Cobalt Blue Holdings Limited Annual Report 2014

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FY2014 Annual Report · Cobalt Blue Holdings Limited

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Cobham plc

Annual Report and Accounts 2014

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, UK
T: +44 (0)1202 882020
F: +44 (0)1202 840523

www.cobham.com

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AM 19 3 4 - 2014

COBHAM PROTECTS LIVES
AND LIVELIHOODS WITH ITS
DIFFERENTIATED TECHNOLOGY
AND KNOW-HOW. IT OFFERS
AN INNOVATIVE RANGE
OF TECHNOLOGIES AND
SERVICES TO SOLVE
CHALLENGING PROBLEMS
IN HARSH ENVIRONMENTS

Front cover image:
Lockheed Martin A2100 Satellite:
Affordability, Performance and Reliability
Cobham Semiconductor Solutions is at the
forefront of the space-based telecommunications
revolution. It is a partner on the Lockheed Martin
A2100 satellite platform, one of the most
powerful flight-proven commercial spacecraft
available, supplying microelectronics for vital
subsystems including the command and
data handling subsystem (the ‘brains’ of the
spacecraft) and microelectronics service
solutions to enable mission success.

Inside cover image:
Inmarsat: Global Xpress Satellite
Cobham Semiconductor Solutions supplies
a wide range of component and subsystem
solutions used on the Inmarsat Global Xpress
(GX) satellite, the first commercial service
to offer global mobile broadcast coverage.
Cobham’s content ranges from discrete
components to complete major subsystems
that are delivered ready for high level system
integration. Cobham SATCOM is also a launch
partner with Inmarsat supplying maritime and
land terminals for GX.

Front cover: Image courtesy of Lockheed Martin Corporation.
Inside front cover: Image courtesy of Boeing.

Find more online
Our website provides further information including
shareholder services and governance, details of our
products and services, corporate responsibility and
sustainability and more at:

www.cobham.com

Corporate responsibility and sustainability
www.cobhamsustainability.com

Investor information and share price performance
www.cobhaminvestors.com

Products and service offerings
www.cobham.com/products-and-services

Employing more than 12,000 people
on five continents, Cobham has
customers and partners in over 100
countries, with market leading positions
in wireless, audio, video and data
communications, including: satellite
communications; defence electronics;
Printed by:
air-to-air refuelling; aviation services;
Park Communications on FSC® certified paper.
life support and mission equipment.

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When you have finished with this report, please pass it on to other interested
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Highlights of the year

Contents

– Significant progress which positions
the business to return to organic
revenue growth from 2015, despite
challenging market conditions

– Order intake up 10% before M&A

at constant currency

– Total revenue growth of 3% driven by

acquisitions and like-for-like commercial
revenue growth of 5%; commercial now
the Group’s largest end market segment
at 39%. Group organic revenue down 2%

– Trading profit impacted by product
mix, aerial refuelling development
programme performance and
unfavourable foreign currency
translation

Strategic Report
Group at a Glance

What We Do

Cobham’s 80th Anniversary

Chairman’s Statement

Chief Executive Officer’s Statement

Our Markets

Our Strategy and Key
Performance Indicators

Aeroflex Case Study

Communications and Connectivity

Mission Systems

Advanced Electronic Solutions

Aviation Services

Financial Review

Principal Risks

Corporate Responsibility
and Sustainability

Corporate Governance
Board of Directors

Corporate Governance Report

Nomination Committee Report

– Initial trading contribution from Aeroflex

Audit Committee Report

and integration off to a good start

Directors’ Remuneration Report

Directors’ Report

– Private venture investment increased

to 6.7% of revenue (2013: 6.2%)

– Recommended 10% increase in full year
dividend; future dividend progression
to be broadly aligned with underlying
earnings growth

Dividend

10.65p

(2013: 9.68p)

Total revenue

£1,852m

(2013: £1,790m)

Earnings per ordinary
share – underlying*

Earnings per ordinary
share – basic**

18.5p

(2013: 21.6p)

2.6p

(2013: 10.7p)

Statement of Directors’ Responsibilities 68

Compliance with the UK
Corporate Governance Code

Financial Statements
Independent Auditors’ Report

Group Financial Statements

Parent Company
Independent Auditors’ Report

Parent Company
Financial Statements

Other Information
Group Financial Record

Shareholder Information

Glossary

Definitions

118

119

124

125

126

128

Visit us online at
www.cobham.com

You can also view this Annual
Report and Accounts online at
www.cobhaminvestors.com

* For definitions, please refer to page 128.
** After M&A related costs which include the acquisition
of Aeroflex and amortisation of acquired intangibles,
and other non-underlying items; see page 128.

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.

Employing more than 12,000 people
on five continents, Cobham has
customers and partners in over 100
countries, with market leading positions
in: wireless, audio, video and data
communications, including satellite
communications; defence electronics;
air-to-air refuelling; aviation services; life
support and mission equipment.

Cobham plcAnnual Report and Accounts 2014www.cobham.comCOBHAM’S INTERNATIONAL
NETWORK PROVIDES A PRESENCE
IN FAST GROWING MARKETS

The Group in 2014
Cobham is a provider of specialist
technologies and know-how for
components and subsystems, in
its four Sectors; Communications
and Connectivity, Mission Systems,
Advanced Electronic Solutions and
Aviation Services. It has three broad
end markets which comprise
commercial, US defence/security
and non-US defence/security.

