedge accounted derivative financial instruments
Amortisation of intangible assets arising on business combinations
Impairment of goodwill
Revaluation gain arising on equity interests in FBH (2012: Thrane & Thrane)
Other business acquisition and divestment related items
Net profit on divestment of emergency locator beacons business
Additional profit on other divestments in prior years
Adjustments to businesses held for sale
Release of contingent consideration
Other M&A related costs
Trading profit
Net underlying finance costs
Underlying profit before taxation
Taxation charge on underlying profit
Non-controlling interests
Underlying profit after tax attributable to owners of the parent
Underlying basic EPS
Underlying diluted EPS
Note
2013
2012
(as restated)
11
29
20
158.8
56.1
(2.2)
103.9
63.0
(62.1)
–
(2.1)
8.3
(11.9)
5.8
317.6
(29.6)
288.0
(57.0)
(0.2)
230.8
237.5
37.9
(11.1)
68.9
–
(1.0)
(7.8)
(7.4)
13.3
(8.7)
10.4
332.0
(31.8)
300.2
(58.5)
(0.1)
241.6
21.60p
21.51p
22.48p
22.42p
Underlying administrative expenses, which exclude the reconciling items in the table above, amounted to £169.6m (2012: £170.4m as restated),
representing 9.5% (2012: 9.7%) of revenue.
Business restructuring costs relate to the restructuring of the Group’s portfolio under its EiD programme which are incremental to normal
operations. These relate exclusively to the ongoing design and implementation of Standard Operating Frameworks within the principal
locations, initial development costs of a new ERP computer system, together with site consolidation, consequential asset write downs and
workforce reduction costs arising from additional streamlining under the two year extension of the programme, which continues into 2015.
As disclosed in note 29, on 15 July 2013 an agreement was reached to acquire the 50% shareholding that the Group did not already own in
FBH. The proceeds of the deemed disposal of the 50% interest previously held were valued at £74.2m which generated the revaluation gain
arising on equity interests in FBH of £62.1m.
Net cash from operating activities is reconciled to free cash flow as follows:
£m
Net cash from operating activities per cash flow statement
Dividends received from joint ventures
Purchase of property, plant and equipment
Purchase of intangible assets
Capitalised expenditure on intangible assets
Proceeds on disposal of property, plant and equipment
M&A costs paid
Free cash flow
2013
2012
210.6
3.7
(58.0)
(11.0)
–
8.0
1.7
155.0
288.2
7.5
(48.2)
(13.8)
(1.4)
1.0
7.8
241.1
Free cash flow before Excellence in Delivery restructuring costs
205.9
272.9
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Cobham plc Annual Report and Accounts 2013
89
Group Financial Statements Notes to the Group Financial Statements continued
4. Revenue and segmental information
Revenue
Revenue comprises income from the sale of goods and services during the year and can be analysed as follows:
£m
Revenue from sale of goods
Revenue from services
2013
2012
1,424.8
364.9
1,789.7
1,423.1
326.3
1,749.4
Major customers
Revenue of £130.8m (2012: £162.9m) is directly attributable to US Government departments and agencies, although this is widely spread across
different agencies and customers. This accounts for 7.3% of total revenue (2012: 9.3%) and originates in all segments other than Cobham
Aviation Services. In addition, a number of customers also sell our products on to various US Government departments and agencies.
Operating segments
£m
Revenue
Trading profit
Segment net assets
2013
2012
2013
2012
(as restated)
2013
2012
Aerospace and Security
Defence Systems
Mission Systems
Aviation Services
Head office, other activities and elimination of inter-segment items
Core Group
Non-core businesses
Total Group
Interests in joint ventures and associates
Unallocated assets
Total net assets
743.6
309.0
357.7
365.2
(6.7)
1,768.8
20.9
1,789.7
697.3
322.9
372.6
326.6
(6.5)
1,712.9
36.5
1,749.4
132.4
46.5
74.0
48.0
14.2
315.1
2.5
317.6
149.1
44.9
81.3
38.0
13.8
327.1
4.9
332.0
795.5
335.2
294.9
322.9
20.7
1,769.2
(3.1)
1,766.1
3.1
(725.0)
1,044.2
794.8
377.1
251.9
157.0
76.5
1,657.3
(10.5)
1,646.8
15.8
(608.2)
1,054.4
Head office results (net of recoveries) are not included within the operating segments as described above. Non-core businesses are those
which were identified for divestment in 2011.
The Group’s share of the post-tax results of joint ventures and associates arises in Aviation Services (£3.1m, 2012: £7.0m) and Aerospace
and Security (£nil, 2012: £0.4m).
Trading profit is reconciled to profit before taxation as follows:
£m
Trading profit
Business restructuring – Excellence in Delivery
Movements in non-hedge accounted derivative financial instruments
Amortisation of intangible assets arising on business combinations
Impairment of goodwill
Revaluation gain arising on equity interests in FBH (2012: Thrane & Thrane)
Other business acquisition and divestment related items
Net finance costs
Profit before taxation
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Cobham plc Annual Report and Accounts 2013
Note
2013
2012
(as restated)
3
23
10
29
6
317.6
(56.1)
2.2
(103.9)
(63.0)
62.1
(0.1)
(32.2)
126.6
332.0
(37.9)
11.1
(68.9)
–
1.0
0.2
(33.5)
204.0
Depreciation of property, plant and equipment, investment properties and amortisation of internally generated intangibles are included in the
calculation of trading profit and can be analysed by segment as follows:
£m
Aerospace and Security
Defence Systems
Mission Systems
Aviation Services
Core Group
Non-core businesses
Total Group
2013
17.3
13.5
6.4
30.6
67.8
0.4
68.2
2012
14.7
14.8
6.5
23.6
59.6
0.7
60.3
Details of employees analysed by operating segment can be found in note 5.
Geographical information
Revenue
Revenue from external customers analysed by their geographical location, irrespective of the origin of the goods and services, is shown
below. Revenue from customers located in individual countries within the EU (except the UK) and the rest of the world is not considered
to be individually material.
£m
Year to 31 December 2013
Year to 31 December 2012
UK
USA
Australia
235.2
172.3
812.5
885.6
249.8
241.4
Other EU
countries
277.4
292.5
Asia
132.8
99.3
Rest of the
world
Total
82.0
58.3
1,789.7
1,749.4
Non-current assets
Non-current assets are analysed by the physical location of the assets and exclude financial instruments and deferred tax assets.
£m
At 31 December 2013
At 31 December 2012
UK
USA
Denmark
402.4
212.2
588.9
666.2
272.6
295.6
Other EU
countries
101.2
106.0
Australia
90.5
111.2
Rest of the
world
Total
70.4
42.2
1,526.0
1,433.4
5. Operating costs
Operating costs include materials costs of £592.7m (2012: £575.4m) within cost of sales in the Consolidated Income Statement.
Company funded research and development
£m
Company funded research and development
Employment costs
The aggregate employment costs of Group employees are as follows:
£m
Wages and salaries
Social security costs
Pension costs
Share based payments
2013
88.0
2012
75.4
Note
2013
2012
497.0
41.1
29.6
(1.7)
566.0
467.2
39.0
25.7
6.8
538.7
24
28
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Cobham plc Annual Report and Accounts 2013
91
Group Financial Statements The average number of employees during the year, analysed by segment, is as follows:
Aerospace and Security
Defence Systems
Mission Systems
Aviation Services
Head office and other activities
Core Group
Non-core businesses
Total Group
Compensation of key management personnel
The remuneration of Directors and other members of key management during the year was as follows:
£m
Remuneration
Post-employment benefits
Share based payments
2013
2012
4,140
2,206
1,500
1,931
184
9,961
129
10,090
2013
6.2
0.7
(0.5)
6.4
4,019
2,329
1,473
1,815
131
9,767
225
9,992
2012
5.8
0.6
3.8
10.2
Audit fees
During the year the Group obtained the following services from the Company’s auditors, PricewaterhouseCoopers LLP and its associates,
as follows:
£m
Annual audit of the Parent Company and Group Financial Statements
Audit of the Company’s subsidiaries
Total fees payable for audit services
Fees payable for other services
Tax compliance services
Other tax advisory services
Other audit related assurance services
Total fees payable for other services
Total fees payable to the auditors
2013
1.0
1.1
2.1
0.3
1.2
0.2
1.7
3.8
2012
1.1
0.9
2.0
0.2
0.8
0.1
1.1
3.1
In addition to the amounts shown above, the auditors received fees of £45,750 in 2012 for the audit of the Group’s pension schemes.
A description of the work of the Audit Committee is set out in the Corporate Governance Report on pages 44 to 47 and includes an
explanation of how auditor objectivity and independence are safeguarded when non-audit services are provided by the auditors.
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Cobham plc Annual Report and Accounts 2013
Notes to the Group Financial Statements continued 6. Finance income and costs
£m
Finance income
Bank interest
Other finance income
Total finance income
Finance costs
Interest on bank overdrafts and loans
Interest on net pension scheme liabilities
Other finance expense
Total finance costs
Net finance costs excluding pension schemes
Net finance costs arising from pension schemes
Net finance costs
Note
2013
2012
(as restated)
24
3.3
2.0
5.3
(29.6)
(2.8)
(5.1)
(37.5)
(29.4)
(2.8)
(32.2)
4.0
2.8
6.8
(32.1)
(2.9)
(5.3)
(40.3)
(30.6)
(2.9)
(33.5)
Other finance expense above includes £1.5m (2012: £2.8m) in relation to interest rate swaps (previously designated as cash flow hedges)
which were terminated during 2009 and have been amortised over the life of the original contracts to August 2013. It also includes
£2.6m (2012: £1.7m) relating to the unwinding of acquisition related discounting, excluded from underlying profit in note 3.
7. Income tax expense
£m
Current tax
Charge for the year
Adjustments to tax charge in respect of prior years
Current tax
Deferred tax
Credit for the year
Adjustments to tax charge in respect of prior years
Impact of change in tax rates
Deferred tax
Total tax charge for the year
Note
2013
2012
(as restated)
44.1
(14.7)
29.4
(16.5)
0.2
(1.0)
(17.3)
50.0
(2.6)
47.4
(0.5)
(14.7)
–
(15.2)
12.1
32.2
22
Income tax is calculated on the estimated assessable profit for the year at the rates prevailing in the relevant tax jurisdiction. The total tax
charge for the year includes £7.7m (2012: £6.8m) for the UK.
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Cobham plc Annual Report and Accounts 2013
93
Group Financial Statements The total charge for the year can be reconciled to the accounting profit as follows:
£m
Profit before tax
Tax thereon at the UK income tax rate of 23.25% (2012: 24.5%)
Tax effect of share of results of joint ventures and associates
Effect of differences in overseas taxation rates
Expenditure qualifying for additional R&D tax relief
Revaluation gain on FBH
Goodwill impairment
Adjustments to tax charge in respect of prior years
Impact of other items
Total tax charge for the year
2012
(as restated)
2013
126.6
204.0
29.4
(0.7)
1.0
(3.7)
(14.4)
14.6
(14.5)
0.4
12.1
50.0
(1.8)
6.7
(5.7)
–
–
(17.3)
0.3
32.2
In addition to the tax expense charged to the income statement, the following charges/(credits) have been included in OCI and equity:
£m
Included in OCI
Items that will not be reclassified subsequently to profit or loss
Actuarial loss on retirement benefit obligations
Actuarial loss on other retirement benefit obligations
Items that may subsequently be reclassified to profit or loss
Movements in hedge accounted derivative financial instruments
Included in equity
Share based payments
The rate of UK corporation tax will reduce from 23% to 21% from 1 April 2014 and to 20% from 1 April 2015.
8. Dividends
£m
Final dividend of 6.4 pence per share for 2012 (2011: 6.2 pence)
Interim dividend of 2.64 pence per share for 2013 (2012: 2.4 pence)
Total dividend authorised and paid during the year
2012
(as restated)
2013
(4.1)
–
(4.1)
(1.8)
(0.2)
(2.0)
1.2
3.2
2.6
0.5
2013
68.5
28.1
96.6
2012
66.7
25.8
92.5
In addition to the above, the Directors are proposing a final dividend in respect of the financial year ended 31 December 2013 of 7.04 pence
per share at an estimated total cost of £75.2m. This dividend is subject to approval by shareholders at the Annual General Meeting and has not
been included as a liability in these financial statements. If authorised, it will be paid on 30 May 2014 to shareholders who are on the register
of members as at 2 May 2014. The total dividend in respect of the financial year ended 31 December 2013 will therefore be 9.68 pence per
share (2012: 8.8 pence). The total amount payable in respect of 2013 will be £103.3m.
94
Cobham plc Annual Report and Accounts 2013
Notes to the Group Financial Statements continued 9. Earnings per Ordinary Share
Basic earnings per share (EPS)
Earnings attributable to owners of the parent
Effect of dilutive securities
Diluted EPS
10. Cash and cash equivalents and net debt
Reconciliation of cash and cash equivalents and net debt
£m
Cash and cash equivalents as shown in Cash Flow Statement
Bank overdrafts
Cash and cash equivalents per Balance Sheet
Borrowings – current liabilities
Borrowings – non-current liabilities
Net debt at 31 December
2013
2012
Weighted
average
number of
shares
million
Earnings
£m
Per share
amount
pence
Earnings
(as restated)
£m
Weighted
average
number of
shares
million
Per share
amount
(as restated)
pence
114.3
114.3
1,068.7
4.3
1,073.0
10.70
171.7
10.65
171.7
1,074.7
3.0
1,077.7
15.98
15.93
2013
2012
199.0
1.7
200.7
(344.5)
(309.6)
(453.4)
250.2
14.0
264.2
(307.3)
(316.8)
(359.9)
Details of the offsetting of overdrafts with cash and cash equivalents and other financial instruments can be found in note 16.
Reconciliation of movements in net debt
£m
Net debt at 1 January
Decrease in cash and cash equivalents in the year per Cash Flow Statement
New borrowings
Repayment of borrowings
Exchange movements
Net debt at 31 December
2013
2012
(359.9)
(36.8)
(67.0)
7.7
2.6
(453.4)
(232.5)
(73.4)
(184.5)
113.1
17.4
(359.9)
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Cobham plc Annual Report and Accounts 2013
95
Group Financial Statements 11. Intangible assets
£m
Cost
At 1 January 2012
Additions – purchased
Additions – internally generated
Recognised on business combinations
Business divestments
Disposals and derecognitions
Foreign exchange adjustments
Reclassifications
At 1 January 2013
Additions – purchased
Recognised on business combinations
Disposals and derecognitions
Foreign exchange adjustments
Reclassifications
At 31 December 2013
Accumulated amortisation and impairment
At 1 January 2012
Charge for the year
Eliminated on business divestments
Disposals and derecognitions
Foreign exchange adjustments
At 1 January 2013
Amortisation charge for the year
Impairment provision
Disposals and derecognitions
Foreign exchange adjustments
Reclassifications
At 31 December 2013
Carrying amount
At 31 December 2013
At 31 December 2012
At 1 January 2012
Goodwill
Customer
relationships
Technology
based assets
Development
costs
Other
Total
678.5
–
–
150.5
(22.5)
–
(17.4)
–
789.1
–
86.9
–
(1.5)
–
874.5
–
–
–
–
–
–
–
63.0
–
–
–
63.0
237.8
–
–
81.9
–
(7.6)
(9.8)
–
302.3
–
59.2
(60.9)
2.3
–
302.9
92.1
36.0
–
(7.6)
(4.3)
116.2
53.0
–
(60.9)
(0.1)
–
108.2
811.5
789.1
678.5
194.7
186.1
145.7
138.1
–
–
55.3
(0.4)
(15.3)
(4.5)
–
173.2
–
25.4
(34.3)
2.3
–
166.6
61.4
27.9
(0.2)
(15.3)
(2.1)
71.7
39.9
–
(34.3)
0.4
–
77.7
88.9
101.5
76.7
3.4
–
1.4
–
–
–
(0.1)
–
4.7
–
–
(2.7)
0.1
–
2.1
2.1
0.5
–
–
(0.1)
2.5
1.2
–
(2.7)
0.1
–
1.1
1.0
2.2
1.3
52.9
13.8
–
3.3
(0.2)
(23.3)
(1.7)
0.7
45.5
11.0
46.1
(5.9)
(0.4)
1.0
97.3
37.5
9.3
(0.2)
(23.1)
(1.2)
22.3
14.8
–
(5.9)
(0.5)
0.5
31.2
1,110.7
13.8
1.4
291.0
(23.1)
(46.2)
(33.5)
0.7
1,314.8
11.0
217.6
(103.8)
2.8
1.0
1,443.4
193.1
73.7
(0.4)
(46.0)
(7.7)
212.7
108.9
63.0
(103.8)
(0.1)
0.5
281.2
66.1
23.2
15.4
1,162.2
1,102.1
917.6
Amortisation charged during the year relating to intangible assets recognised on business combinations was £103.9m (2012: £68.9m).