Our Sectors
The Group has transitioned to a new
operational structure in the year, with
four realigned Sectors replacing the
four Divisions. The former Aerospace
and Security Division has been
renamed the Communications and
Connectivity Sector to reflect the
significant amount of revenue it now
generates in other markets, including
marine and wireless communications.
The former Defence Systems Division
has been renamed the Advanced
Electronic Solutions Sector to reflect
the commercial revenue it generates
following the Aeroflex acquisition.

Revenue by Sector (%)

Trading profit by Sector (%)

Aviation Services
22%

Mission Systems
18%

Communications &
Connectivity 38%

Aviation Services
20%

Communications &
Connectivity 43%

Mission Systems
13%

Advanced Electronic
Solutions 22%

Advanced Electronic
Solutions 24%

£1,852m

£287m

Sectoral percentages for revenue and trading profit exclude non-core activities, head

office results and eliminations: see note 3 on page 88.

Communications and Connectivity
Provides aircraft and in-building communications
equipment, law enforcement and national security
monitoring solutions, satellite communication equipment
for land, sea and air applications, specialist composite
products for military and commercial applications, and
test and measure instrumentation for radio frequency,
cellular communications and wireless networking.

Operating locations
United States, United Kingdom, Denmark, France,
South Africa, Finland and Sweden.

Mission Systems
Provides safety and survival systems for extreme
environments, aerial 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 military
and homeland security.

Operating locations
United Kingdom, United States and Germany.

Revenue

£697m

(2013: £678m)

Trading profit

£118m

(2013: £115m)

Revenue

£334m

(2013: £358m)

Trading profit

£36m

(2013: £74m)

See page 20 for more information.

See page 22 for more information.

Cobham plcAnnual Report and Accounts 2014www.cobham.comGroup at a Glance

Markets (% of revenue)

Geography (% of revenue)

Commercial
39%

US defence/security
34%

Other EU 16%

Non-US defence/security
27%

UK 12%

USA 44%

Australia 13%

Asia 9%

RoW 6%

Employees worldwide

12,707*

(2013: 10,265)

* Total permanent headcount
at 31 December 2014.

Advanced Electronic Solutions
Provides critical solutions for communication on land,
at sea, and in the air and in space, by moving data through
off-the-shelf and customised products including radio
frequency, microwave, and high reliability microelectronics,
antenna subsystems and motion control solutions. Cobham
Advanced Electronic Solutions supplies defence, wireless/
mobile and fixed broadband, X-ray imaging, medical,
industrial, and point of sale markets.

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.

Operating locations
Australia and United Kingdom.

Operating locations
United States and Mexico.

Revenue

£410m

(2013: £372m)

Trading profit

£64m

(2013: £63m)

Revenue

£412m

(2013: £365m)

Trading profit

£55m

(2013: £48m)

See page 24 for more information.

See page 26 for more information.

For further information visit us
online at www.cobham.com

Cobham plcAnnual Report and Accounts 2014www.cobham.comSTRATEGIC REPORT

What We Do

WE HAVE A TECHNOLOGY
AND KNOW-HOW BASED
BUSINESS MODEL

t i

Talented
and engaged
employees
page 41

s
t
e

g i n g into new mark

s it i o

2. Invest

Highest ethical
standards
page 40

1. Leading m arket p

Safe working
environment
page 42

Understanding of
and response to
customer needs

t
i

ellence

Managing
environmental impacts
page 43

3 .

L e

Our business model
Our integrated business model depends on our
deep understanding of how to successfully manage
a leading edge and specialist technology business
on a sustainable basis and on our close customer
relationships, which have been built up over many
years. This is combined with a focus on safety,
ethics and on developing the skills and capabilities
of our employees.

1. Leading positions
in our markets

Cobham is focused at the tier 2 (subsystems) and
tier 3 (components) levels of its markets. It has a
good understanding of the characteristics of these
markets, where it focuses its technology investment.

The Group’s leading market positions increases
the returns it can deliver for its shareholders and
ensures it can continue to invest in technology
and in its employees.

System of Systems

Tier 1

Platforms

Platform Systems &
Signal Processing

Tier 2

Subsystems

Circuits

Tier 3

Cobham in action
Cobham is marine and land launch partner with
Inmarsat on the new GX satellite constellation, which
will offer customers faster download speeds globally.
It has developed and brought to market new
SATCOM antennas and terminals in the year, with
the GX system expected to enter global service
early in the second half of 2015.

Investing in skills and expertise
In a technology led business, developing employee
skills and capabilities are critical to the delivery of the
Group’s growth strategy. Cobham has continued to
build on the previously increased level of investment
in learning and development.

Cobham plcAnnual Report and Accounts 2014www.cobham.com

Financial characteristics
The business delivers above average
trading margins in its markets.
These are due to its differentiated
technology and know-how and its
leading positions in its specialist
markets. The business also has a
relatively low capital intensity and,
when combined with its margin
characteristics, this has resulted
over time in good cash generation.

Trading margin

15.5%

(2013: 17.7%)

See page 14 for information on our strategy
and key performance indicators.

See page 34 for information about our risks.

Free cash flow (after restructuring)

£114m

(2013: £155m)

For further information visit us
online at www.cobham.com

2. Investment in high value,

3. Leverage of existing technology

leading edge technology and
know-how

products and services into
new markets

4. Programme management
and operational excellence

Investment in technology is crucial to Cobham
maintaining and building its leading market
positions. The Group’s strategy of increasing
technology investment, positions it well to deliver
revenue growth. Cobham further increased its
Private Venture (PV) investment to £97m (2013:
£88m), representing 6.7% of revenue (2013: 6.2%).
This included an initial contribution from Aeroflex.

The Group’s technology often has application
in different end markets, with emphasis on growing
revenue in commercial markets. This should enable
the Company to produce sustainable growth through
economic cycles, as it shifts its portfolio accordingly.
This organic leverage is supplemented by targeted
acquisitions, which bring complementary technology
with application across adjacent end markets.

Revenue from commercial markets

39%

(2013: 35%)

Cobham in action
Cobham’s fuel tank inerting technology, originally
a technology used in military applications, is a safety
related product that decreases the probability of
combustion of flammable material in aircraft fuel
tanks. It is gaining increased traction in large aircraft
transport markets and is being used on the Boeing
787 wide body aircraft, which is now in full rate
production. It has also been chosen for the Japanese
Mitsubishi Regional Jet, which is expected to have
its first flight in the second quarter of 2015.

See page 12 for more information.

PV investment

£97m

(2013: £88m)

Total R&D investment

£198m

(2013: £186m)

Cobham in action
Cobham has successfully developed a suite of
complex valves for use on the Space Launch System
(SLS), which is NASA’s first exploration-class vehicle
since the Saturn V took astronauts to the moon
40 years ago. These valves perform critical functions
for the main propulsion system on the SLS.

See page 10 for more information.

The business has, as anticipated, substantially
concluded its successful Excellence in Delivery
(EiD) programme. The EiD programme has
delivered significant improvements across a range
of operational and customer metrics, including
productivity, on time delivery, quality and within the
supply chain. The Group is seeking to build on the
foundation EiD provides by driving a culture of
continuous improvement across its operations.
The Group’s EiD expertise is being leveraged into
the Aeroflex integration programme.

Total efficiency savings from EiD

£100m

There has been a focus on enhancing programme
and life cycle management capabilities, with a
streamlined functional structure put in place, together
with a clearly defined career development path. There
has been increased training and development activity,
as this capability is critical to the future success of
the business.

Cobham in action
During the year, Cobham has set up an internal
project management training academy (PPM
Academy) which has received accreditation from
the Association of Project Management Practitioners.

Senior project and programme
managers assessed

(2013: nil)

See pages 11 and 16 for more information.

Employees receiving training

Training completed

See page 41 for more information.

9,840

(2013: 8,898 employees)

235,190 hours

(2013: 183,567 hours)

Cobham plcAnnual Report and Accounts 2014www.cobham.comSTRATEGIC REPORTCobham’s 80th Anniversary

AT THE FOREFRONT
OF INNOVATION
FOR 80 YEARS

1948
Cobham provides
equipment and
personnel to
support the
Berlin Airlift.

1949
USAF B-50A
achieves the first
non-stop flight
around the world,
using Cobham’s
air-to-air refuelling
equipment.

1980s
Cobham’s
development of
the automatic
preserver inflation
system increased
US Navy aircrew
survival rates after
ejection from
65% to 84%.

1961
Since 1961 every
US astronaut has
used Cobham
regulators,
including Neil
Armstrong, the
first man to walk
on the moon.

1982
Cobham’s
air-to-air refuelling
equipment plays
a vital role in the
UK’s Falklands
campaign.

1949
Hose and drogue
method of aerial
refuelling
invented by
Cobham.

1969
Concorde’s first
flight completed
with 200 separate
Cobham
assemblies.

1934

Flight Refuelling
Limited formed
29 October.

1934
Sir Alan Cobham
completes first
aerial refuelled
flight to Pakistan.

Cobham plcAnnual Report and Accounts 2014www.cobham.com 2013
Cobham’s cellular
and public safety
communications
architecture has
been fitted to the
Pentagon, Beijing
Subway, Germany’s
Bundestag, The
Shard in London and
Burj Khalifa in Dubai.

2014
Cobham has
more than 250
components on
the International
Space Station.

2014

Cobham
celebrates its
80th anniversary.

AM 19 3 4 - 2014

1994
Channel tunnel
opened between
France and
England including
Cobham
communication
antennas.

2008
Cobham’s
Sentinel contract
operates
maritime
surveillance
aircraft which
patrol over
25 million square
kilometres of
Australian waters,
flying some 3,000
missions per year.

2009
Two Cobham
businesses
honoured with
the Queen’s
award for
innovation and
international
trade.

2010
Cobham’s
surveillance
equipment is
used to keep the
lives of those
attending the
Oscars safe.

2003
Cobham’s video
transmission
technology
delivers
spectacular video
from Red Bull Air
Race cockpits,
even at 12g
and 280mph.

2006
The F-35 Joint
Strike Fighter’s
first flight with
over 100 Cobham
subsystems and
components,
including at the
heart of its radar
and threat
warning systems.

2012
Cobham provided
high definition,
live action TV
transmission from
the world’s
smallest Nano HD
transmitter during
the 2012 London
Olympics.