This has been excluded from underlying profit as shown in note 3. All amortisation charges are included within administrative expenses
in the Consolidated Income Statement.
Business combinations during the year represent the acquisition of Axell Wireless and the 50% of the shares of FB Heliservices Limited,
FB Leasing Limited and FBS Limited (together FBH) not already owned by Cobham. Axell Wireless forms part of the Antenna Systems strategic
business unit (SBU) and FBH operates within the Aviation Services SBU. Further details can be found in note 29.
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Cobham plc Annual Report and Accounts 2013
Notes to the Group Financial Statements continued Customer relationships represents customer lists, customer contracts and the associated benefits of customer relationships recognised on
acquisition. Technology based assets represent trade secrets and processes, patented and unpatented technology and know-how recognised
on acquisition, together with purchased technology assets. Other intangible assets represent purchased and acquired patents, licences and
trademarks, software rights and licences and the order backlog of acquired businesses at the date of acquisition. Order backlog is
derecognised when it has been fully amortised.
Goodwill and annual impairment review
Goodwill represents the premium paid in anticipation of future economic benefits from assets that are not capable of being separately
identified and separately recognised, such as the value of the workforce, and is the only indefinite life intangible asset held by the Group.
The Group reviews goodwill for potential impairment of each cash generating unit (CGU) annually, or more frequently if there are indications
that goodwill might be impaired. As a result of the site integrations and other EiD activity, CGUs are typically considered to be SBUs.
The recoverable amounts of the CGUs are determined from value in use calculations unless specific conditions at a CGU dictate otherwise.
Businesses held for sale are assessed for impairment using expected net proceeds of divestment.
Following an impairment review of the Cobham Tactical Communications and Surveillance SBU (TC&S), part of the Aerospace and Security
segment, an impairment loss of £63.0m has been recognised. Elements of the TC&S business have an exposure to short cycle orders from US
military and other US government agencies, which were impacted significantly by budget spending constraints, particularly in the second half
of 2013. While a recovery in activity is expected in the medium term it is considered appropriate to recognise an impairment of the carrying
value in light of the impact of the current situation on the value in use calculation. A discount rate of 9.0% (2012: 9.3%) was used in the value
in use calculation. The remaining goodwill related to this SBU is £43.3m.
The key assumptions for the value in use calculations are those regarding the discount rates, growth rates and operating cash projections
during the period for which management have detailed plans. Management estimate discount rates using pre-tax rates that reflect current
market assessments of the Group’s time value of money and the risks specific to the CGU being measured.
As part of its annual strategic planning process, the Group prepares cash flow forecasts for the following five years at CGU level. These are
approved by management. These forecasts take into account the current and expected economic environment including factors such as
the softening of the US defence market in the near term. The growth rate assumed after this five year period is based on long term GDP
projections of the primary market for the CGU. The long term projections used are in the range 2.0% to 2.5%. The growth rates assume that
demand for the Group’s products in the US and in the UK remains broadly in line with the underlying economic environment in the long term
future. Taking into account the expectation of future market conditions, management believe that the evolution of selling prices and direct
costs will reflect past practices.
The pre-tax rates used to discount the forecast cash flows are within the range 8.1% to 10.7% (2012: 8.8% to 10.9%), having considered
the country and currency risks in the principal territories in which the Group operates.
If the goodwill allocated to a CGU represents more than 10% of the Group’s total goodwill carrying value, then the CGU is considered
to be individually significant. These CGUs are as follows:
CGU
Operating segment
Defence Electronics
SATCOM
Antenna Systems
Life Support
Defence Systems
Aerospace and Security
Aerospace and Security
Mission Systems
Goodwill carrying value
£m
Headroom
£m
Pre-tax discount
rate
Projected GDP
growth rate
215
205
122
85
153
398
699
418
9.5%
9.0%
9.4%
9.5%
2.5%
2.1%
2.2%
2.5%
Sensitivity analysis has been performed on these CGUs and no impairment losses would arise if the discount rate increased by 20%,
if the growth rate was zero or if cash flows reduced by 20%. The Directors have not identified any other likely changes in other significant
assumptions that would cause the carrying value of recognised goodwill to exceed its recoverable amount.
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Cobham plc Annual Report and Accounts 2013
97
Group Financial Statements 12. Property, plant and equipment
Land and buildings
£m
Freehold
Long leases
Short leases
Plant and
machinery
(including aircraft
& vehicles)
Fixtures,
fittings, tools
and equipment
Payments on
account and
assets under
construction
Cost
At 1 January 2012
Additions
Acquired with business combinations
Business divestments
Disposals
Foreign exchange adjustments
Reclassifications
At 1 January 2013
Additions
Acquired with business combinations
Reclassified as held for sale
Disposals
Foreign exchange adjustments
Reclassifications
At 31 December 2013
Accumulated depreciation
At 1 January 2012
Depreciation charge for the year
Eliminated on business divestments
Eliminated on disposals
Foreign exchange adjustments
Reclassifications
At 1 January 2013
Depreciation charge for the year
Eliminated on disposals
Reclassified as held for sale
Foreign exchange adjustments
Reclassifications
At 31 December 2013
Carrying amount
At 31 December 2013
At 31 December 2012
At 1 January 2012
84.9
0.1
2.9
(1.4)
(0.7)
(2.3)
7.7
91.2
2.7
–
(2.1)
(2.8)
(2.9)
2.3
88.4
25.5
3.7
(0.4)
(0.6)
(0.8)
–
27.4
4.5
(1.3)
(1.5)
(1.1)
–
28.0
60.4
63.8
59.4
36.4
1.9
–
–
(0.5)
(0.6)
(0.2)
37.0
2.0
–
–
(7.4)
(0.2)
0.7
32.1
13.8
2.6
–
–
(0.5)
(0.2)
15.7
2.5
(3.6)
–
(0.1)
–
14.5
17.6
21.3
22.6
10.2
0.5
–
–
(0.3)
(0.4)
–
10.0
0.1
–
–
(3.7)
–
0.2
6.6
6.2
1.2
–
(0.2)
(0.2)
–
7.0
1.2
(2.9)
–
(0.1)
0.1
5.3
1.3
3.0
4.0
565.9
23.5
2.6
(3.1)
(14.9)
(13.5)
2.2
562.7
33.4
74.8
–
(31.3)
(36.3)
2.5
605.8
364.9
40.2
(2.6)
(13.3)
(7.8)
–
381.4
45.8
(27.0)
–
(20.9)
(1.8)
377.5
228.3
181.3
201.0
79.6
5.3
0.9
(0.5)
(1.2)
(2.3)
4.7
86.5
4.4
2.4
–
(6.6)
(3.2)
4.2
87.7
56.8
7.5
(0.4)
(0.9)
(1.7)
0.8
62.1
8.8
(5.8)
–
(2.4)
1.2
63.9
23.8
24.4
22.8
8.8
16.3
–
–
–
(0.3)
(13.8)
11.0
18.0
1.6
–
–
(0.3)
(10.9)
19.4
–
–
–
–
–
–
–
–
–
–
–
–
–
19.4
11.0
8.8
Total
785.8
47.6
6.4
(5.0)
(17.6)
(19.4)
0.6
798.4
60.6
78.8
(2.1)
(51.8)
(42.9)
(1.0)
840.0
467.2
55.2
(3.4)
(15.0)
(11.0)
0.6
493.6
62.8
(40.6)
(1.5)
(24.6)
(0.5)
489.2
350.8
304.8
318.6
98
Cobham plc Annual Report and Accounts 2013
Notes to the Group Financial Statements continued 13. Investment properties
£m
Carrying amount at 1 January
Disposals
Depreciation
Foreign exchange adjustments
Carrying amount at 31 December
2013
10.7
(0.3)
(0.4)
(0.1)
9.9
2012
11.2
–
(0.3)
(0.2)
10.7
The total fair value of the Group’s investment properties has been assessed to be £14.2m (2012: £18.0m). This includes £7.8m for UK properties
based on estimated market prices provided by external valuers, Vail Williams LLP as at 31 December 2013, and £6.4m for the US property,
which is based on Directors’ estimates using current market data.
Property rental income earned by the Group from its investment properties amounted to £1.9m (2012: £1.8m), which is net of all direct costs
associated with the leasing of the property except depreciation. The buildings are leased to commercial users on operating leases with terms
of between 5 and 25 years, commencing between 1998 and 2010.
14. Investments in joint ventures and associates
The Group has the following interests in joint ventures and associates:
Name
Aviation Défense Service SA
Northrop Grumman Cobham Intercoms LLC
Philtech Co., Ltd
Percentage
shareholding
Nature of
relationship
Reporting segment
Country of incorporation
or registration
45%
50%
30%
Joint venture
Joint venture
Associate
Aviation Services
Aerospace and Security
Aerospace and Security
France
USA
South Korea
The Company’s joint ventures and associates all have share capital consisting solely of ordinary shares, which are indirectly held, and the
country of incorporation or registration is also their principal place of operation. Details of the acquisition of FB Heliservices Limited, FBS
Limited and FB Leasing Limited, which were previously held as joint ventures, are given in note 29. The 45% investment in Aviation Défense
Service SA is treated as a joint venture because the governance structure means that the Group has joint control with its partner.
The share of the balance sheets and income statements of the joint ventures, included in the consolidated financial statements, is as follows:
£m
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Net assets
Income
Expenses
2013
2.1
4.1
(2.8)
(0.3)
3.1
25.2
(20.4)
2012
13.1
44.4
(13.5)
(28.2)
15.8
49.6
(39.6)
The assets and results of the associated undertaking are not separately disclosed on the basis of materiality. The address of the principal place
of business of Philtech Co., Ltd is Sujeong-gu, Seonngnam-si, Gyeonggido, South Korea.
15. Inventories
£m
Raw materials and consumables
Work in progress
Finished goods and goods for resale
Allowance for obsolescence
2013
2012
139.0
187.0
36.8
(46.9)
315.9
128.1
185.8
34.2
(41.7)
306.4
99
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Cobham plc Annual Report and Accounts 2013
Group Financial Statements During the year £15.2m (2012: £14.0m) was provided, £6.1m (2012: £5.0m) was utilised and £6.4m (2012: £9.4m) of the allowance for
obsolescence was reversed.
This allowance is reviewed by management on a regular basis and further amounts are provided or released as considered necessary.
The amounts are generally determined based on factors which include ageing and known demand. Subsequent events may give rise
to these estimates being revised and, consequently, to the reversal of amounts previously provided.
Inventory will be realised within the normal operating cycle of the businesses. Within the Mission Systems segment, inventory relating
to long term contracts expected to be realised after more than 12 months amounts to £39.0m (2012: £34.6m).
16. Financial instruments
The Group’s financial assets and liabilities can be categorised as follows:
Note
Loans and
receivables
Fair value
through profit
or loss
Amortised
cost
Derivatives
used for
hedging
Total carrying
amount
£m
Financial assets
Trade receivables
Other receivables
Cash and cash equivalents
Derivative contracts (not hedge accounted)
Other financial assets
Financial liabilities
Borrowings
Trade payables
Accruals
Contingent consideration
Other financial liabilities
Derivative contracts (not hedge accounted)
Hedging instruments
Liabilities
Net financial liabilities at 31 December 2013
Financial assets
Trade receivables
Other receivables
Cash and cash equivalents
Derivative contracts (not hedge accounted)
Financial liabilities
Borrowings
Trade payables
Accruals
Contingent consideration
Other financial liabilities
Derivative contracts (not hedge accounted)
Hedging instruments
Liabilities
Net financial liabilities at 31 December 2012
–
–
–
11.7
–
–
–
–
(27.4)
–
(8.8)
–
–
–
–
7.1
–
–
–
(16.8)
–
(8.6)
–
–
–
–
6.1
(654.1)
(117.1)
(99.6)
–
(47.8)
–
–
–
–
–
–
(624.1)
(105.1)
(109.9)
–
(41.8)
–
17
17
10
23
19
20
20
20
23
23
17
17
10
23
19
20
20
20
23
23
238.3
76.9
200.7
–
–
–
–
–
–
–
–
–
225.2
82.3
264.2
–
–
–
–
–
–
–
–
–
–
(8.3)
Fair value
238.3
76.9
200.7
11.7
6.1
(687.5)
(117.1)
(99.6)
(27.4)
(47.8)
(8.8)
–
–
–
–
–
–
–
–
–
–
–
238.3
76.9
200.7
11.7
6.1
(654.1)
(117.1)
(99.6)
(27.4)
(47.8)
(8.8)
(3.2)
(3.2)
(424.3)
(3.2)
(457.7)
–
–
–
–
–
–
–
–
–
–
225.2
82.3
264.2
7.1
(624.1)
(105.1)
(109.9)
(16.8)
(41.8)
(8.6)
(8.3)
(335.8)
225.2
82.3
264.2
7.1
(675.4)
(105.1)
(109.9)
(16.8)
(41.8)
(8.6)
(8.3)
(387.1)
Borrowings are held at amortised cost which equates to fair value except for the Group’s fixed rate senior notes. At 31 December 2013 the fair
value of those notes was £250.1m (31 December 2012: £272.2m) compared to their book value of £216.7m (31 December 2012: £220.9m). The
fair value of the senior notes and derivative financial instruments have been determined by reference to observable market prices and rates.
100
Cobham plc Annual Report and Accounts 2013
Notes to the Group Financial Statements continued Cash and cash equivalents include term deposits in Australia equivalent to £6.4m in total (2012: £7.5m). These term deposits are held primarily
to satisfy a requirement to provide security over the residual value of leased assets under an agreement which expires in 2020 but can be
realised within three months under the terms of the agreements.
Other financial assets relate to Cobham plc’s investments in connection with the FSTA project which are held at cost, totalling £6.1m (2012:
£44,000). These trade investments are categorised as available for sale in accordance with IAS 39. The results of these companies are not
consolidated within the results of the Group:
– 13% of the voting share capital of AirTanker Holdings Limited.
– 5% of the voting share capital of AirTanker Services Limited.
– 13.3% of the voting share capital of AirTanker Equity Bridge Loan Limited.
The total interest income and expense for financial assets and liabilities not held at fair value through profit or loss is as shown in note 6.
Offsetting financial assets and liabilities
The following financial assets and liabilities are subject to offsetting, enforceable master netting arrangements and similar agreements.
Cash and cash equivalents as shown in the balance sheet include overdraft balances on currency cash pooling accounts which have been
offset as the accounts will be settled on a net basis as described in note 25. Master netting agreements also cover all bank balances and
derivative balances with the same counterparty. These do not meet the criteria for offsetting because the right to offset is only enforceable
on the occurrence of future events such as a default and amounts presented in the Balance Sheet are therefore presented on a gross basis.
If full offsetting by counterparty were to be applied, the resulting net amounts would be as follows:
£m
Financial assets
Cash and cash equivalents
Derivative financial assets
Financial liabilities
Bank overdrafts
Derivative financial liabilities
As at 31 December 2013
Financial assets
Cash and cash equivalents
Derivative financial assets
Financial liabilities
Bank overdrafts
Derivative financial liabilities
As at 31 December 2012
17. Trade and other receivables
17a. Current
£m
Trade receivables (net of provision for impairment)
Accrued income
Loans and other receivables
Prepayments
Gross amounts
before set off
Amounts set
off in the
Balance Sheet
Amounts as
presented in
the Balance
Sheet
Amounts not
set off in the
Balance Sheet
Net amount
343.9
11.7
(143.2)
–
200.7
11.7
(1.4)
(5.9)
199.3
5.8
(144.9)
(12.0)
198.7
143.2
–
–
(1.7)
(12.0)
198.7
1.7
5.6
–
–
(6.4)
198.7
370.3
7.1
(120.1)
(16.9)
240.4
(106.1)
–
264.2
7.1
106.1
–
–
(14.0)
(16.9)
240.4
(10.4)
(3.0)
11.2
2.2
–
253.8
4.1
(2.8)
(14.7)
240.4
2013
2012
238.3
38.2
16.5
24.7
317.7
225.2
15.2
20.0
20.6
281.0
101
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Cobham plc Annual Report and Accounts 2013
Group Financial Statements 17b. Non-current
£m
Loans and other receivables
17c. Impairment of trade receivables
£m
Trade receivables
Provision for impairment of trade receivables
Net trade receivables
2013
22.2
2012
47.1
2013
2012
239.9
(1.6)
238.3
227.9
(2.7)
225.2
The Group has not experienced any material change in performance with respect to the recovery of trade receivables. A significant proportion
of its business is directly with government agencies or in respect of large government funded military programmes, where risk is considered
to remain low. Information concerning credit risk is shown in note 25.
The credit quality of trade receivables can be analysed as follows:
£m
2013
2012
Amounts not yet due and not impaired
Amounts past due but not impaired
Amounts for which full or partial impairment provision has been made
At 31 December
Trade receivables which are past due but not considered by management to be impaired are aged as follows:
£m
Due at 31 December
1 month overdue
2 months overdue
3 or more months overdue
186.0
51.1
2.8
239.9
2013
34.3
10.1
2.8
3.9
51.1
186.4
37.5
4.0
227.9
2012
26.4
4.5
2.4
4.2
37.5
Other classes of financial assets within trade and other receivables do not include any overdue or impaired assets. Movements in the provision
for impairment of trade receivables during the current and prior year were not individually significant.
18. Non-current assets and disposal groups held for sale
£m
Intangible assets
Property, plant and equipment
Inventories
Trade and other receivables
Total assets classified as held for sale
Trade and other payables
Tax and other liabilities
Total liabilities associated with assets classified as held for sale
2013
–
1.9
2.8
3.5
8.2
(4.7)
(0.5)
(5.2)
2012
1.1
3.1
6.1
4.8
15.1
(2.5)
(0.7)
(3.2)
Total net assets of disposal groups and non-current assets held for sale
3.0
11.9
Non-current assets and disposal groups held for sale at 31 December 2013 includes businesses and vacant properties which are being actively
marketed and are expected to be disposed of within 12 months of the balance sheet date. These assets are measured on a non-recurring
basis at fair value (based on an estimated sales price) less costs to sell as this is lower than the original carrying value of those assets.
102
Cobham plc Annual Report and Accounts 2013
Notes to the Group Financial Statements continued 19. Borrowings
£m
Current:
Bank overdrafts
Bank loans
Senior notes
Loan notes, finance leases and other borrowings
Non-current:
Bank loans
Senior notes
Finance leases
Total borrowings
2013
2012
1.7
296.4
46.2
0.2
344.5
45.3
264.1
0.2
309.6
14.0
292.3
–
1.0
307.3
–
316.2
0.6
316.8
654.1
624.1
The Group’s principal borrowings include bank overdrafts, bank loans and senior notes. Bank overdrafts are repayable on demand and accrue
interest at floating rates. Interest is payable on all bank loans at LIBOR plus margin and the loans comprise the following:
Agreement date
Maturity date
US$75m credit agreement
DKK525m multi-currency revolving facility June 2012
US$360m multi-currency revolving credit
agreement comprising:
October 2011
December 2008
US$90m
US$270m
EUR70m multi-currency revolving facility
June 2012
December 2016
October 2017
October 2016
October 2018
June 2017
Amount drawn
Undrawn facilities
2013
£m
45.3
52.7
51.7
155.2
36.8
341.7
2012
£m
46.2
18.9
53.5
160.5
13.2
292.3
2013
£m
–
5.8
2.6
7.9
21.4
37.7
2012
£m
–
38.2
1.9
5.6
43.6
89.3
Under the US$75m agreement, which expires in 2031, the lender has a series of put options exercisable every three years from December 2016.
The US$360m agreement contains lender’s options to extend for up to two years and during 2012 the first extension of one year was confirmed
by the lenders of US$270m. The DKK525m facility contains lender’s options that could extend the agreement by up to two years.
A loan agreement for AUS$90m expiring in October 2018 was signed subsequent to the year-end.
The drawdowns under the revolving multi-currency credit agreements are for periods not exceeding three months and hence these balances
are reported as current liabilities.
Senior notes with a total principal value of US$514.0m are outstanding as set out below:
£m
US$76.5m fixed rate
US$81m fixed rate
US$50m floating rate
US$105m floating rate
US$157.5m fixed rate
US$44m fixed rate
Issue date
Maturity date
2013
2012
March 2009
March 2009
May 2010
January 2010
March 2009
October 2012
March 2014
March 2016
May 2017
February/March 2018
March 2019
October 2020
46.2
48.9
30.2
63.4
95.0
26.6
310.3
47.1
49.8
30.8
64.5
96.9
27.1
316.2
103
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Cobham plc Annual Report and Accounts 2013
Group Financial Statements The various loan and note subscription agreements include both financial and non-financial covenants but do not contain any provisions for
charges over Group assets. The terms of the financial covenants are based on adjusted IFRS results and are as shown on page 25. There have
been no breaches of the terms of agreements or defaults during the current or comparative periods.
20. Trade and other payables
20a. Current liabilities
£m
Payments received on account
Trade payables
Other taxes and social security
Accruals and deferred income
Contingent consideration
Other liabilities
20b. Non-current liabilities
£m
Payments received on account
Trade payables
Accruals and deferred income
Contingent consideration
Other liabilities
Movements in the fair value of contingent consideration during the year are as follows:
£m
At 1 January 2013
Acquired on business combinations
Amounts paid
Gains or losses recognised in profit or loss:
Released in year
Unrealised change in fair value – discounting included in finance costs
Foreign exchange adjustments
At 31 December 2013
2013
2012
72.3
116.4
19.2
104.4
15.2
42.8
370.3
2013
9.4
0.7
10.7
12.2
5.0
38.0
68.6
104.8
20.6
116.6
2.5
36.8
349.9
2012
11.3
0.3
8.2
14.3
5.0
39.1
2013
16.8
22.1
(2.5)
(11.9)
2.6
0.3
27.4
The fair value of contingent consideration is not based on observable market data but is based on management’s best estimates of discounted
expected payments of contingent consideration reflecting expectations of achievement of earnings targets. The estimated fair value would
decrease with lower than anticipated annual revenue growth rates and profit margin or a higher discount rate. Management consider that
changing the unobservable inputs to reflect other reasonably possible alternative assumptions would not result in a significant change in the
estimated fair value. Of the amount outstanding at 31 December 2013, £12.5m has been paid in January 2014 and the remainder is due to be
paid by March 2015.
Contingent consideration has been released in the year following a reassessment of the likely outcome of the agreements relating to acquisitions
in a prior year. The amount released is included in administrative expenses in the Consolidated Income Statement and is excluded from
underlying profit in note 3.
104
Cobham plc Annual Report and Accounts 2013
Notes to the Group Financial Statements continued 21. Provisions
£m
Current liabilities
Non-current liabilities
Movements in provisions during the year are as follows:
£m
At 1 January 2013
Additional provisions in the year
Acquired on business combinations
Utilisation of provisions
Unused amounts reversed in the year
Reclassifications
Foreign exchange adjustments
At 31 December 2013
2013
34.4
8.6
43.0
Other
15.3
3.7
–
(3.2)
(1.9)
–
–
13.9
2012
36.3
10.9
47.2
Total
47.2
13.5
0.1
(9.7)
(8.0)
0.3
(0.4)
43.0
Provisions
related to
businesses
divested
Warranty
claims
Contract loss
provisions
Aircraft
maintenance
provisions
12.8
–
–
(0.7)
(1.3)
–
–
10.8
10.3
5.0
0.1
(3.1)
(2.0)
–
0.2
10.5
5.4
2.8
–
(2.3)
(1.5)
–
–
4.4
3.4
2.0
–
(0.4)
(1.3)
0.3
(0.6)
3.4
Provisions related to businesses divested relate to longer term warranties given on divestments completed in 2005. Due to uncertainties
surrounding the timing of settlement of these items, they have been disclosed as current liabilities.
Provisions for warranty claims and contract losses are generally expected to be crystallised within one year.
Aircraft maintenance provisions relate to significant periodic maintenance costs as well as return conditions for leased aircraft. These conditions
may relate to the number of operational hours to be available before a major maintenance check, the physical configuration of the aircraft
or direct costs to be incurred by the lessee in the physical return of the aircraft to the lessor. While there is uncertainty over the future level
of flying hours, aircraft maintenance provisions are anticipated to crystallise in the next eight years.
Other provisions include amounts provided in respect of announced business restructuring and legal claims and are expected to be settled
within one year.
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Cobham plc Annual Report and Accounts 2013
105
Group Financial Statements 22. Deferred tax
£m
Deferred tax assets
Deferred tax liabilities
2013
(9.9)
52.9
43.0
2012
(9.8)
44.2
34.4
The following are the major deferred tax assets and liabilities recognised by the Group, and the movements thereon:
£m
At 1 January 2012
(Credit)/charge to income statement (as restated)
Charge/(credit) to other comprehensive income (as restated)
Credit to reserves
Acquired with business combinations
Business divestments
Foreign exchange adjustments
Reclassifications
At 1 January 2013
(Credit)/charge to income statement
(Credit)/charge to other comprehensive income
Credit to reserves
Acquired with business combinations
Foreign exchange adjustments
Reclassifications
At 31 December 2013
Accelerated
tax
depreciation
Retirement
benefit
obligations
Intangible
assets
Other
Total
10.8
7.3
–
–
0.6
–
(0.3)
–
18.4
2.3
–
–
(1.6)
(0.8)
–
18.3
(17.8)
2.6
(1.8)
–
–
–
–
–
(17.0)
2.7
(4.1)
–
–
–
–
(18.4)
24.1
3.8
–
–
37.4
–
(1.2)
1.3
65.4
(20.1)
–
–
27.4
1.2
(0.4)
73.5
(19.9)
(28.9)
16.9
(0.5)
(2.6)
1.3
1.3
–
(32.4)
(2.2)
1.2
(2.1)
2.6
2.5
–
(30.4)
(2.8)
(15.2)
15.1
(0.5)
35.4
1.3
(0.2)
1.3
34.4
(17.3)
(2.9)
(2.1)
28.4
2.9
(0.4)
43.0
Other deferred tax assets and liabilities shown above include balances arising from temporary differences in relation to provisions,
deferred compensation, share based payments and derivative financial instruments.
Certain deferred tax assets and liabilities have been offset in accordance with the Group’s accounting policy. Deferred tax balances
(after offset) for balance sheet purposes are analysed as follows:
£m
Deferred tax liabilities fall due as follows:
Within one year
After one year
Deferred tax assets are recoverable as follows:
Within one year
After one year
106
Cobham plc Annual Report and Accounts 2013
2013
2012
17.6
35.3
52.9
(5.7)
(4.2)
(9.9)
7.2
37.0
44.2
(2.8)
(7.0)
(9.8)
Notes to the Group Financial Statements continued Without taking into consideration the offsetting of balances, deferred tax balances are as follows:
£m
Deferred tax assets
Deferred tax liabilities
At 31 December 2013
Deferred tax assets
Deferred tax liabilities
At 31 December 2012
Accelerated
tax
depreciation
Retirement
benefit
obligations
Intangible
assets
Other
Total
–
18.3
18.3
(0.8)
19.2
18.4
(18.4)
–
(18.4)
(17.0)
–
(17.0)
–
73.5
73.5
–
65.4
65.4
(44.8)
14.4
(30.4)
(42.2)
9.8
(32.4)
(63.2)
106.2
43.0
(60.0)
94.4
34.4
At the balance sheet date, the Group has unused capital losses of £65.7m (2012: £65.7m) potentially available for offset against future capital
profits in certain circumstances. No deferred tax asset has been recognised in respect of this amount because of the unpredictability of
future qualifying profit streams. These losses can be carried forward indefinitely.
At the balance sheet date, the aggregate amount of temporary differences associated with undistributed earnings of subsidiaries and joint
ventures for which deferred tax liabilities have not been recognised is £369.2m (2012: £431.1m).
23. Derivative financial instruments
The fair values of derivative financial instruments are as follows:
£m
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Fair value at 31 December 2013
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Fair value at 31 December 2012
Interest rate
swaps – cash
flow hedges
Foreign
exchange
derivatives Inflation swap
–
–
(0.5)
(2.7)
(3.2)
–
–
(3.5)
(4.8)
(8.3)
5.1
6.6
(3.6)
(1.8)
6.3
3.4
3.7
(2.6)
(2.7)
1.8
–
–
(0.5)
(2.9)
(3.4)
–
–
(0.5)
(2.8)
(3.3)
Total
5.1
6.6
(4.6)
(7.4)
(0.3)
3.4
3.7
(6.6)
(10.3)
(9.8)
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Cobham plc Annual Report and Accounts 2013
107
Group Financial Statements The movements in the fair values of derivative financial instruments during the year are as follows:
£m
At 1 January 2012
Gain/(loss) through income statement – not hedged
Gain through income statement – other
Gain reclassified to income statement
Loss through OCI – hedged items
Foreign exchange adjustments
At 1 January 2013
Gain/(loss) through income statement – not hedged
Gain through income statement – other
Gain reclassified to income statement
Foreign exchange adjustments
At 31 December 2013
Interest rate
swaps – cash
flow hedges
Note
Foreign
exchange
derivatives Inflation swap
Total
(12.4)
–
–
7.2
(3.5)
0.4
(8.3)
–
–
4.5
0.6
(3.2)
(14.4)
12.8
3.4
–
–
–
1.8
2.9
1.5
–
0.1
6.3
(1.7)
(1.7)
–
–
–
0.1
(3.3)
(0.7)
–
–
0.6
(3.4)
(28.5)
11.1
3.4
7.2
(3.5)
0.5
(9.8)
2.2
1.5
4.5
1.3
(0.3)
27
27
27
27
27
Interest rate swaps are designated as cash flow hedging instruments and hedge accounting is applied. There is no material ineffectiveness
in cash flow hedges to be reported through the income statement.
Foreign exchange and inflation derivatives are not accounted for using hedge accounting and movements in fair values are recorded in the
income statement as part of operating profit. The movement in the fair value of currency swaps which offset movements in currency
balances are offset against exchange movements in those balances in the income statement.
Full details of the Group’s financial instrument accounting policies and risk management strategies, objectives and policies are set out in the
accounting policies in note 1 and in note 25, financial risk management.
108
Cobham plc Annual Report and Accounts 2013
Notes to the Group Financial Statements continued 24. Retirement benefit schemes
Retirement benefit obligations per the Balance Sheet consist of:
£m
Defined benefit scheme assets
Defined benefit obligations
Pension expense included in employment costs in note 5 are as follows:
£m
Defined benefit schemes
Defined contribution schemes
2013
2012
577.6
(664.9)
(87.3)
572.4
(645.8)
(73.4)
2013
5.2
24.4
29.6
2012
4.6
21.1
25.7
The Group operates a number of funded defined benefit schemes, the most significant being the Cobham Pension Plan (CPP). The assets
of all of these schemes are held separately from those of the Group in funds under the control of trustees. All defined benefit schemes
have been closed to new members since 2003. The Group also manages a number of defined contribution pension arrangements.
Actuarial valuations of the present value of the defined benefit obligations for the CPP are carried out on a triennial basis by qualified
independent actuaries; the most recent valuation was as at 1 April 2012. Actuarial valuations of other schemes have been carried out at
regular intervals as required by the applicable country regulations. The actuarial valuations were updated by qualified independent actuaries
for accounting purposes to 31 December 2013.
On 1 July 2013 the liabilities related to past service of pensioners of the CPP on that date were subject to a buy-in arrangement. Under the terms
of this arrangement, the CPP transferred assets to an insurance company in return for a qualifying insurance policy which provides an income
stream to the Plan equivalent to the Plan’s obligations to pensioners covered by the arrangement. This eliminated the Group’s exposure to the
interest, inflation and longevity risks associated with these liabilities. The liabilities covered by this buy-in amounted to £242m, which had the
impact of generating an actuarial loss of £39m. This follows similar buy-in arrangements completed in 2011 related to past service of pensioner
and deferred members of some of the smaller defined benefit schemes. The insurance contract assets are measured at a value equal to the
related liabilities.
There were no significant contributions outstanding at the end of 2013 or 2012 for the defined benefit schemes. £1.2m (2012: £0.6m) was
outstanding in respect of defined contribution schemes but not due for payment at 31 December 2013.
The principal financial assumptions used for the purpose of the actuarial valuations were as follows:
Rate of increase in salary costs
Rate of increase in pensions in payment unless overridden by specific scheme rules
Rate of increase in deferred pensions
Discount rate
Inflation assumption
2013
UK
schemes
USA
scheme
UK
schemes
3.80%
3.55%
2.55%
4.50%
3.55%
3.80%
3.55%
3.55%
4.50%
3.55%
3.47%
2.97%
2.17%
4.40%
2.97%
2012
USA
scheme
3.47%
2.97%
2.97%
4.40%
2.97%
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Cobham plc Annual Report and Accounts 2013
109
Group Financial Statements The mortality assumptions used for the CPP are based upon actuarial tables which reflect actual recent mortality experience and also allow
for future mortality improvements. The mortality tables used to estimate life expectancy are known as ‘SAPS CMI 09’. In practical terms,
this is demonstrated in the table below:
Male
Female
Male
Female
Year of birth
Year age 65
Further life
expectancy
1948
1948
1980
1980
2013 22.7 years
2013 24.8 years
2045 25.8 years
2045 27.9 years
At 31 December 2013 it has been assumed that members will commute on average 20% (2012: 20%) of their pension for cash at retirement.