2013
Cobham starts its
partnership with
the Volvo Ocean
Race, providing
global SATCOM
and wireless
in-race coverage.

Cobham plcAnnual Report and Accounts 2014www.cobham.com STRATEGIC REPORTChairman’s Statement

MOVING THE BALANCE OF THE
PORTFOLIO TOWARDS ATTRACTIVE
COMMERCIAL MARKETS

“ We have a tremendous
track record of providing
an increasing dividend
to our shareholders.”

our customers, the savings have also given us the
opportunity to increase our investment in the business.
We are now using the expertise gained during the EiD
implementation in the integration of Aeroflex. Building on
the progress made over the last few years, we have also
further moved the balance of the portfolio towards
attractive and growing commercial markets. We have
continued to grow our commercial revenue organically
often leveraging technology from our defence/security
markets into adjacent commercial markets.

Bob Murphy has transitioned the Group to a new
operational structure in the year, through the organisational
design project. Four realigned Sectors have replaced the four
Divisions and it has strengthened the senior management
and reporting structure to align it with the drive to deliver
sustainable growth.

We have continued to review and align the culture of the
business, with the initiation of the Great Place to Work®
survey. Included in this, is a Group-wide employee
engagement and feedback initiative, which had an initial
response rate of over 80% of employees. Work will continue
on this initiative through 2015 to build on and sustain
engagement with employees. This should ensure the
workforce is fully aligned with the Group’s growth strategy
and other objectives as well as monitoring and building
the job satisfaction of our employees.

Full year dividend

10.65p

(2013: 9.68p)

Overview
I am pleased with the progress we have made,
implementing the Group’s strategy and positioning
the business to deliver sustainable growth, despite
the challenging market background in the year,

In the US, the defence/security market is continuing
through its periodic down-cycle, albeit with the rate of
decline expected to moderate. Our other global defence/
security markets are mixed, with investment in Europe being
held back but we are seeing growth in other parts of the
world. Our commercial businesses continue to benefit
from good momentum and we expect this to continue.

We are also going through a phase of increased engineering
and development activity which, while it creates short term
pressures for the business, will ultimately result in a stream
of long term revenue from high priority programmes, as
they move into production and aftermarket phases.

Over a number of years, we have successfully increased
the rate of our investment in technology and this now
stands at 6.7% of revenue. We have also continued to
invest in the Group’s employees, building on the training
and development programmes that were initiated in
previous years. Cobham has also joined the 5% club,
an initiative which commits UK employers to hiring 5%
of its intake as apprentices or graduates within five years.

We substantially completed the multi-year EiD programme
in 2014, which has improved productivity, as well as
delivering a fundamental improvement across a range of
operational metrics. It has also delivered significant cost
savings. Not only is this programme supporting us in our
efforts to grow the business through consistent delivery to

Of course, acting ethically and in compliance with all
applicable laws and regulations is another fundamental
cornerstone of sustainable growth and a key foundation of
our culture, on which we will not compromise. This principle
is enshrined within the Cobham Code of Business Conduct.
We have striven to ensure that every single Cobham

Cobham plcAnnual Report and Accounts 2014www.cobham.com 13% CAGR over ten years in dividend (pence)

2010

2011

2012

2013

2014

Dividend
The Board is recommending a final dividend for 2014
of 7.746p (2013: 7.04p). This, together with the interim
dividend of 2.904p (2012: 2.64p), will result in a total
dividend per share for 2014 of 10.65p (2013: 9.68p),
an increase of 10% on the prior year, in line with the
Group’s progressive dividend policy.

6.00

8.00

8.80

9.68

10.65

The Group has a long track record of dividend growth
and the Board remains committed to continuing to pay
a progressive dividend. As Cobham now enters a new
phase of sustainable growth, the Board has considered
its future approach to dividends. It has concluded that
future dividend increases should be broadly aligned with
underlying earnings growth, while rebuilding dividend
cover over time. This policy will give it flexibility to drive
growth and maximise shareholder returns.

Conclusion
We will now focus the Group on delivering organic revenue
growth, integrating Aeroflex, generating strong cash flows
from operations and continuing to upgrade our programme
management skills and capabilities. We will also continue
to make significant investment in the portfolio to further
strengthen our leading market positions

Overall, Cobham has excellent prospects based on its close
customer relationships, differentiated technology and
know-how, market leading positions and an increasingly
strong operational foundation, enabling us to drive
sustainable growth through economic cycles.

John Devaney
Chairman
4 March 2015

employee knows what is expected of them and understands
the standards to be met. We have been mandating training
programmes on the Cobham Code of Business Conduct for
a number of years and I am pleased to say that we have
achieved 100% employee training in the year. This will
continue to receive an appropriate level of senior
management focus going forward.

The Board
After nine years service John Patterson, Non-executive
Director and Chair of the Remuneration Committee,
stood down from the Cobham Board at the conclusion
of the Annual General Meeting on 24 April 2014. We are
grateful for his significant contribution and support over
this period. Alison Wood has taken over as Chair of
the Remuneration Committee.

Also on 24 April 2014, we welcomed Birgit Nørgaard to
the Board as a Non-executive Director. Birgit is a Danish
national and has extensive experience in engineering related
markets, including as the former Chief Executive Officer
of Grontmij Carl Bro, the Danish engineering consultancy
group, as well as the Chief Operating Officer of Grontmij NV,
its Dutch parent company. She currently holds a number of
non-executive roles in the private and public sector in the
UK and overseas. Birgit has also joined Cobham’s
Remuneration Committee.