This implies a full take-up of the permitted 25% (2012: 25%) commutation by approximately 80% (2012: 80%) of eligible members on retirement.
The sensitivity of scheme liabilities to changes in certain key assumptions, after adjusting for liabilities covered by insurance contracts,
is provided below:
– Increasing the discount rate by 0.1% would decrease scheme liabilities by £6.2m.
– Increasing the inflation rate by 0.1% would increase scheme liabilities by £3.4m.
– If each scheme member was expected to live for an additional year, then scheme liabilities would increase by £9.4m.
The impact of increases and decreases in assumptions are approximately symmetrical.
A summary of the movements in the net liability and the amounts recognised in the income statement and other comprehensive income
are as follows:
£m
Net liability at start of year
Amounts recognised in operating profit:
Current service cost included in administrative expenses
Past service (cost)/credit included in administrative expenses
Scheme administration expenses
Amounts credited/(charged) to other finance income/costs:
Scheme
assets
Defined
benefit
obligations
2013
Total
Scheme
assets
Defined
benefit
obligations
572.4
(645.8)
(73.4)
528.7
(599.9)
–
–
(1.4)
(5.2)
–
–
(5.2)
–
(1.4)
–
–
(1.1)
(4.3)
(0.3)
–
2012
Total
(71.2)
(4.3)
(0.3)
(1.1)
Net interest
25.2
(28.0)
(2.8)
25.7
(28.6)
(2.9)
Amounts recognised in other comprehensive income:
Actual return less interest income on pension scheme assets
Actuarial loss arising on buy-in transaction
Experience gains arising on scheme liabilities
Actuarial gains and losses arising from changes in financial
assumptions
Actuarial gains and losses arising from changes in demographic
assumptions
Amounts included in cash flow statement:
Employer contributions
Member contributions
NI rebates
Benefits paid
Other changes:
Exchange differences
Net liability at end of year
22.8
(39.0)
–
–
–
21.1
2.7
–
(25.9)
–
–
–
22.8
(39.0)
–
(18.1)
(18.1)
8.7
8.7
–
(2.7)
–
25.9
21.1
–
–
–
14.8
–
–
–
–
20.0
2.8
0.6
(18.4)
–
–
12.8
14.8
–
12.8
(40.9)
(40.9)
(0.4)
(0.4)
–
(2.8)
(0.6)
18.4
20.0
–
–
–
(0.3)
577.6
0.3
(664.9)
–
(87.3)
(0.7)
572.4
0.8
(645.8)
0.1
(73.4)
110
Cobham plc Annual Report and Accounts 2013
Notes to the Group Financial Statements continued Total employer contributions exceeded current service cost, past service cost and scheme administration expenses by £14.5m (2012: £14.3m).
The present value of funded obligations relating to the US scheme is US$35.5m (2012: US$34.5m) and the fair value of scheme assets relating
to the US scheme is US$26.2m (2012: US$21.3m).
The cumulative amount of actuarial gains and losses recognised in the Consolidated Statement of Comprehensive Income since transition
to IFRS is £208.1m loss (2012: £182.5m loss). Of the actuarial losses recognised in the year, the changes in financial assumptions are primarily
driven by the movements in the discount rate and inflation assumption, and the change in demographic assumptions primarily arose from
changes to the assumed proportion of members who are married on the date of their retirement.
The actual return on scheme assets was £48.0m (2012: £40.5m) before accounting for the actuarial loss of £39.0m generated on the buy-in
transaction. The Group expects to contribute £22.1m to its defined benefit pension schemes in 2014. This includes £17.6m related to deficit
funding. The weighted average duration of the scheme liabilities is estimated to be 19 years.
The fair value of major categories of scheme assets, and as a percentage of total scheme assets, is as follows:
UK equity instruments
Overseas equities
Emerging markets equities
Gilts
Corporate bonds
Property
Diversified growth funds
Insurance contracts
Other assets
2013
%
12.9%
7.4%
3.5%
–
5.0%
–
22.1%
48.6%
0.5%
100.0%
£m
74.7
43.0
20.0
–
28.8
–
127.4
280.7
3.0
577.6
2012
%
16.7%
8.8%
3.7%
18.4%
21.7%
7.1%
16.4%
7.0%
0.2%
100.0%
£m
95.7
50.6
21.1
105.5
124.0
40.6
94.0
40.1
0.8
572.4
The expected rates of return on individual categories of scheme assets are determined by reference to relevant indices published by,
for example, the London Stock Exchange. The overall expected rate of return is calculated by weighting the individual rates in accordance
with the anticipated balance in the schemes’ investment portfolios.
The scheme assets do not include any of the Group’s own financial instruments, nor any property occupied by, or other assets used by, the Group.
The history of the scheme for the current and previous four periods is as follows:
£m
Present value of defined benefit obligations
Fair value of scheme assets
Net liability
Experience adjustments on scheme liabilities
Experience adjustments on scheme assets
2013
2012
2011
2010
2009
(664.9)
577.6
(87.3)
(645.8)
572.4
(73.4)
–
(16.2)
12.8
12.8
(599.9)
528.7
(71.2)
1.8
(40.3)
(592.8)
510.8
(82.0)
1.3
24.1
(561.3)
446.1
(115.2)
1.8
13.8
Other retirement benefit schemes
A number of the Group’s subsidiaries based in France contribute to a retirement indemnity scheme. The liabilities of the scheme were valued
by an independent actuary as at 31 December 2012 at EUR4.3m and are recorded in these financial statements at £3.6m (2012: £3.5m). These
liabilities are included in other liabilities in note 20. Retirement obligations relating to a subsidiary based in Germany have gross obligations
of EUR3.1m (2012: EUR2.2m). These obligations are covered by an insurance policy and therefore there is no net liability.
The actuarial loss for these schemes in the year to 31 December 2013, recognised in OCI, was £nil (2012: £0.5m).
www.cobham.com
Cobham plc Annual Report and Accounts 2013
111
Group Financial Statements 25. Financial risk management
The Group’s multinational operations and debt financing expose it to a variety of financial risks which include the effects of changes in
foreign currency exchange rates, interest rates, liquidity risk and credit risk. The Group has in place a risk management programme that
seeks to limit the adverse effects on the financial performance of the Group by using foreign currency financial instruments, debt and other
instruments, including interest rate swaps. Other derivative financial instruments may be used from time to time to manage other exposures
such as inflation risks. The financial risk management policies agreed by the Board have not changed during the year and are summarised
below. The Group does not trade in financial instruments.
Foreign currency risk
The Group is based in the UK, reports in sterling and has significant investment in overseas operations in the USA, Australia and other
European countries. As a result, the Group’s balance sheet can be affected by movements in these countries’ exchange rates. The Group’s
policy is to reduce, or eliminate where practical, both structural and transactional foreign exchange risk and, consequently, the net foreign
exchange losses included in the income statement amounted to £3.2m (2012: £3.6m). All currency exposures are reviewed regularly and all
significant foreign exchange transactions are approved by Cobham plc management.
The Group has the following exposure to foreign currency denominated monetary assets and monetary liabilities in its Balance Sheet,
translated into sterling at the relevant year-end exchange rates:
£m
US dollars
Euros
Australian dollars
Danish kroner
Other currencies
Sterling denominated monetary assets and liabilities
2013
2012
Monetary
assets
Monetary
liabilities
Monetary
assets
Monetary
liabilities
188.8
86.8
56.2
18.1
24.5
374.4
166.2
540.6
(584.9)
(109.3)
(54.2)
(90.7)
(8.3)
(847.4)
(117.9)
(965.3)
214.2
87.8
65.9
14.0
17.5
399.4
192.8
592.2
(620.3)
(49.7)
(72.8)
(92.6)
(6.5)
(841.9)
(74.8)
(916.7)
Foreign currency borrowings are used to mitigate the impact of foreign currency exchange differences arising from the Group’s overseas
net assets. The Group typically borrows in the currency of the acquisition and uses intercompany debt to create a natural economic hedge.
Monetary liabilities in the table above include US dollar borrowings of £482.4m (2012: £484.2m) and Danish kroner borrowings of £75.9m
(2012: £74.0m) which match exposures arising from currency denominated net assets. Foreign currency contracts are also used to manage
exposure to currency risks.
On consolidation, the net assets of overseas subsidiaries (which include the monetary assets and liabilities shown in the tables above) are
translated at closing exchange rates and exchange differences arising are accounted for in other comprehensive income and in the translation
reserve (note 27).
The Group is exposed to foreign currency risk in the income statement where individual subsidiaries hold non-functional currency monetary
assets and liabilities and when an operating unit makes sales and purchases in currencies other than its own functional currency. The Group
undertakes a formal process to actively manage and mitigate this exposure through a combination of matching non-functional currency
revenues and costs, matching non-functional currency monetary assets and liabilities and through the use of forward contracts.
112
Cobham plc Annual Report and Accounts 2013
Notes to the Group Financial Statements continued The sterling/US dollar exchange rate is the most important as far as the Group is concerned, particularly given the level of US dollars which
non-US based subsidiaries expect to receive from their normal business activities, and the proportion of the Group based in the USA. The
Group has the following forward foreign currency contracts outstanding for net sales of US dollars:
Expiring within one year
Expiring within one to two years
Expiring after two years
Contracts outstanding at 31 December
US$m amount
Average US$: £
exchange rate
2013
124.1
38.0
71.6
233.7
2012
138.7
76.0
17.9
232.6
2013
1.59
1.58
1.56
1.58
2012
1.59
1.61
1.58
1.60
The latest expiry date of forward foreign currency contracts for sales of US dollars is July 2022 and it is the Group’s current belief that the
net dollar receipts by its subsidiaries will exceed the level of the outstanding commitment.
The following table details the Group’s sensitivity to a weakening in sterling against the respective foreign currencies, with a negative number
indicating a reduction in profit after taxation or total equity. The sensitivities below represent management’s assessment of the possible
changes in foreign exchange rates, based on experience over the previous five years.
£m
US dollars
Euros
Sensitivity Profit or loss Total equity
Sensitivity
Profit or loss
Total equity
2013
2012
11%
9%
(13.8)
(3.3)
(13.8)
(3.3)
16%
13%
(21.0)
(10.3)
(21.0)
(10.3)
This sensitivity analysis has been based on the assumption that the change is effective throughout the financial year and that all other variables,
including interest rates, remain constant. It includes the effect of derivative financial instruments.
In order to provide comparable information, sensitivity has also been assessed based on a 10% weakening in sterling against the respective
foreign currency, as follows:
£m
US dollars
Euros
2013
2012
Sensitivity Profit or loss Total equity
Sensitivity
Profit or loss
Total equity
10%
10%
(12.4)
(3.7)
(12.4)
(3.7)
10%
10%
(12.2)
(7.7)
(12.2)
(7.7)
Interest rate risk
The Group has long and short-term borrowings at both fixed and floating rates of interest. In managing its borrowing costs, the Group monitors
its exposure to movements in interest rates, having regard to prevailing market conditions and, where necessary, uses interest rate swaps
to manage the interest rate risk.
www.cobham.com
Cobham plc Annual Report and Accounts 2013
113
Group Financial Statements As noted above, borrowings are held in various currencies and can be analysed between fixed and floating rates as follows:
£m
Fixed rates
Senior notes
Bank loans
Floating rates
Bank loans and overdrafts
Senior notes
Loan notes, finance leases and other borrowings
Total borrowings
All floating rate borrowings have regular repricing dates.
2013
2012
216.7
45.3
262.0
298.1
93.6
0.4
392.1
220.9
–
220.9
306.3
95.3
1.6
403.2
654.1
624.1
Floating to fixed interest rate swaps, designated as cash flow hedges, have been used to mitigate the interest rate exposure arising on selected
floating rate debt. Interest rate swaps outstanding at the year-end are as follows:
Hedged item
Fixed rate
from
to
Currency
value
Australian dollar loans
6.30%
May 2006
6.40% January 2007
January 2020 AUS$58.0m
January 2020 AUS$10.8m
Period of swap contract
2013
£m
Currency
value
31.3 AUS$74.4m
5.8 AUS$14.3m
37.1
2012
£m
42.3
8.0
50.3
Interest rate swaps which expired during the year to 31 December 2013 were previously used to fix the interest rates on US dollar floating
rate loans. At 31 December 2012, these swaps had a total notional currency value of US$295.0m (£181.5m) and fixed interest rates at between
3.22% and 3.61%.
The Group does not currently hold any fair value hedging instruments such as fixed to floating interest rate swaps.
Surplus funds are placed on short-term fixed rate deposit and as such also give rise to interest rate exposure. There was no material sensitivity
to changes in interest rates at the year-end.
Liquidity risk
The Group’s policy on managing liquidity risk throughout the year has been to maintain a mix of short, medium and long term borrowings
with lenders. Overdraft and revolving credit facilities provide short term flexibility whilst the revolving credit facilities provide longer term
committed funding.
As shown in note 19, undrawn committed borrowing facilities of £37.7m were available to the Group at 31 December 2013 (2012: £89.3m)
in various currencies.
At an operating level, the Group has a positive cash flow from operating activities and where practical the funds generated by business units
are managed on a regional basis. In the UK and US, most business units utilise local bank facilities within a UK or US group arrangement. This
allows a balance to be maintained between continuity of funding, security and flexibility.
The table below summarises the remaining contractual maturity for the Group’s borrowings and other financial liabilities, including derivative
financial liabilities. The amounts shown are the contractual undiscounted cash flows which include interest, analysed by contractual maturity.
The difference between the contractual cash flows and the carrying amount of these liabilities reflects the effects of interest not included in
the carrying amount and discounting applied in assessing fair value.
114
Cobham plc Annual Report and Accounts 2013
Notes to the Group Financial Statements continued £m
At 31 December 2013
Non-derivative financial liabilities
Borrowings
Bank loans and overdrafts
Senior notes
Other borrowings
Trade and other payables
Trade payables
Accruals
Contingent consideration
Other liabilities
Derivative liabilities
Interest rate swaps
Foreign exchange derivatives
Gross cash outflows
Gross cash inflows
Inflation swap
At 31 December 2012
Non-derivative financial liabilities
Borrowings
Bank loans and overdrafts
Senior notes
Other borrowings
Trade and other payables
Trade payables
Accruals
Contingent consideration
Other liabilities
Derivative liabilities
Interest rate swaps
Foreign exchange derivatives
Gross cash outflows
Gross cash inflows
Inflation swap
Within
one year
1-2 years
2-3 years
3-4 years
4-5 years
Over
5 years
Total
300.2
59.1
0.2
359.5
116.4
97.0
15.2
42.8
271.4
1.9
12.4
0.2
14.5
0.5
0.5
12.2
1.0
14.2
1.3
0.8
120.9
(118.1)
0.5
4.6
16.8
(15.1)
0.9
3.4
307.7
15.5
1.0
324.2
104.8
107.8
2.5
36.8
251.9
–
60.3
0.5
60.8
0.2
0.2
14.3
0.5
15.2
4.3
1.4
47.1
58.7
–
105.8
–
39.0
–
39.0
–
71.1
–
71.1
–
124.5
–
124.5
0.2
0.3
–
0.7
1.2
0.7
0.2
(0.2)
1.1
1.8
–
12.7
0.1
12.8
0.1
0.1
–
1.2
1.4
1.0
–
0.3
–
0.9
1.2
0.3
–
–
0.7
1.0
–
59.9
–
59.9
–
0.2
–
0.7
0.9
0.8
–
–
0.8
1.6
–
0.3
–
0.8
1.1
0.2
–
–
0.2
0.4
–
39.8
–
39.8
–
0.2
–
0.7
0.9
0.5
–
–
0.5
1.0
–
1.2
–
1.6
2.8
0.1
7.5
(8.0)
–
(0.4)
–
199.4
–
199.4
–
1.4
–
1.9
3.3
0.5
–
–
0.2
0.7
349.2
364.8
0.4
714.4
117.1
99.6
27.4
47.8
291.9
3.4
145.4
(141.4)
3.4
10.8
307.7
387.6
1.6
696.9
105.1
109.9
16.8
41.8
273.6
8.5
161.0
(156.3)
3.3
16.5
120.2
(117.9)
0.5
7.1
25.4
(24.2)
0.6
3.2
15.4
(14.2)
0.7
2.9
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Cobham plc Annual Report and Accounts 2013
115
Group Financial Statements Credit risk
The Group’s principal financial assets are bank balances, cash and trade and other receivables and there are no significant concentrations
of credit risk.