We have also welcomed Alan Semple to the Board on
25 February 2015. Alan is currently a Director and Chief
Financial Officer at John Wood Group plc, a role which he
has announced he will retire from in May 2015, after 15
years service. Alan has also been appointed to the Group’s
Audit Committee, so that it can benefit from his deep and
extensive financial knowledge. At the conclusion of the
Annual General Meeting on 23 April 2015, Alan will become
Chair of the Audit Committee. He will replace Mike Wareing,
who will stand down as Chair on that date but remain a
member of the Audit Committee.

See page 28 for more information
on our financial performance.

For further information visit us
online at www.cobham.com

Cobham plcAnnual Report and Accounts 2014www.cobham.com STRATEGIC REPORTChief Executive Officer’s Statement

A CLEAR AND UNWAVERING
FOCUS ON CREATING
SHAREHOLDER VALUE

“ We’ve made good progress
towards delivering our
strategic objective of
achieving sustainable
organic growth.”

PV investment

6.7%

(2013: 6.2%)

Commercial revenue

39%

(2013: 35%)

Strategy and progress overview
The Board has a clear and unwavering focus on creating
value for Cobham’s shareholders through leveraging the
Group’s innovative technology, know-how and
understanding of customer requirements to build and
maintain leading positions in the second and third tiers
of commercial aerospace, marine, wireless and other land
markets and the global defence/security market. We will
deliver sustainable top and bottom line growth, relative
to the markets in which we operate, while consistently
generating good free cash flow.

Our strategy has two major strands. The first is an organic
strategy, based on the three pillars of continuously investing
in the business, improving execution and increasing
customer intimacy. We invest to keep our technology,
people and processes at the cutting edge in the markets
in which we operate. Maintaining technology differentiation
is critical to the future success of the business and it needs
to be backed up with flawless execution to meet ever
increasing customer expectations. This includes maintaining
an efficient, competitive cost base. The combination of
these pillars enables us to compete effectively and deliver
organic growth.

This organic investment is supplemented by using the healthy
cash flows that the business generates and its balance sheet
capacity to acquire businesses that operate in the same or
closely adjacent markets. This further strengthens our leading
market positions and ensures our portfolio is exposed to
markets that are growing organically as we move through
economic cycles. Potential acquisitions must have similar
operating characteristics and leading edge technology or
know-how. As two thirds of the Group’s portfolio is now

exposed to connectivity markets, which is underpinned by
strong macro growth trends, this will continue to be a focus
for the Group.

Organic strategy and execution
We increased PV investment in the year to £97m
(2013: £88m), representing 6.7% of revenue (2013: 6.2%).

We continued to focus this investment on our leading edge
technologies where there is most opportunity for profitable
growth, investing in a range of exciting new products and
technologies, including the following examples:

− Development and launch of the SATCOM SAILOR 100
GX system for the marine market and the EXPLORER
5075 GX system for the land market. Shipments of
SATCOM terminals are expected to benefit from the
global entry into commercial service of the Inmarsat GX
satellite constellation. This is currently anticipated to be
early in the second half of 2015, with Inmarsat
announcing the successful launch of the second of
three satellites in February 2015;

− The Semiconductor Solutions business, formerly part
of Aeroflex, has successfully developed and brought to
market a 90nm application specific integrated circuit for
use in space, delivering size and weight benefits to its
customers together with reduced power requirements;
− The Mission Systems Sector has developed its on-board

oxygen system (OBOGS), which has been used for
military applications for the general and business
aviation markets. First revenue is expected in 2015.
OBOGS has a number of advantages over alternative
technologies including being cheaper to use as well as
being lighter. It also has additional safety features;

Cobham plcAnnual Report and Accounts 2014www.cobham.com connectivity and bandwidth, so that approximately two
thirds of the Group’s revenue is now focused in this area.
Aeroflex is a leading global provider of radio frequency
and microwave subsystems and components for critical and
harsh environments. It also operates in high end, technology-
led segments of the wireless and communications market,
having a leading position in the provision of technology for
specialist wireless infrastructure testing applications. Aeroflex
has similar revenue growth potential to Cobham, with similar
trading margins and cash generation characteristics.

We have been pleased with the trading performance of
Aeroflex in the period since completion, which has been
in line with the Board’s plan. Aeroflex also brings substantial
revenue and cost synergy opportunities. Its microelectronics
business has been combined with Cobham’s Advanced
Electronic Solutions Sector, so that they are now being
managed together, having considerable complementary
technology and customer cross-selling opportunities.
There are also opportunities for synergy between Aeroflex’s
wireless business and existing Cobham businesses, including
Axell Wireless. These businesses have also been placed
under common management as part of Cobham’s
Communications and Connectivity Sector.

We remain encouraged by the overall potential scope
for realising synergies from combining the companies,
targeting some US$85m on an annualised, run rate basis,
for a total cost of US$215m. Approximately 60% of the
benefits and 70% of the costs are expected to be in the
first three years of ownership. The integration of the two
businesses has got off to a good start, with good early
progress on delivering the underlying synergies identified
including a significant reduction in central costs, the
commencement of supply chain initiatives and the
announcement of the first major physical site integration.

Conclusion
In 2014 we made significant progress on the delivery of
Cobham’s strategic objectives. Completing the Aeroflex
acquisition was a key highlight, increasing the Group’s
exposure to growing commercial markets, and Aeroflex’s
post acquisition trading and integration has been in line with
the Board’s expectations. This progress enhances Cobham’s
position as a technology company with exciting prospects
based on its close customer relationships, differentiated
technology and know-how, market leading positions and
an increasingly strong operational foundation.

Overall we have made significant progress on the delivery
of our strategic objectives in 2014 and, as anticipated,
Cobham remains well positioned to deliver mid-single
digit organic revenue growth from 2015.

Bob Murphy
Chief Executive Officer
4 March 2015

− Within the Advanced Electronic Solutions Sector, the

technology focus within its defence businesses has been
on developing smaller and lighter products which use
less power, provide enhanced mission effectiveness and
which are less costly for customers. These are for priority
defence applications including: ship protection, the next
generation of radar and contested airspace applications.

Total Group R&D investment, including customer funded
projects, was £198m (2013: £186m). The increase in
customer funded R&D was primarily driven by ongoing
major development activity on aerial refuelling programmes.
Total Group R&D investment, including customer funded
projects, was £198m (2013: £186m). The increase in
customer funded R&D was primarily driven by ongoing
major development activity on aerial refuelling programmes
which, as they move through this phase, tend to generate
lower margins and so dilute the Group’s overall margin
performance. In February 2015 we also announced we
would make a one-off provision of £15m on these
programmes, addressing cost escalation. However, these
are critical programmes and we are confident that they
will lead to significant future streams of production and
aftermarket revenue over an extended timeframe.

In addition to our investment in our core technology
capabilities we have, as anticipated, substantially
concluded the successful multi-year EiD programme.
EiD has succeeded in significantly reducing the cost base
through a targeted programme of site integrations and
rationalisations. These, when combined with business
improvements, have enabled us to deliver the anticipated
£24m of year-on-year efficiency savings in the year, bringing
total annualised benefits to £100m since the programme
was launched in 2010. These savings have, in part, been
used to significantly increase organic investment, including
in technology and in skills and capabilities.

The Group has transitioned to a new operational
structure in the year, through its organisational design
project, with four realigned Sectors replacing the four
Divisions and it has strengthened its senior management
and reporting structure to align it with the drive to deliver
sustainable growth.

Capital deployment strategy
In the context of maintaining a robust balance sheet,
which enables recurring business commitments to be met,
including external financing and pension obligations, the
key elements of our capital deployment strategy are:

− To prioritise investment in the business for

organic growth;

− To maintain a progressive dividend policy; and
− To utilise the balance sheet and strong cash generation
to acquire businesses that reinforce our differentiated
technology and know-how, in particular where these
enable us to leverage our capabilities into adjacent,
growing commercial markets.

Acquisition of Aeroflex
In 2014, as well as continuing to meet our strategic
objectives in respect of organic investment and dividends,
we have increased our exposure towards growing,
commercial markets through the acquisition of Aeroflex,
for an enterprise value of approximately US$1,460m. In
total, some 70% of Aeroflex’s revenue is generated from
commercial markets. Consistent with Cobham’s strategy,
Aeroflex’s revenue is connectivity focused, further
increasing exposure to the growing demand for data,

Strategic Overview
Our strategic priorities allow us to:
Deliver growth
Generate free cash flow
Create shareholder value

The seven strategic priorities that enable
us to return to sustainable growth are:
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

See page 14 for more information.

See page 28 for more information
on our financial performance

For further information visit us
online at www.cobham.com

Cobham plcAnnual Report and Accounts 2014www.cobham.com STRATEGIC REPORTOur Markets

OUR TECHNOLOGY IS USED
GLOBALLY IN DEFENCE AND
COMMERCIAL MARKETS

Competitive position within our markets
Cobham operates in three broad end markets; commercial,
which comprises aviation, marine and wireless and other
land markets; US defence/security and non-US defence/
security. The proportion of Group revenue attributable
to each end market is shown in the charts below.

Commercial markets
Specialist commercial markets now make up the largest of
the Group’s end markets, with Cobham successfully growing
its presence over a number of years. Cobham’s primary
commercial markets are marine SATCOM, commercial
aerospace, including large transport aircraft, regional and
business jets, helicopters and smaller aircraft, and wireless
and other land markets. Across these markets it specialises
in communications, in particular supplying products and
services for environments where the communication
solution represents a technology challenge. In addition,
Cobham has significant and growing positions in specialist
aviation services, largely in Australia.

Driving long term demand in Cobham’s main commercial
markets is the increased need for bandwidth, as the desire
to communicate increases, increasingly stringent safety
requirements and the demand for smaller and lighter
products, which bring operational benefits for customers.
In addition, in commercial aerospace markets Cobham
benefits from increasing aircraft production. In its specialist
aviation services markets, Cobham benefits from the
increased outsourcing of airline flying operations and
growth in labour demand from the natural resources
industry. This is aligned with a reputation for performance,
for exceptional safety standards and for the ability to
provide differentiated capabilities and know-how.

Cobham leverages technology used in defence/security
markets into new commercial applications. For example, the
Group’s fuel tank inerting technology was originally used on
military programmes. This safety related product decreases
the probability of combustion of flammable material in
aircraft fuel tanks. It is gaining increased traction in
commercial large aircraft transport markets and is being
used on the Boeing 787 wide body aircraft, which is now
in full rate production. It has also been chosen for the
Mitsubishi Regional Jet, which is expected to have its first
flight in the second quarter of 2015 and there are also airline
retrofit opportunities beginning to become available.