The Group has a conservative policy towards the credit risk related to liquid funds and derivative financial instruments with balances currently
spread across a range of reputable financial institutions, such as banks which have satisfactory credit ratings assigned by international credit
rating agencies. The levels of credit risk are monitored through the Group’s ongoing risk management processes, which include a regular
review of the banks’ credit ratings. Risk in this area is limited further by setting a maximum level for deposits with any one counterparty.
Concentrations of credit risk with respect to trade receivables are limited due to the Group’s customer base being large and unrelated. Customers
are typically large global companies or government agencies with long term trading relationships. The Group also has in place procedures that
require appropriate credit checks on potential customers before sales are made. Existing customer accounts are monitored on an ongoing basis
and appropriate action is taken where necessary to minimise any credit risk. The Directors therefore believe there is no further credit risk provision
required in excess of normal provision for impaired receivables shown in note 17.
Group management monitor the ageing of receivables which are more than one month overdue and debtor days on a regular basis.
At 31 December 2013, 8.2% (2012: 6.4%) of gross trade receivables were overdue by one month or more.
The maximum exposure to credit risk at 31 December 2013 is the fair value of each class of receivable as disclosed in note 17. Letters of credit
are the only collateral held as security against trade receivables. These are obtained in a limited number of cases in accordance with good
business practice and secure around £2.3m of receivables.
Bank term balances totalling £6.4m (2012: £7.5m) have been pledged against the residual value of leased assets as described in note 16.
In the UK and the USA, the Group has master netting arrangements in respect of bank balances. In the normal course of business, these
bank accounts are settled on a net basis within each currency and as such are presented net in the Balance Sheet as shown in note 16.
In the event of an automatic enforcement event, the bank balances are automatically set off against each other to achieve a net position.
Derivatives can also be offset by counterparties in the event of a default; net amounts that result on this basis are shown in note 16.
Inflation risk
The Group’s exposure to inflation is considered to be a general business risk which is mitigated through normal commercial activity.
The Group has one swap contract which was designed to manage the inherent inflation risk in a specific operational contract. The fair value
of this swap contract is included in derivative financial instruments shown in note 23.
Capital risk management
Group policy is to maintain a strong capital base, defined as total equity, excluding non-controlling interests, totalling £1,043.4m at 31 December 2013
(2012: £1,053.8m), so as to maintain stakeholder confidence and to sustain future development of the business. Within this overall policy, the Group
seeks to maintain an appropriate finance structure through a mixture of debt and retained earnings. Funding needs are reviewed periodically and
also each time a significant acquisition or business divestment is made. A number of factors are considered which include the net debt/EBITDA ratio,
future funding needs (usually potential acquisitions) and proposed dividend levels. Group banking arrangements are also considered; these include
financial covenants which are based on adjusted IFRS results as outlined on page 25. This policy has been reviewed by the Board on a regular basis
during the year and, given the current economic climate, continues to be considered appropriate.
116
Cobham plc Annual Report and Accounts 2013
Notes to the Group Financial Statements continued 26. Share capital
£m
Authorised
Ordinary Shares of par value 2.5 pence
6% second cumulative Preference Shares of £1
Issued and fully paid
Ordinary Shares of par value 2.5 pence
Number
of shares
2013
2012
1,479,200,000
20,000
37.0
–
37.0
–
1,154,527,625
28.9
28.9
As at 31 December 2013, 85,680,533 (2012: 87,699,405) Ordinary Shares were held in treasury including 9,728,809 (2012: 11,747,681) shares held
in the Cobham Employee Benefit Trust. At 31 December 2013, the market value of treasury shares was £235.2m (2012: £193.6m), including
shares with a market value of £26.7m (2012: £25.9m) held by the Cobham Employee Benefit Trust.
During the year ended 31 December 2013, treasury shares were used to satisfy awards and options under the Group’s PSP, BCP, ESOS and
ShareSave schemes. The net cost of treasury shares after receipts from option exercises is deducted from retained earnings and total equity.
Further details of the share capital of Cobham plc can be found in the Directors’ Report on page 64.
27. Other reserves
£m
At 1 January 2012
Foreign exchange differences on translation of overseas operations
Reclassification of foreign exchange on divestment of overseas operation
Movements on cash flow hedges
Reclassification of fair value of cash flow hedges to income statement
Release of hedge reserve
Transfer of hedge reserve to retained earnings
Transfer of translation reserve on settlement of cash flow hedge contracts
Transfer of share options reserve on exercise
Share based payments recognised in reserves
Dividend equivalents paid on vesting of PSP and BCP awards
Tax effects
At 1 January 2013
Foreign exchange differences on translation of overseas operations
Movements on cash flow hedges
Reclassification of fair value of cash flow hedges to income statement
Release of hedge reserve
Transfer of translation reserve on settlement of cash flow hedge contracts
Transfer of share options reserve on exercise
Share based payments recognised in reserves
Tax effects
At 31 December 2013
Translation
Note
reserve Hedge reserve
Share options
reserve
Total other
reserves
65.1
(19.2)
(4.8)
0.4
–
–
–
0.3
–
–
–
(0.1)
41.7
(11.1)
0.6
–
–
1.5
–
–
(0.5)
32.2
(5.7)
–
–
(3.5)
7.2
2.8
(3.7)
(0.3)
–
–
–
(3.1)
(6.3)
–
–
4.5
1.5
(1.5)
–
–
(0.7)
(2.5)
24.4
–
–
–
–
–
–
–
(2.8)
6.8
(0.1)
0.5
28.8
–
–
–
–
–
(4.2)
(1.7)
2.6
25.5
83.8
(19.2)
(4.8)
(3.1)
7.2
2.8
(3.7)
–
(2.8)
6.8
(0.1)
(2.7)
64.2
(11.1)
0.6
4.5
1.5
–
(4.2)
(1.7)
1.4
55.2
23
28
23
28
The translation reserve comprises all foreign exchange differences arising on the results and financial position of subsidiaries whose
functional currencies differ from the Group’s reporting currency. Foreign exchange movements arising on interest rate swaps designated
as cash flow hedges are also included here and, following the settlement of the financial instrument, any balances remaining are transferred
to retained earnings.
www.cobham.com
Cobham plc Annual Report and Accounts 2013
117
Group Financial Statements The hedge reserve reflects movements in fair values on cash flow hedging derivatives as detailed in notes 23 and 25.
The share options reserve includes the cost of share options as assessed under IFRS 2 together with deferred tax provided under IAS 12
relating to share based payments, where the calculated future tax benefit is in excess of the amount charged to date under IFRS 2. The
appropriate proportion of the share options reserve is transferred to retained earnings following exercise.
28. Share based payments
The total amount included in the income statement arising from the Group’s equity settled share based payment schemes is as follows:
£m
PSP
Other schemes
Release of amounts charged in previous years
2013
4.7
1.2
(7.6)
(1.7)
2012
4.5
2.3
–
6.8
During the year ended 31 December 2013, £7.6m which has been charged to the Income Statement in previous years has been released,
reflecting actual vesting experience of vested awards and a reassessment of the expected future vesting of awards which are unvested
at the year-end, based on non-market related performance conditions.
The Group operates the following equity settled share based payment schemes:
The PSP scheme is offered to senior executives across the Group and allows for annual grants of conditional shares with vesting conditions
based on the Group’s financial performance, taking into account both market based conditions such as TSR growth and non-market based
measures such as EPS growth or cash conversion respectively. The scheme includes buy-out awards granted in 2012 and 2013 to the Group’s
CEO and CFO.
Until 2012, share options were also awarded to senior executives under the ESOS scheme, with exercise conditional upon the Group’s underlying
EPS growth over a three year period. Awards have been made in 2013 to US employees under the ‘time-only’ section of the ESOS. This allows
for options to be granted with 25% vesting on each annual anniversary, conditional only on continued employment within the Group.
The Bonus Co-investment Plan (BCP) is offered to a small number of senior executives and provides matching shares where bonus awards
are invested in shares.
Finally the Group operates a ShareSave scheme which is open to all UK employees. The fair values of ESOS and ShareSave awards are significantly
lower than for PSP and BSP awards due to the effect of the exercise price which is set based upon the market value of the Group’s Ordinary Shares
around the date of grant.
Further details of all the schemes can be found in the Directors’ Remuneration Report on pages 50 and 51.
The number of options outstanding at 31 December are as follows:
Number of awards (thousands of shares)
PSP
ESOS
BCP
ShareSave
At 31 December
2013
8,544
10,161
190
5,447
24,342
2012
7,794
17,698
350
6,498
32,340
118
Cobham plc Annual Report and Accounts 2013
Notes to the Group Financial Statements continued Details of movements in the awards under the PSP scheme are as follows:
Number of awards (thousands of shares)
At 1 January
Awards granted
Awards forfeited or cancelled
Exercised
Expired
At 31 December
Weighted average remaining contractual life of PSP awards outstanding
Number of PSP awards exercisable at 31 December (thousands)
Effective date of grant for awards made in the year
Average fair value at date of grant
2013
7,794
3,531
(2,315)
(466)
–
8,544
2012
6,838
3,076
(1,629)
(490)
(1)
7,794
1.38 years
669
1.28 years
212
4 April,
19 August
£2.223
26 March,
14 September
£1.735
The average fair values above were calculated using the Black-Scholes option pricing model modified by a Monte Carlo simulation to determine
the likely impact of market related performance conditions. The inputs into the models were as follows:
Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Expected employee cancellation rate
Risk free rate
2013
2012
£2.472
nil
26%
2.96 years
1.8%
0.3%
£2.250
nil
31%
2.79 years
2.2%
1.3%
Expected volatility was determined through the assessment of the historical volatility over a period consistent with the expected life of
the award. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability
and behavioural considerations. The expected employee cancellation rate is based on an assessment of historic rates of voluntary cancellations
of contracts by employees. Most participants of the PSP scheme receive the benefit of dividend payments and therefore dividend yields are
not taken into consideration in the valuation model.
www.cobham.com
Cobham plc Annual Report and Accounts 2013
119
Group Financial Statements 29. Business combinations
Businesses acquired during the year
The purchase of the entire share capital of Avenue 64 Limited, the parent company of the Axell Wireless group (Axell), was completed on 9
May 2013. On a debt and cash free basis, total consideration was £85m including conditional cash consideration of up to £25m payable during
2014 and 2015, contingent on future performance.
Axell is a leading global provider of Distributed Antenna Systems and wireless solutions for the public safety and cellular markets, with a
specific focus on communication systems for buildings and critical infrastructure applications. Axell brings technology that is complementary
to the Group’s existing Antenna Systems and Tactical Communications and Surveillance businesses and its acquisition is in line with the
Group’s strategic objectives. The company has approximately 250 employees worldwide and is headquartered in Chesham, UK. It is reported
through the Antenna Systems Strategic Business Unit, within the Aerospace and Security Division.
On 15 July 2013 it was announced that an agreement was reached to acquire the 50% shareholding that the Group did not already own
in FB Heliservices Limited, FB Leasing Limited and FBS Limited (together FBH), from its long standing joint venture partner, Bristow Helicopters
Limited (Bristow). The transaction comprised cash consideration of £74m payable on completion, together with the assumption of Bristow’s
share of FBH’s net debt. FBH specialises in defence helicopter training in the UK and elsewhere, including a contract with the Ministry of
Defence to train helicopter crews for all branches of the armed forces, as well as the provision of search and rescue, logistics and emergency
medical services for government customers globally.
In accordance with IFRS 3, the revaluation gains on previously held equity interests in FBH that arise on gaining full control of the company
have been recognised in the income statement. This business is now part of Aviation Services.
Fair value information
Components of the fair value of the business combinations during the year are as follows:
£m
Cash consideration
Revaluation gains arising on equity interests on transfer of control
Investment in joint venture on date of transfer
Contingent consideration
Total fair value at date control achieved
Axell
55.5
–
–
22.1
77.6
FBH
74.2
62.1
12.2
–
148.5
Total
129.7
62.1
12.2
22.1
226.1
Revaluation gains arising on equity interests on transfer of control are excluded from underlying profits as shown in note 3. Contingent
consideration has been provided at fair value which is considered to be the discounted maximum payable under the agreement. Further
details can be found in note 20.
A summary of the fair values of the net assets acquired are as follows:
£m
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Net assets acquired
Goodwill
Total value of business acquired
Axell
48.0
22.5
(15.9)
(12.0)
42.6
35.0
77.6
FBH
Total
161.5
23.8
(72.2)
(16.5)
96.6
51.9
148.5
209.5
46.3
(88.1)
(28.5)
139.2
86.9
226.1
The fair values of net assets acquired in respect of FBH are provisional and subject to potential adjustment.
120
Cobham plc Annual Report and Accounts 2013
Notes to the Group Financial Statements continued All intangible assets were recognised at their respective fair values. The residual excess of the total cost over the fair value of the net assets
acquired is recognised as goodwill in the financial statements. Goodwill represents the premium paid in anticipation of future economic
benefits from assets that are not capable of being separately identified and separately recognised, such as the value of the workforce.
Goodwill is not anticipated to be deductible for tax purposes.
The fair values of acquired receivables included in current assets in the table above are £6.0m for Axell and £12.2m for FBH. These relate to trade
and other receivables and are considered to be recoverable in full. Current liabilities of FBH on acquisition included £43.2m payable to Cobham.
Results of business combinations
Third party revenue of Axell and FBH, since acquisition, was £34.9m and £42.3m respectively. The result after tax since the date of acquisition
was £6.0m loss and £3.7m loss. These include the impacts of amortisation of the intangible assets which are recognised as a result of the
business combination and writing off the pre-acquisition profit element of inventory written up on acquisition. Operating profit was £6.2m
for Axell and £8.5m for FBH.
If these business combinations had taken effect on 1 January 2013, it is estimated that Group total revenues would have been £1,842.7m and
profit after tax £108.0m. This information is not necessarily indicative of the results had the operations been acquired at the start of the period,
nor of future results of the combined operations.
The net cash flows resulting from business combinations are as follows:
£m
Cash consideration paid for the business combinations completed in the year
Net debt acquired with the business combinations completed in the year
Total
130.1
(4.1)
126.0
Costs of £1.7m were incurred in relation to business combinations. These costs are recognised within administrative expenses in the
Consolidated Income Statement and included within other M&A related costs excluded from underlying profit as shown in note 3.
30. Operating lease arrangements
At the balance sheet date the Group had outstanding commitments for minimum lease payments due under non-cancellable operating leases
as follows:
£m
Within one year
Between one and two years
Between two and three years
Between three and four years
Between four and five years
After five years
2013
26.0
23.4
21.0
18.8
16.3
63.4
168.9
2012
26.1
23.1
21.6
18.7
17.3
88.0
194.8
Operating lease payments during the year totalled £30.4m (2012: £31.1m) including rental costs of £7.1m (2012: £8.4m) relating to operational
aircraft used in its service businesses; the remainder primarily relates to the rental of office and operating facilities.
www.cobham.com
Cobham plc Annual Report and Accounts 2013
121
Group Financial Statements 31. Contingent liabilities and commitments
At 31 December 2013, the Company and the Group had contingent liabilities in respect of bank and contractual performance guarantees
and other matters arising in the ordinary course of business. Where it is expected that a material liability will arise in respect of these matters,
appropriate provision is made within the Group Consolidated Financial Statements.
The Company and various of its subsidiaries are, from time to time, parties to various legal proceedings and claims. Management do not
anticipate that the outcome of these, either individually or in aggregate, would have a material adverse effect upon the Group’s financial
position as at 31 December 2013.
As notified in prior years, the Group has previously identified one, more significant, contractual breach dating back some years. The contract
was in respect of goods provided into a geographic market which represents only a small amount of revenue for the Group. The circumstances
surrounding this remain under review and neither the outcome nor the timing of resolution can be estimated. No further information is
disclosed as it could be prejudicial.
The nature of much of the contracting work done by the Group means that there are reasonably frequent contractual issues, variations and
renegotiations that arise in the ordinary course of business, whose resolution is uncertain and could materially impact the Group’s future
reported earnings. In particular, on fixed price development contracts, where there is currently a high level of activity, costs incurred and
anticipated can significantly exceed amounts estimated at inception as a result of material enhancements to the specifications originally
agreed under the contracts. Judgement is therefore required as regards the outcome of negotiations and the amounts recoverable under
these contracts. The Directors take account of the advice of experts in making these judgements and believe that the outcome of
negotiations will result in an appropriate recovery of costs.
On 24 February 2014 the Group voluntarily contacted the United States Department of Justice (DoJ) to inform it that Cobham had undertaken
an initial internal investigation into potentially irregular sales practices concerning sales to Asia of certain commercial, non-classified products
manufactured by TracStar Systems Inc. (TracStar). TracStar is based in Orlando, Florida and is part of the group’s SATCOM business. The
business manufactures a range of inertial stabilisation and satellite tracking systems used by government and commercial customers globally
for land based applications. Its total worldwide revenue in 2013 was under £15m, representing less than 1% of Group revenue. Cobham will
continue to co-operate with the DoJ in relation to this matter however, the circumstances are under review and neither the outcome nor the
timescale for resolution can be estimated at present.
At 31 December 2013, the Group had commitments for the acquisition of property, plant and equipment of £13.6m (2012: £17.2m).
32. Related party transactions
£m
Transactions between Group entities and joint ventures and associates during the year
Sales of goods
Purchases of goods
Dividends received from joint ventures
Loan advanced to joint venture
Loan repayments and interest received from joint ventures
Amounts owed by joint ventures at the year-end
2013
2012
0.4
0.3
(3.7)
–
(3.0)
0.3
0.4
(7.5)
40.0
(3.1)
–
45.4
Sales of goods to related parties were made at the Group’s usual list prices for sales to non-related parties.
The amounts owed are unsecured, will be settled in cash and are included in other receivables in note 17. No guarantees have been given
to, or received from, related parties. No expense has been recognised in the period for bad or doubtful debts in respect of the amounts
owed by related parties.
Compensation of key management personnel
Details of the compensation of key management personnel can be found in note 5.
The Directors of Cobham plc had no material transactions with the Company during the year, other than as a result of service agreements.
Details of Directors’ remuneration are disclosed in the Directors’ Remuneration Report on pages 48 to 63.
122
Cobham plc Annual Report and Accounts 2013
Notes to the Group Financial Statements continued 33. Events after the balance sheet date
In February 2014, a loan agreement was signed for AUS$90m expiring in October 2018.
34. Subsidiaries
All subsidiary undertakings have been included in the Group consolidation. The undertakings held at 31 December 2013 which, in the opinion
of the Directors, principally affected the results for the year or the net assets of the Group were:
Operating
segment
Strategic Business Unit and principal activities
Name of undertaking
Place of incorporation
(or registration) and operation
Cobham Aerospace and Security
Cobham Aerospace Communications
Design and manufacture of navigation, communication
and airborne networking products and systems
for commercial, business, homeland security and
military aircraft.
Cobham Antenna Systems
Design and manufacture of communication systems
and navigation antennas that enable people and
systems to communicate on land, in the air and at sea.
Air Précision SAS
Chelton Avionics, Inc
Chelton Telecom and Microwave SAS
TEAM SA
Axell Wireless Limited
Chelton Limited
Chelton, Inc
Cobham Advanced Composites Limited
Cobham Composite Products Inc
Cobham CTS Limited
Continental Microwave & Tool Co, Inc
Trivec-Avant Corporation
France
USA
France
France
England
England
USA
England
USA
England
USA
USA
Cobham SATCOM
Development, manufacture, sales and support
of satellite and radio communication equipment
and earth stations for maritime based, land based
and aeronautical applications.
Omnipless Manufacturing (Pty) Limited
Sea Tel, Inc
Thrane & Thrane A/S
South Africa
USA
Denmark
Cobham Tactical Communications and Surveillance
Provision of specialist communications, security and
surveillance products including integrated systems
and solutions.
Cobham Defence Communications Limited
Cobham TCS Limited
DTC Communications, Inc
England
England
USA
Cobham Defence Systems
Cobham Defence Electronics
Design and manufacture of antenna systems
and radomes, ground data link terminals, active
microwave components, assemblies and subsystems
for the aerospace and defence industries.
Cobham Electronic Systems Inc
REMEC Defense & Space, Inc
Sensor & Antenna Systems, Lansdale, Inc
USA
USA
USA
www.cobham.com
Cobham plc Annual Report and Accounts 2013
123
Group Financial Statements Operating
segment
Strategic Business Unit and principal activities
Name of undertaking
Place of incorporation
(or registration) and operation
Cobham Mission Systems
Cobham Life Support
Life support, safety and personal survival equipment
systems including oxygen systems for aviators and
astronauts, crew restraints and flotation gear along
with fuel tank inerting capabilities.
Cobham Mission Equipment
Design, development and manufacture of critical
technology for air-to-air refuelling, weapons carriage
and release systems and unmanned explosive
ordnance robot applications for both military
and homeland security markets.
Cobham Aviation Services
Cobham Aviation Services
Delivers specialist aviation services for commercial,
government and defence customers worldwide
through airborne special mission operations,
outsourced commercial aviation, military training,
aircraft engineering, flight inspection and air
traffic services.
Carleton Life Support Systems, Inc *
Carleton Technologies, Inc *
Carleton Life Support Systems, Inc *
Carleton Technologies, Inc *
Flight Refuelling Limited **
Telerob Gesellschaft für
Fernhantierungstechnik mbH
FR Aviation Limited
FB Heliservices Limited
Jet Systems Pty Limited
National Jet Express Pty Limited
National Jet Systems Pty Limited
Surveillance Australia Pty Limited
* Carleton Life Support Systems, Inc and Carleton Technologies, Inc both operate across the Cobham Life Support and Cobham Mission Equipment SBUs.
** Issued shares in Flight Refuelling Limited are held by Cobham plc. Otherwise shares are held by, or by a nominee for, a subsidiary of Cobham plc.
The Group owns 100% of the share capital of all subsidiaries with the exception of TEAM SA (98.7% owned).
A full list of subsidiary companies is annexed to the Company’s annual return to the Registrar of Companies.
USA
USA
USA
USA
England
Germany
England
England
Australia
Australia
Australia
Australia
124
Cobham plc Annual Report and Accounts 2013
Notes to the Group Financial Statements continued Independent Auditors’ Report to the
Members of Cobham plc
Report on the Parent Company Financial Statements
Our opinion
In our opinion the Parent Company Financial Statements,
defined below:
•
give a true and fair view of the state of the Parent Company’s
affairs as at 31 December 2013;
• have been properly prepared in accordance with United Kingdom
In addition, we read all the financial and non-financial information in
the Annual Report and Accounts to identify material inconsistencies
with the audited Parent Company Financial Statements and to identify
any information that is apparently materially incorrect based on, or
materially inconsistent with, the knowledge acquired by us in the
course of performing the audit.
Generally Accepted Accounting Practice; and
• have been prepared in accordance with the requirements of the
If we become aware of any apparent material misstatements or
inconsistencies we consider the implications for our report.
Companies Act 2006.
This opinion is to be read in the context of what we say in the
remainder of this report.
What we have audited
The Parent Company Financial Statements, which are prepared
by Cobham plc, comprise:
•
•
the Parent Company Balance Sheet as at 31 December 2013;
the Parent Company Reconciliation of Movements in
Shareholders’ Funds for the year then ended; and
the Notes to the Parent Company Financial Statements, which
include a summary of significant accounting policies and other
explanatory information.
•
The financial reporting framework that has been applied in their
preparation comprises applicable law and United Kingdom Accounting
Standards (United Kingdom Generally Accepted Accounting Practice).
Opinions on matters prescribed by the Companies Act 2006
In our opinion:
•
the information given in the Strategic Report and the Directors’
Report for the financial year for which the Parent Company
Financial Statements are prepared is consistent with the Parent
Company Financial Statements.
the part of the Directors’ Remuneration Report to be audited
has been properly prepared in accordance with the Companies
Act 2006.
•
Other matters on which we are required to report
by exception
Adequacy of accounting records and information
and explanations received
Under the Companies Act 2006 we are required to report to you if,
in our opinion:
• we have not received all the information and explanations we
In applying the financial reporting framework, the Directors have
made a number of subjective judgements, for example in respect
of significant accounting estimates. In making such estimates, they
have made assumptions and considered future events.
•
•
Certain disclosures required by the financial reporting framework
have been presented elsewhere in the Annual Report and Accounts,
rather than in the notes to the financial statements. These are
cross-referenced from the financial statements and are identified
as audited.
What an audit of financial statements involves
We conducted our audit in accordance with International Standards
on Auditing (UK and Ireland) (ISAs (UK & Ireland)). An audit involves
obtaining evidence about the amounts and disclosures in the financial
statements sufficient to give reasonable assurance that the financial
statements are free from material misstatement, whether caused
by fraud or error. This includes an assessment of:
• whether the accounting policies are appropriate to the Parent
Company’s circumstances and have been consistently applied
and adequately disclosed;
the reasonableness of significant accounting estimates made
by the Directors; and
the overall presentation of the financial statements.
•
•
require for our audit; or
adequate accounting records have not been kept by the Parent
Company, or returns adequate for our audit have not been
received from branches not visited by us; or
the Parent Company Financial Statements and the part of the
Directors’ Remuneration Report to be audited are not in
agreement with the accounting records and returns.
We have no exceptions to report arising from this responsibility.
Directors’ remuneration
Under the Companies Act 2006 we are required to report to you if,
in our opinion, certain disclosures of directors’ remuneration
specified by law have not been made.
We have no exceptions to report arising from this responsibility.
Other information in the Annual Report and Accounts
Under ISAs (UK & Ireland), we are required to report to you if,
in our opinion, information in the Annual Report and Accounts is:
• materially inconsistent with the information in the audited Parent
Company Financial Statements; or
apparently materially incorrect based on, or materially
inconsistent with, our knowledge of the Parent Company
acquired in the course of performing our audit; or
is otherwise misleading.
•
•
We have no exceptions to report arising from this responsibility.
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Cobham plc Annual Report and Accounts 2013
125
Parent Company Financial Statements Independent Auditors’ Report continued
Responsibilities for the financial statements and the audit
Our responsibilities and those of the Directors
As explained more fully in the Statement of Directors’ Responsibilities
on page 67, the Directors are responsible for the preparation of the
Parent Company Financial Statements and for being satisfied that
they give a true and fair view.
Our responsibility is to audit and express an opinion on the Parent
Company Financial Statements in accordance with applicable law and
ISAs (UK & Ireland). Those standards require us to comply with the
Auditing Practices Board’s Ethical Standards for Auditors.
This report, including the opinions, has been prepared for and only
for the Company’s members as a body in accordance with Chapter 3
of Part 16 of the Companies Act 2006 and for no other purpose. We
do not, in giving these opinions, accept or assume responsibility for
any other purpose or to any other person to whom this report is
shown or into whose hands it may come save where expressly
agreed by our prior consent in writing.
Other matter
We have reported separately on the Group Financial Statements
of Cobham plc for the year ended 31 December 2013.
Stuart Watson
(Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
5 March 2014
126
Cobham plc Annual Report and Accounts 2013
Parent Company Balance Sheet
(under UK GAAP)
As at 31 December 2013
£m
Fixed assets
Intangible assets
Tangible assets
Investments in Group and other undertakings
Other investments
Financial assets: derivative financial instruments
Current assets
Financial assets: derivative financial instruments
Debtors
Cash at bank and in hand
Creditors: amounts falling due within one year
Net current assets
Total assets less current liabilities
Creditors: amounts falling due after more than one year
Provisions for liabilities
Net assets
Capital and reserves
Called up share capital
Share premium account
Special reserve
Other reserves
Profit and loss account
Equity shareholders’ funds
Note
2013
2012
6
7
5
5
12
12
8
9
10
11
13
14
14
14
14
–
0.1
776.8
6.1
18.1
801.1
8.3
1,118.9
74.1
1,201.3
0.2
0.2
779.1
–
14.2
793.7
5.8
1,107.2
7.1
1,120.1
(651.7)
549.6
(567.3)
552.8
1,350.7
1,346.5
(723.7)
(6.6)
620.4
(731.3)
(6.6)
608.6
28.9
126.6
43.6
14.8
406.5
620.4
28.9
126.6
43.6
16.9
392.6
608.6
The financial statements on pages 127 to 135 were approved by a duly appointed and authorised committee of the Board on 5 March 2014
and signed on its behalf by:
R Murphy
Directors
S Nicholls
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Cobham plc Annual Report and Accounts 2013
127
Parent Company Financial Statements
Reconciliation of Movements in Shareholders’ Funds
For the year ended 31 December 2013
£m
Note
2013
2012
Profit for the financial year
Dividends
Retained profit for the financial year
Treasury shares
Movements in hedge reserve
Reclassification of hedge reserve
Share based payments
Dividend equivalents paid on vesting of PSP and BCP awards
Net addition to shareholders’ funds
Shareholders’ funds at 1 January
Shareholders’ funds at 31 December
2
14
14
14
14
14
108.1
(96.6)
11.5
(1.8)
3.8
–
(1.7)
–
11.8
608.6
620.4
164.3
(92.5)
71.8
(18.7)
(0.6)
3.8
6.8
(0.1)
63.0
545.6
608.6
Profit for the financial year
In accordance with the concession granted under Section 408 of the Companies Act 2006, the profit and loss account of Cobham plc
has not been separately presented in these financial statements.
128
Cobham plc Annual Report and Accounts 2013
Notes to the Parent Company
Financial Statements
1. Parent Company accounting policies
Accounting convention
These financial statements have been prepared on the going concern
basis, under the historical cost convention as modified by the revaluation
of derivative contracts which are held at fair value, and in accordance
with the Companies Act 2006 and applicable accounting standards
in the United Kingdom (UK GAAP).
The principal accounting policies, which have been consistently
applied, are as set out below.
Dividends
Dividends payable are recognised as a liability in the period in which
they are fully authorised. Dividend income is recognised when the
shareholders’ right to receive payment has been established.
Pensions
The Company operates and contributes to multi-employer defined
benefit pension schemes. Contributions and pension costs are
apportioned across the schemes as a whole and assessed in accordance
with the advice of qualified actuaries. The schemes are closed to new
members and have a high proportion of deferred and pensioner
members from businesses that no longer participate in the schemes.
The Company is therefore not able to identify its share of underlying
assets and liabilities of the schemes on a reasonable and consistent
basis and in accordance with the multi-employer exemption contained
in FRS 17, Retirement Benefits, the schemes have been accounted
for as if they were defined contribution schemes. The charge to the
profit and loss account therefore reflects payments for the year.
Contributions to defined contribution schemes are charged to the
profit and loss account in the period the contributions are payable.
The Company also makes contributions for certain employees to
individual personal pension and stakeholder schemes. Contributions are
charged to the profit and loss account in the year to which they relate.
Deferred taxation
Deferred tax is recognised in respect of all timing differences that
have originated but not reversed at the balance sheet date, where
transactions or events that result in an obligation to pay more tax in
the future or a right to pay less tax in the future have occurred at the
balance sheet date.
A net deferred tax asset is recognised as recoverable when, on the
basis of all available evidence, it can be regarded as more likely than
not that there will be suitable taxable profits from which the future
reversal of underlying timing differences can be deducted.
Deferred tax is measured at the tax rates that are expected to apply
in the periods in which the timing differences are expected to
reverse, based on tax rates and laws that have been enacted or
substantively enacted by the balance sheet date. Deferred tax
has not been discounted.
amortised on a straight-line basis over their estimated useful lives,
which range from three to five years.
Tangible fixed assets
Fixed assets are initially recognised at cost and depreciated
on a straight-line basis to their estimated residual values over
their estimated useful lives, which range from three to six years.
Investments in Group and other undertakings
Investments in subsidiary undertakings are stated at cost less any
provision for impairment in value and include the fair value at the
date of grant of share options awarded to employees of subsidiary
undertakings, net of amounts recovered as management charges.
Other investments are stated at cost less any provision for
impairment in value.
Provisions
A provision is recognised when the Company has a present legal or
constructive obligation as a result of a past event and it is probable that
settlement will be required of an amount that can be reliably estimated.
Share capital
Ordinary share capital is classified as equity. Financial liabilities and
equity instruments are classified according to the substance of the
contractual agreements entered into. An equity instrument is any
contract that evidences a residual interest in the assets of the
Company after deducting all of its liabilities.
Preference share capital is classified as a liability if it is redeemable
on a specific date or at the option of the preference shareholders or
if dividend payments are not discretionary. Dividends on preference
share capital classified as liabilities are recognised in the profit and
loss account as interest expense.
Treasury shares
When ordinary share capital recognised as equity is acquired by the
Company, the shares are held as treasury shares. The consideration
paid, including commissions and taxes, is deducted from retained
earnings and total shareholders’ equity.