End markets (% of revenue)

2011

2012

2013

2014

2011

2012

2013

2014

2011

2012

2013

2014

Commercial

US Defence/Security

Non-US Defence/Security

Commercial organic growth

(2013: 7%)

Defence/security
organic growth

(5)%

(2013: (9%))

Cobham plcAnnual Report and Accounts 2014www.cobham.com US defence/security market
The US defence/security market is continuing through its
periodic down-cycle with continuing pressure on budgets
due to high levels of Government indebtedness. The Group
believes there are indications that the investment accounts,
which comprises spending on procurement and research,
development, testing and evaluation, are beginning to
stabilise with the adverse impact on Group revenue
slowly moderating.

Non-US defence/security markets
The generally subdued economic situation and outlook
and the high levels of public indebtedness in many
countries, have continued to hold back defence and security
investment in Europe, notwithstanding increased internal
and external security tensions. However, certain countries,
including in Eastern Europe, are starting to increase their
defence budgets, in part driven by the current politically
uncertain environment.

However, there remains residual risk and uncertainty
in this market, with the potential for further significant
disruption and cuts in 2016 unless timely action is taken
by Congress to avoid the mechanism of Sequestration
that is currently mandated.

The Group’s leading edge technology, strong programme
positions on high priority platforms and its strategy of
increasing technology investment positions it well to deliver
revenue growth once the down-cycle is completed. It is
currently involved in the development or low rate initial
production phases of a number of attractive long term
programmes, including the US Air Force KC-46 aerial
refuelling aircraft, the F-35 Joint Strike Fighter and the
next generation Air and Missile Defence Radar (AMDR)
upgrade programme for the US Navy, among others.

Elsewhere, particularly in Asia, the Middle East, Australia and
parts of South America, defence investment has continued
to increase. This is driven by local and regional security
tensions and underpinned by economic growth.

Cobham’s revenue in non-US defence/security markets will
be driven in particular by growth in outsourced maintenance
and training for fixed and rotary wing aircraft and increased
production on non-US aerial refuelling programmes, primarily
the Airbus A400M, the Airbus A330 MRTT and the Embraer
KC-390 aircraft. Cobham also benefits from export orders,
won by larger US and non-US defence companies in
accessible markets around the globe, as its critical
components and subsystems are used across a wide
and diverse range of platforms and programmes.

The KC-46 development programme took an important step
forward just before the end of 2014 with the completion of
its first flight. Subsequent flights are scheduled for 2015,
which will include testing of its aerial refuelling capability,
and the Group remains on track to participate in this.

During the year Cobham demonstrated significant progress
in its non-US defence/security market, including the award
of a significant new contract with the Australian Maritime
Safety Authority for airborne search and rescue, with flying
commencing in 2016. This contract has a potential value
of AUS$700m over its life, if all options are exercised.

Cobham’s focused investment in priority areas of technology
has continued to deliver results, with the Group increasing its
ship set on the F-35 aircraft by US$100,000 in the year, as
the customer looks to implement capability enhancements.
The increased ship set includes unique integrated microwave
assemblies which will be used to upgrade the aircraft’s
electronic warfare system.

The aerial refuelling market, in which Cobham has a
leading position, has also remained active with Qatar,
Singapore and France all announcing in 2014 that they
have chosen to purchase the Airbus A330 MRTT aircraft.
In addition, the Brazilian air force has ordered 28 KC-390
aircraft, with this aircraft successfully undertaking its first
flight during February 2015.

Global defence expenditure
growth estimates

-5%

MENA*

10%
7%

Asia-Pacific

Latin America

Africa

Europe

-1%

* MENA – Middle East and North Africa
Sources: Cobham analysis, SIPRI, IMF,
Strategic Defense Intelligence

Main commercial end markets

Specialist Aviation
Services

Aerospace

Marine SATCOM

Wireless
Communications

US Defence/Security market cycles (US$bn)

Vietnam
War

(50%)

Gulf
War

(51%)

y
t
i
r
o
h
t
u
A
t
e
g
d
u
B

a
t
o
T

300

250

200

150

100

FY54

FY56

FY58

FY60

FY62

FY64

FY66

FY68

FY70

FY72

FY74

FY76

FY78

FY80

FY82

FY84

FY86

FY88

FY90

FY92

FY94

FY96

FY98

FY99

FY02

FY04

FY06

FY08

FY10

Procurement
Sources: Cobham analysis, DoD FY15 Green Book, DoD, OMB

Federal Debt as % of GDP

RDT&E

Afghanistan/
Iraq conflicts

120%

(39%)

100%

G
r
o
s
s
F
e
d
e
r
a

D
e
b
t
%
t
o
G
D
P

80%

60%

40%

20%

0%
FY12

FY14

STRATEGIC REPORTCobham plcAnnual Report and Accounts 2014www.cobham.com

Our Strategy and Key Performance Indicators

DELIVERING AGAINST OUR
STRATEGIC PRIORITIES ...

Strategic priority

1. Innovation with insight

2. Focus on components

and subsystems

Description

Importance

Improve understanding of our markets and
customers’ future needs, aligning private
venture investments with these priorities.

Remain focused on the second and third tiers
of global defence/security markets, and
commercial aerospace, marine and wireless
and other land markets.

Our technology is a key differentiator in our markets, and
is intrinsic to the future success of the business. The ability
to maintain a close relationship with the customer, so as to
understand the customer’s needs and develop products
and services in line with these needs is equally critical.