Foreign currencies
The functional currency of the Company is sterling. Transactions in
currencies other than the local currency are translated at the exchange
rate ruling at the date of the transaction. Monetary assets and liabilities
denominated in non-functional currencies are retranslated at the
exchange rate ruling at the balance sheet date. Investments in
subsidiary undertakings denominated in foreign currencies which are
financed by foreign currency borrowings are translated at the year-end
exchange rate. Investments denominated in foreign currencies not
financed by foreign currency borrowings are translated at the rate
of exchange ruling at the date of the original transaction.
All exchange differences arising are taken to the profit and loss account.
Intangible assets
Intangible assets, comprising software, are stated at cost less
accumulated amortisation and impairment losses. They are
In order to manage the Company’s exposure to certain foreign
exchange risks, the Company enters into forward contracts and
options which are accounted for as derivative financial instruments.
www.cobham.com
Cobham plc Annual Report and Accounts 2013
129
Parent Company Financial Statements
Derivative financial instruments and hedge accounting
The Company’s activities expose it to the financial risks
of changes in foreign currency exchange rates and interest rates.
The Company uses foreign exchange contracts and interest rate
swap contracts to reduce these exposures and does not use
derivative financial instruments for speculative purposes. Other
derivative financial instruments may be used from time to time
to hedge other exposures such as inflation risks.
The Company has documented its risk management objectives and
strategy for undertaking various hedge transactions and utilises hedge
accounting principles in relation to interest rate swaps. These are
designated as cash flow hedges which mitigate the Company’s
exposure to changes in interest rates arising on floating rate debt.
Foreign exchange contracts entered into to mitigate foreign
exchange impacts of trading in non-functional currencies and
inflation swaps entered into to mitigate inflation risks are not
accounted for using hedge accounting.
Derivative financial instruments are initially recognised at fair
value on the date a derivative contract is entered into and are
subsequently remeasured at their fair value. The method of
recognising the resulting gain or loss depends on whether the
derivative is designated as a hedging instrument and, if so, the
nature of the item being hedged.
Where hedge accounting is applied, the relationship between
hedging instruments and hedged items is documented at the
inception of the transaction. The Company also documents its
assessment, both at hedge inception and on an ongoing basis,
of whether the derivatives used in hedging transactions are highly
effective in offsetting changes in cash flows (or fair values if
appropriate) of hedged items.
Where interest rate swaps are designated and qualify as cash flow
hedges, the effective portion of changes in fair values of derivatives
that are designated and qualify as cash flow hedges are recognised
in reserves. The gain or loss relating to the ineffective portion is
recognised immediately in the profit and loss account. Amounts
accumulated in reserves are recycled to the profit and loss account
in the periods when the hedged item affects profit or loss.
When a cash flow hedging derivative expires or is sold, or when
a hedge no longer meets the criteria for hedge accounting, any
2. Dividends
£m
Final dividend of 6.4 pence per share for 2012 (2011: 6.2 pence)
Interim dividend of 2.64 pence per share for 2013 (2012: 2.4 pence)
Total dividend authorised and paid during the year
cumulative gain or loss existing in reserves at that time remains in
equity and is recognised when the forecast transaction is ultimately
recognised in the profit and loss account. If a hedged transaction
is no longer expected to occur, the net cumulative gain or loss
recognised in reserves is immediately transferred to the profit
and loss account in that period.
The fair value of a hedging derivative is classified as a current asset
or liability except when the remaining maturity of the hedged item
is more than 12 months.
Where hedge accounting is not applied, the movements in fair value
of the derivative instruments are included in the profit and loss account.
The fair value of such derivatives is classified as a current or non-current
asset or liability dependent upon the maturity of the contracts.
Other financial instruments
Amounts receivable from and owed to subsidiaries are recognised at
amortised cost using the effective interest method and are reduced
by appropriate allowances for estimated irrecoverable amounts.
Interest bearing bank loans and overdrafts are recorded at the
proceeds received, net of direct issue costs and subsequently held
at amortised cost. Interest is accounted for on an accruals basis in
the profit and loss account using the effective interest rate method
and is added to the carrying amount of the instrument to the extent
that the expenses are not settled in the period in which they arise.
Share based payments
For grants made to employees of Cobham plc under the Group’s
share based payment schemes, amounts which reflect the fair value
of options awarded as at the time of grant are charged to the profit
and loss account over the vesting period. The vesting estimates are
reviewed and updated at each balance sheet date; this includes
progress against non-market related performance conditions.
The fair value of options awarded to employees of subsidiary
undertakings, net of amounts recovered as management charges,
is recognised as a capital contribution and recorded in investments.
The valuation of the options utilises a methodology based on the
Black-Scholes model, modified where required to allow for the
impact of market related performance criteria and taking into
account all non-vesting conditions.
2013
68.5
28.1
96.6
2012
66.7
25.8
92.5
In addition to the above, the Directors are proposing a final dividend in respect of the financial year ended 31 December 2013 of 7.04 pence per
share which will absorb an estimated £75.2m of shareholders’ funds. This dividend is subject to approval by shareholders at the Annual General
Meeting and has not been included as a liability in these financial statements. If authorised, it will be paid on 30 May 2014 to shareholders who
are on the register of members as at 2 May 2014. The total dividend in respect of the financial year ended 31 December 2013 will therefore
be 9.68 pence per share (2012: 8.8 pence). The total amount payable in respect of 2013 will be £103.3m.
130
Cobham plc Annual Report and Accounts 2013
Notes to the Parent Company Financial Statements continued 3. Directors’ emoluments and pension costs
Disclosures in respect of Directors’ emoluments can be found in the Directors’ Remuneration Report on pages 48 to 63 of the Annual Report
and Accounts.
Defined benefit pension schemes
The Company operates and participates in the Cobham Pension Plan (CPP) and the Cobham Executive Pension Plan (CEPP). The pension
schemes are of the defined benefit type and assets are held in separate trustee administered funds. The funds are valued every three years by
a professionally qualified independent actuary and the rates of contribution payable are determined by the actuary. The latest effective dates of
the actuarial assessment of the CPP and CEPP were 1 April 2012 and 1 April 2013 respectively. The assessments were updated to 31 December 2013,
at which date the total net liabilities of the schemes were assessed to be £81.7m. The Directors will continue to monitor the pension deficits and
take advice from independent actuaries as appropriate.
The schemes have been accounted for as if they were defined contribution schemes and the charge to the profit and loss account therefore
reflects payments for the year.
Contributions to the Group schemes for 2013 were £0.3m (2012: £0.3m) of normal funding and £9.4m (2012: £9.3m) of deficit funding.
No contributions were outstanding at the end of 2013 or 2012.
Defined contribution pension schemes
The Company also operates and participates in the Cobham plc money purchase pension arrangements. The assets of the schemes are held
separately from those of the Company in independently administered funds. The pension cost charged represents contributions payable by
the Company to the funds and amounted to £1.0m (2012: £0.7m). No contributions were outstanding at the end of 2013 or 2012.
4. Share based payments
Employees of Cobham plc participate in the following equity settled share based payment schemes which are operated by the Group for
certain senior executives:
– The Cobham Performance Share Plan (PSP).
– The Cobham Executive Share Option Scheme (ESOS).
– The Cobham Bonus Co-investment Plan (BCP).
Employees also participate in the Cobham Savings Related Share Option Scheme (ShareSave) operated by the Group, which is open to all
UK employees.
The Company recognised a total credit of £2.2m (2012: £2.9m expense) related to equity settled share based payment transactions during
the year (excluding national insurance). This includes charges of £2.3m less a reversal of £4.5m of amounts charged in previous years due
to the reassessment of assumptions during the year. As shown in note 5, investments in Group and other undertakings have been adjusted
by £2.3m to reflect the value of options granted to employees of the Company’s subsidiaries, less amounts recharged during the year.
At 31 December, the following awards were outstanding under each of the schemes:
Number of awards (thousands of shares)
PSP
ESOS
BCP
ShareSave
2013
2012
3,821
817
111
269
5,018
4,265
5,467
258
314
10,304
Further details of these schemes can be found in the Directors’ Remuneration Report on pages 50 and 51 and in note 28 to the Group
Financial Statements on pages 118 and 119.
www.cobham.com
Cobham plc Annual Report and Accounts 2013
131
Parent Company Financial Statements 5. Investments in Group and other undertakings
£m
Cost and net book amount
At 1 January 2013
Options granted to employees of Group undertakings net of recoveries
At 31 December 2013
Shares
Options
Total
764.7
–
764.7
14.4
(2.3)
12.1
779.1
(2.3)
776.8
In the opinion of the Directors the value of investments in subsidiary undertakings is not less than the aggregate amount at which they are
shown above.
A list of significant subsidiaries is provided in note 34 to the Group Financial Statements. The market capitalisation of the Group as a whole
is given in the Group Financial Record on page 136.
The Company has minority shareholdings in three companies in connection with the FSTA project and has issued loan notes during the year
which are included in debtors in note 8. The total amount invested is £6.1m (2012: £44,000) and this is held as a trade investment.
6. Intangible assets
£m
Cost
At 1 January and 31 December 2013
Accumulated amortisation
At 1 January 2013
Charge for the year
At 31 December 2013
Net book amount
At 31 December 2013
At 31 December 2012
7. Tangible fixed assets
£m
Cost
At 1 January 2013
Disposals
At 31 December 2013
Accumulated depreciation
At 1 January 2013
Charge for the year
Disposals
At 31 December 2013
Net book amount
At 31 December 2013
At 31 December 2012
132
Cobham plc Annual Report and Accounts 2013
Software
0.8
0.6
0.2
0.8
–
0.2
Plant,
machinery,
fixtures and
fittings
1.0
(0.3)
0.7
0.8
0.1
(0.3)
0.6
0.1
0.2
Notes to the Parent Company Financial Statements continued 8. Debtors
£m
Amounts owed by Group undertakings
Corporation tax receivable
Deferred tax
Loan notes
Prepayments and accrued income
2013
2012
1,093.5
–
2.8
18.3
4.3
1,118.9
1,089.6
4.4
5.4
–
7.8
1,107.2
Amounts owed by Group undertakings, excluding trading balances, are unsecured, interest bearing and repayable on demand.
Loan notes were issued during the year in connection with the FSTA project. These accrue interest at LIBOR plus margin and are due
for repayment in 2035.
The net deferred tax asset can be analysed as follows:
£m
Derivative financial instruments
Share based payments
Other timing differences
Movements in the net deferred tax asset are as follows:
£m
At 1 January 2013
Charge to reserves
Charge to profit and loss account
At 31 December 2013
2013
2012
1.3
1.0
0.5
2.8
2.2
1.9
1.3
5.4
2013
5.4
(0.7)
(1.9)
2.8
The deferred tax asset is considered recoverable on the basis that sufficient taxable profits will be available to utilise any tax losses that may arise.
9. Creditors: amounts falling due within one year
£m
Bank overdrafts
Bank loans
Senior notes
Total borrowings
Trade creditors
Amounts owed to Group undertakings
Derivative financial instruments
Corporation tax payable
Other tax and social security
Accruals and deferred income
Note
2013
143.2
296.4
46.2
485.8
1.9
125.8
8.8
7.4
1.9
20.1
651.7
12
2012
116.6
292.3
–
408.9
3.2
115.5
10.0
–
1.3
28.4
567.3
Details of the Company’s principal borrowing facilities are disclosed in note 19 to the Group Financial Statements.
Interest is charged on amounts owed to Group undertakings at rates varying between 0.4% and 9.0%. These amounts are unsecured
and are repayable on demand.
www.cobham.com
Cobham plc Annual Report and Accounts 2013
133
Parent Company Financial Statements 10. Creditors: amounts falling due after more than one year
£m
Bank loans
Senior notes
Amounts owed to Group undertakings
Derivative financial instruments
Note
2013
45.3
264.1
403.5
10.8
723.7
12
2012
–
316.2
403.5
11.6
731.3
The bank loan due after more than one year is due for repayment by December 2016 at the latest. Senior notes falling due after more than
one year mature as follows:
£m
Between one and two years
Between two and five years
After five years, maturing in 2019 and 2020
2013
–
142.5
121.6
264.1
2012
47.1
80.6
188.5
316.2
Amounts owed to Group undertakings consist of frozen loans which are unsecured, interest free and not repayable within one year.
11. Provisions for liabilities
Other provisions of £6.6m (2012: £6.6m) relate to longer term warranties given on divestments completed in 2005. All amounts have been
determined based on the Directors’ current estimates of likely outcomes and the timing of any claims is uncertain.
12. Derivative financial instruments
The fair values of derivative financial instruments are as follows:
£m
Fixed assets
Current assets
Creditors: amounts falling due within one year
Creditors: amounts falling due after more than one year
At 31 December 2013
Fixed assets
Current assets
Creditors: amounts falling due within one year
Creditors: amounts falling due after more than one year
At 31 December 2012
13. Called up share capital
£m
Allotted, issued and fully paid
Equity
1,154,527,625 (2012: 1,154,527,625) 2.5 pence Ordinary Shares
Non-equity
19,700 (2012: 19,700) 6% second cumulative Preference Shares of £1
134
Cobham plc Annual Report and Accounts 2013
Interest rate
swaps – cash
flow hedges
Foreign
exchange
derivatives Inflation swap
Total
–
–
(0.5)
(2.7)
(3.2)
–
–
(3.5)
(4.8)
(8.3)
15.2
7.8
(7.8)
(5.2)
10.0
11.4
5.3
(6.0)
(4.0)
6.7
2.9
0.5
(0.5)
(2.9)
–
2.8
0.5
(0.5)
(2.8)
–
18.1
8.3
(8.8)
(10.8)
6.8
14.2
5.8
(10.0)
(11.6)
(1.6)
2013
2012
28.9
28.9
–
–
Notes to the Parent Company Financial Statements continued As at 31 December 2013, 85,680,533 (2012: 87,699,405) Ordinary Shares were held in treasury. This includes 9,728,809 (2012: 11,747,681) shares
held in the Cobham Employee Benefit Trust. At 31 December 2013, the market value of treasury shares was £235.2m (2012: £193.6m), including
shares with a market value of £26.7m (2012: £25.9m) held by the Cobham Employee Benefit Trust.
The Preference Shares which have been issued are classified as borrowings with a value of £19,700. Further details of the share capital of Cobham plc
can be found in the Directors’ Report on page 64.
14. Reserves
£m
At 1 January 2013
Profit for the financial year
Dividends
Purchase of treasury shares
Reclassifications to profit and loss account
Tax effect of hedge reserve movements
Share based payments recognised in reserves
Transfer of share options reserve on exercise
At 31 December 2013
Share premium
account
Special
reserve
Hedge
reserve
Share options
reserve
Profit and loss
account
Other reserves
126.6
–
–
–
–
–
–
–
126.6
43.6
–
–
–
–
–
–
–
43.6
(6.3)
–
–
–
4.5
(0.7)
–
–
(2.5)
23.2
–
–
–
–
–
(1.7)
(4.2)
17.3
392.6
108.1
(96.6)
(1.8)
–
–
–
4.2
406.5
The profit and loss account includes the purchase of Ordinary Shares by the Cobham Employee Benefit Trust in connection with the PSP,
BCP, ESOS and ShareSave plans described in note 4, and the allocation of shares upon vesting of share awards and the exercise of options.
Unallocated shares are held as treasury shares as described in note 13. During the year, 5,847,422 (2012: 12,598,162) shares were purchased
and 7,866,294 (2012: 4,878,372) shares were allocated to employees. £15.3m (2012: £26.3m) was paid for these shares during the year and
£13.5m (2012: £7.5m) was received following the exercise of share options.
The special reserve was created in 1996, with the sanction of the High Court, against which goodwill arising on subsequent acquisitions may
be charged.
The share options reserve relates to provisions made in accordance with FRS 20 for shares allocated to the Company’s employees under the
Group’s share option schemes. Where share options which gave rise to charges under FRS 20 have been exercised, the appropriate proportion
of the share options reserve is transferred to the profit and loss account in equity.
The audit fee in respect of the Parent Company Financial Statements was £45,000 (2012: £44,000).
15. Contingent liabilities and commitments
The Company has contingent liabilities in respect of bank and contractual performance guarantees and other matters arising in the ordinary
course of business entered into for, or on behalf of, certain Group undertakings.
As the conditions of the above guarantees are currently being met, no obligating event is foreseeable and therefore no provision has been
made at the year-end.
The Company had no capital commitments at 31 December 2013 (2012: £nil).
16. Related party transactions
The Directors of Cobham plc had no material transactions with the Company during the year, other than as a result of service agreements.
Details of the Directors’ remuneration are disclosed in the Directors’ Remuneration Report on pages 48 to 63.
Exemption has been taken under FRS 8 (revised) from disclosing related party transactions with wholly owned group companies. The only
transactions with non-wholly owned subsidiaries relate to the receipt of management and brand charges totalling £1.1m (2012: £0.6m) from
TEAM SA which is 98.7% owned. No amounts were outstanding at the current or prior year-end.
17. Events after the balance sheet date
In February 2014, a loan agreement was signed for AUS$90m expiring in October 2018.
www.cobham.com
Cobham plc Annual Report and Accounts 2013
135
Parent Company Financial Statements Group Financial Record
£m
Revenue
2009
2010
2011
2012
2013
1,880.4
1,902.6
1,854.4
1,749.4
1,789.7
Underlying profit before taxation
295.3
306.1
327.9
300.2
288.0
Profit before taxation
Taxation
Profit after taxation for the year
Net assets employed
Intangible assets
Property, plant and equipment (including investment properties)
Investments
Other non-current assets
Current assets
Current liabilities
Non-current liabilities excluding retirement benefit obligations
Net assets excluding retirement benefit obligations
Retirement benefit obligations
Net assets including retirement benefit obligations
Financed by
Ordinary share capital
Reserves
Total equity attributable to the owners of the parent
Non-controlling interests in equity
Total equity
Net debt
Operating cash flow
Operating cash conversion
pence
Dividend paid per Ordinary Share
Earnings per Ordinary Share – underlying
Earnings per Ordinary Share – basic
Earnings per Ordinary Share – diluted
Net assets per Ordinary Share
£m
244.9
(59.0)
185.9
189.3
(36.5)
152.8
234.3
(46.3)
188.0
204.0
(32.2)
171.8
126.6
(12.1)
114.5
1,063.0
1,048.4
917.6
1,102.1
1,162.2
329.5
17.4
69.0
963.2
2,442.1
(903.7)
(474.9)
1,063.5
(115.2)
948.3
28.6
919.4
948.0
0.3
948.3
350.9
17.2
31.2
1,123.2
2,570.9
(827.8)
(584.9)
1,158.2
(82.0)
1,076.2
28.9
1,046.9
1,075.8
0.4
1,076.2
329.8
16.1
36.3
983.7
2,283.5
(749.0)
(444.2)
1,090.3
(71.2)
1,019.1
28.9
989.7
1,018.6
0.5
1,019.1
315.5
15.8
60.3
877.9
2,371.6
(822.5)
(421.3)
1,127.8
(73.4)
1,054.4
360.7
3.1
43.3
849.9
2,419.2
(871.2)
(416.5)
1,131.5
(87.3)
1,044.2
28.9
1,024.9
1,053.8
0.6
1,054.4
28.9
1,014.5
1,043.4
0.8
1,044.2
(412.6)
(326.1)
(232.5)
(359.9)
(453.4)
293.2
89%
271.4
79%
337.1
95%
339.3
104%
268.5
85%
5.09
18.80
16.26
16.17
82.7
5.60
19.68
13.27
13.20
93.2
6.17
22.05
16.80
16.76
88.3
8.60
22.48
15.98
15.93
91.3
9.04
21.60
10.70
10.65
90.4
Market capitalisation as at 31 December
2,883
2,349
2,117
2,549
3,169
In the above table figures for 2012 have been restated, where appropriate, for the impact of IAS 19 described in note 2 to the Group Financial
Statements. On the basis of materiality prior periods have not been restated.
136
Cobham plc Annual Report and Accounts 2013
Shareholder Information
Other Information
Analysis of shareholders
Analysis of ordinary shareholders on the register at 31 December 2013:
Size of holding
Up to 1,000
1,001–10,000
10,001–50,000
50,001–250,000
250,001–1,000,000
1,000,001 and above
Total
Source: Equiniti Limited
Number of
registered holders
Percentage of
registered holders
Number of
Ordinary Shares held
Percentage of
Ordinary Shares
1,603
2,555
630
221
123
130
5,262
30.46
48.56
11.97
4.20
2.34
2.47
100.00
795,057
9,171,660
13,152,411
25,416,043
64,936,774
965,103,956
1,078,575,901
0.07
0.85
1.22
2.36
6.02
89.48
100.00
At 31 December 2013, there were 5,262 ordinary shareholders on the register compared with 5,620 at 31 December 2012.
Registrars
Enquiries concerning shareholdings or dividends should, in the first
instance, be addressed to the Company’s registrars, Equiniti Limited,
Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA
(telephone: 0871 384 2163* or +44 (0)121 415 7047 if calling from
outside the UK). Shareholders should promptly notify the registrars
of any change of address or other particulars.
The registrars provide a range of shareholders’ services online. The
portfolio service provides access to information on investments including
balance movements, indicative share prices and information on recent
dividends and also enables address and mandate details to be amended
online. For further information and practical help on transferring shares
or updating your details, please visit www.shareview.co.uk. The
share dealing service enables shares to be sold by UK shareholders by
telephone, post or over the internet. For telephone sales, please call
0845 603 7037 between 8am and 4:30pm, Monday to Friday. For postal
sales, please send your completed documentation to the address above.
For internet sales, please visit www.shareview.co.uk/dealing.
Individual Savings Accounts (ISAs)
The registrars also offer an ISA for Cobham shareholders. Further
information may be obtained by visiting www.shareview.co.uk, or
telephone 0845 300 0430 (or +44 (0)121 415 0105 if calling from
outside the UK).
You should bear in mind that investments, both their value and the
income they provide, can go down as well as up and you might not
get back what you originally invested.
Capital gains tax
For the information of shareholders who held Cobham plc
Ordinary Shares on 31 March 1982, the market value, adjusted for
capitalisation and rights issues, of the Company’s Ordinary Shares
on that date for capital gains tax purposes, unadjusted for the share
sub-division of July 2005, was 86.02 pence.
ShareGift
Do you have a small shareholding which is uneconomical to sell?
You may want to consider donating it to ShareGift (registered
charity no. 1052686), a charity that specialises in the donation of
small, unwanted shareholdings to good causes. You can find out
more by visiting www.sharegift.org or calling +44 (0)207 930 3737.
Shareholder security
Shareholders are advised to be wary of any unsolicited advice, offers
to buy shares, or offers of free reports about the Company. Details
of any share dealing facilities that the Company endorses will be
included in Company mailings or on our website. If you receive any
unsolicited advice, make sure you get the correct name of the person
and organisation and check that they are appropriately authorised
by the FCA by visiting www.fca.org.uk. You can also call the FCA
Consumer Helpline on 0800 111 6768 (or +44 (0)20 7066 1000
if calling from outside the UK).
Financial calendar
AGM
Final dividend – x-div date
Final dividend – record date
Final dividend
Interim results
Interim dividend – x-div date
Interim dividend – record date
Interim dividend
24 April 2014
30 April 2014
2 May 2014
30 May 2014
7 August 2014
9 October 2014
10 October 2014
7 November 2014
Registered office
Brook Road, Wimborne, Dorset, England BH21 2BJ
Tel: +44 (0)1202 882020
Fax: +44 (0)1202 840523
Internet: www.cobham.com
Registered Number in England: 30470
* Calls to this number cost 8 pence per minute, plus network charges. Lines are open
from 8:30am to 5:30pm, Monday to Friday.
www.cobham.com
Cobham plc Annual Report and Accounts 2013
137
Glossary
Acronym
A350
A400M
AESA
AMDR
Full name
Description
Airbus A350 XWB aircraft
Airbus A400M airlifter
Active Electronically Scanned Array radar
Air and Missile Defence Radar
AMRAAM
Advanced Medium-Range Air-to-Air Missile
B717
DAS
ERP
Boeing 717 aircraft
Distributed Antenna Systems
Enterprise Resource Planning
Eurofighter
Eurofighter Typhoon fighter aircraft
F-#
FBH
FSTA
USAF designated fighter aircraft
FB Heliservices
Future Strategic Tanker Aircraft
Global Xpress
Inmarsat Global Xpress
Gripen
IED
KC-390
138
Saab Gripen fighter aircraft
Improvised Explosive Device
Embraer KC-390 Aerial Refuelling Tanker
Cobham plc Annual Report and Accounts 2013
A twin-engine wide-body jet aircraft
for commercial use. The aircraft is in
development and had its first flight in 2013.
A versatile large military aircraft that performs
three differing duties, within challenging
operating conditions: short-medium range
flights, long range flights and the ability
to provide aerial refuelling capabilities.
Used to detect, target, track and enable
self-protection capabilities. The radar is used
for defence, surveillance and strike scenarios.
An advanced radar suite for US Navy destroyers.
It provides protection against advanced
anti-ship and ballistic missile threats.
A new generation of air-to-air missile with an
all-weather, beyond-visual-range capability.
The B717 is a narrow-body aircraft designed
for short-haul, high frequency commercial use.
Fibre optic communication systems for
infrastructure such as buildings, tunnels and
metros. Covering a wide range of frequencies,
it encompasses both public safety and cellular
bands, providing coverage for network operators,
transportation and public safety authorities.
A software system which integrates all business
processes, including manufacturing, finance
and accounting, human resources, sales and
marketing, purchasing and distribution, and
inventory and warehouse into one central
cohesive repository. It allows businesses
to run more efficiently, with real time access
to data across many business functions.
A multi-role combat aircraft covering a full
spectrum of air operations, from air policing, to
peace support, through to high intensity conflict.
Designation given by the US Air Force to aircraft
designed for air-to-air combat or for multiple
roles, including ground support missions.
The Group’s combined interests in FB Heliservices
Limited, FB Leasing Limited and FBS Limited.
A UK Private Finance Initiative funded project
to replace the UK’s air-to-air refuelling fleets,
and elements of the air transport work
previously undertaken by the RAF VC10
and TriStar fleets.
A satellite service, with global coverage expected
by the end of 2014, which will be the world’s
first to offer global mobile broadband coverage.
Global Xpress will provide increased data speeds
and bandwidth to customers in the government,
maritime and aeronautical sectors.
A multi-role fighter aircraft capable of
air-to-air combat, air-to-surface combat
and reconnaissance roles.
Homemade bombs thought to be the weapon
of choice for terrorists due to their availability
and destructiveness.
A medium-lift military transport and aerial
refuelling tanker aircraft currently being
developed by Embraer. Production is
scheduled to commence in 2015.
Glossary continued
Acronym
KC-46
Mi-17
Minehound
Full name
Description
Boeing KC-46 Aerial Refuelling Tanker
Mi-17-1V multi-purpose medium helicopter
NH-90
NHIndustries NH-90 military helicopter
SATCOM
Satellite Communication
SIGINT
Signals Intelligence
Super Puma
Airbus Super Puma Helicopter
UAV
Unmanned Aerial Vehicle
WGS
Wideband Global Satellite Programme
An aerial refuelling tanker, currently being
developed for the US Air Force to replace its
ageing fleet of KC-135 Stratotankers. The KC-46,
with initial flights scheduled for 2014, offers
improved cargo and passenger capability.
A multi-purpose helicopter with the ability
to carry passengers, stretchers or cargo.
A hand-held device to detect metallic,
minimum-metal and non-metallic threats
underground. Used in the detection of
improvised explosive devices and mines.
A medium lift, multi-role military helicopter
developed from NATO requirements. Used for
troop and cargo transport, casualty evacuation,
search and rescue and anti-submarine hunting.
Enables voice and data communications such
as telephone calls, TV pictures or internet
connections, using an orbiting satellite to
transfer data around the earth.
Intelligence gathering using electronic signals
and systems such as radars, communications
and weapons systems.
Designed to operate in extreme environments,
a medium-large helicopter capable of carrying
heavy objects and passengers.
Unmanned aircraft that generally carry
cameras, sensors, communications equipment
or other payloads. They are used in
reconnaissance and intelligence gathering
roles with more challenging roles envisioned,
including combat missions.
The US Department of Defense’s highest-
capacity satellite communications system.
It supports requirements such as tactical
command and control, battle management,
reconnaissance, intelligence, surveillance
and combat support.
www.cobham.com
Cobham plc Annual Report and Accounts 2013
139
Other Information Definitions
KPI definitions
Group organic revenue growth
Revenue growth stated at constant translation exchange rates,
excluding the incremental effect of acquisitions and disposals.
Underlying EPS growth at constant translation exchange rates
The year on year increase of the underlying profit after taxation,
stated at constant translation exchange rates, divided by the
weighted average number of Ordinary Shares.
Operating cash conversion
Operating cash flow as a percentage of trading profit, excluding
profit from joint ventures.
Return on invested capital
Trading profit as a percentage of the average invested capital
during the year.
Invested capital comprises net assets adjusted to exclude net debt,
retirement benefit obligations, derivative financial instruments, current
and deferred tax, provisions and other financial assets. Intangible assets
recognised on business combinations are grossed up to their original
cost before amortisation and an adjustment is also made to reinstate
the historic goodwill previously written off directly to reserves.
PV investment
PV (Private Venture) or company funded R&D (Research and
Development) measures exclude Aviation Services, where there
is no R&D activity.
Staff safety – major accident incident rate
The number of accidents resulting in more than three days absence
per 100,000 employees.
Voluntary staff turnover
The number of voluntary leavers divided by the average number
of employees over the period, excluding employees who became
redundant, were dismissed or retired.
140
Cobham plc Annual Report and Accounts 2013
Further financial definitions
The following notes apply throughout the Annual Report and Accounts:
To assist with the understanding of earnings trends, the Group has
included within its published financial statements trading profit and
underlying earnings results. Trading profit has been defined as
operating profit from continuing operations excluding the impacts
of certain M&A related costs and business restructuring costs as
detailed below. Also excluded are changes in the marking to market
of non-hedge accounted derivative financial instruments, impairments
of intangible assets, and items deemed by the Directors to be of an
exceptional nature.
M&A related costs excluded from trading profit and underlying
earnings include the amortisation of intangible assets recognised on
acquisition and the writing off of the pre-acquisition profit element
of inventory written up on acquisition. M&A related costs also include
other direct costs associated with business combinations, adjustments
to contingent consideration related to previously acquired businesses
and direct costs from terminated divestments.
Business restructuring costs or gains associated with the
restructuring of the Group’s portfolio which are incremental
to normal operations.
Underlying earnings are defined as trading profit less net underlying
finance costs, which excludes the unwinding of acquisition related
discounting, and after deducting associated taxation and non-
controlling interests.
A reconciliation of operating profit and profit before taxation
to the respective underlying numbers is shown on page 24.
Operating cash flow is defined as net cash from operating activities
before payment of tax, interest, restructuring costs and M&A related
costs but after cash flows from the purchase or disposal of property,
plant, equipment and intangible assets.
Free cash flow is defined as net cash from operating activities plus
dividends received from joint ventures, less cash flows related to the
purchase or disposal of property, plant, equipment and intangible
assets but excluding payments relating to M&A related activities.
Net debt is defined as the net of borrowings less cash and cash
equivalents at the balance sheet date.
When providing divisional analysis by geography, US revenue
includes revenue to US based customers on programmes that
could be designated as export and is therefore non-US defence/
security from a market analysis perspective.
Cobham protects lives and livelihoods with its
differentiated technology and know-how, operating
with a deep insight to customer needs and agility.
The Group offers an innovative range of technologies
and services to solve challenging problems across
commercial, defence and security markets, from
deep space to the depths of the ocean.
It has market leading positions in air-to-air refuelling;
aviation services; audio, video and data communications,
including satellite communications; defence electronics;
life support; and mission equipment.
The most important thing Cobham builds is trust.
Front cover image
Cobham’s Distributed Antenna Systems (DAS)
technology and wireless solutions for the public
safety and cellular markets ensure that buildings
and critical infrastructure have a fail-safe public
safety communications system of the highest
standard. The Burj Khalifa, Dubai, is one of the
many pieces of infrastructure globally that
benefit from Cobham’s DAS technology.
Inside front cover image
Cobham provides governments globally with fixed
and rotary wing services, including helicopter training,
search and rescue, logistics and emergency
medical services.
Find More Online
www.cobham.com
Our website provides further information including shareholder
services and governance, details of our products and services,
corporate responsibility and sustainability and more.
Investor information and share price performance
www.cobhaminvestors.com
Products and service offerings
www.cobham.com/products-and-services
Corporate responsibility and sustainability
www.cobhamsustainability.com
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Cobham plc
Annual Report and Accounts 2013
The most important thing we build is trust
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The most important thing we build is trust
Cobham plc
Brook Road, Wimborne, Dorset, BH21 2BJ, England
T: +44 (0)1202 882020
F: +44 (0)1202 840523
www.cobham.com
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