Our competitive edge is in the tier 2 (subsystems) and tier 3
(components) segments of our markets, where we make
significant investment in technology. This investment,
combined with our knowledge of the markets and close
customer relationships, give us a competitive edge.

Progress

Group PV investment (% of revenue, excluding CAvS)

Group revenue (£m)

2010

2011

2012

2013

2014

4.5

4.9

5.3

6.2

2010

2011

2012

2013

6.7

2014

1,903

1,854

1,749

1,790

1,852

Commentary

Target: 6%

Target: mid-single digit organic revenue growth
from 2015

Following the significant increases in prior years, the rate
of technology investment in the existing business has been
maintained, in addition to a first time contribution from the
former Aeroflex businesses, which has increased the Group’s
overall rate of investment.

Total Group revenue increased 3%, with a good contribution
from acquisitions, including a strong initial contribution from
Aeroflex, which completed in September 2014. Partially
offsetting this was a significant adverse foreign currency
translation impact.

Organic revenue was 2% lower overall.

See page 10 for more information.

See page 28 for more information.

Cobham plcAnnual Report and Accounts 2014www.cobham.com

See page 34 for more information
on our risks.

For further information visit us
online at www.cobham.com

3. Leverage our technology

4. Focus on M&A

Identify adjacent markets where our existing
technology and know-how can be leveraged
to meet the needs of new customers.

Use mergers and acquisitions (M&A) to shift
the emphasis of the portfolio ahead of market
movements to remain exposed to faster
growing markets.

Our technology often has applications across different
markets, with the emphasis on growing our commercial
revenue, to produce sustainable growth through economic
cycles, bringing more balance to the portfolio. This organic
rebalancing is supplemented by acquisitions, to bring similar
but differentiated technology in adjacent end markets.

M&A is used as a supplement to our organic technology
investment. It brings the potential for technology and
revenue synergy as well as efficiency savings. M&A is funded
from the Group’s cash flows and balance sheet and is
subject to the Group’s rigorous and disciplined financial
investment criteria.

Aeroflex acquisition
In 2014 Cobham acquired Aeroflex,
a leading provider of high performance
subsystems and components.

See page 18 for more information.

Commercial revenue growth (%)

2010

2011

2012

2013

2014

Investment in M&A

£897m

(2013: £152m)

1.0

7.6

1.9

6.9

5.3

In 2014 commercial revenue growth of 5% was in part
driven by a strong performance from the SATCOM business,
which delivered good growth in marine and aerospace
markets. The Aviation Services Sector also showed good
growth during the year in its outsourced aviation services
business and in its regional services business, although
commercial growth moderated in the second half.

During the year, Cobham invested in the acquisition
of Aeroflex, for an enterprise value of approximately
US$1,460m. The business has brought access to attractive
commercial markets and technology. It is expected to bring
significant cost savings and its complementary technology
brings good potential for revenue synergies.

See page 28 for more information.

See pages 18 and 19 for more information.

Key performance indicator used
by management.
Used as a measure for determining
executive remuneration.

For definitions, see page 128.

STRATEGIC REPORTCobham plcAnnual Report and Accounts 2014www.cobham.com

Our Strategy and Key Performance Indicators continued

... DRIVES FREE CASH FLOW
AND THE CREATION OF
SHAREHOLDER VALUE

Strategic priority

5. Operational excellence

6. Programme execution

Description

Importance

Drive a culture of continuous improvement
from an integrated, streamlined business,
building on the foundation provided by EiD.

Improve programme execution across
customer and PV funded projects to
achieve sector leading customer delivery
and operational performance.

The Group’s multi-year operational excellence initiative,
EiD was substantially completed in the year. It has delivered
significant savings and operational and customer benefits
which underpin the Group’s growth targets. The Group is
seeking to build on the foundation it provides by driving
a culture of continuous improvement across its operations.

Programme management is a core competency, which
supports the Group’s growth objective by ensuring that
programmes are delivered to customers on time and on
budget, in line with quality and performance expectations.

Progress

Staff safety – major accident incident rate*

Employees trained at Cobham’s PPM academy

2010

2011

2012

2013

2014

185

(2013: nil)

565

465

586

326

423

Operational excellence is one of a number of tools with
which we drive, improve and monitor our health and safety
performance.

Commentary

Target: 400

Cobham had no fatalities in 2014. There was an increase in
the major accident incident rate. This represented 45 work
place injuries, of which 21 occurred in the Aviation Services
Sector. The Group will continue to review its controls to
ensure health and safety is being fully addressed.

Significant work has continued to enhance the Group’s
programme and life cycle management capabilities,
with a streamlined functional structure put in place,
together with a clearly defined career development path.
The increase in programme management training and
development demonstrates the Group’s commitment
to enhancing its capabilities.

See pages 11 and 42 for more information.

See page 5 for more information.

* per 100,000 employees

Cobham plcAnnual Report and Accounts 2014www.cobham.com

See page 34 for more information
on our risks.

For further information visit us
online at www.cobham.com

7. Invest in skills and capabilities

The Group is investing in its seven priority areas to drive
improvement in its financial metrics

Ensure the right capabilities are in place in
changing markets by increasing investment
to build essential skills and capabilities.

Earnings

Underlying EPS (pence)

In a technology led business, it is essential that we have the
right skills and capabilities in place to deliver future growth.
We have continued to invest in learning and development,
with particular focus on strategic workforce planning and
the development of a high performance culture.

Voluntary staff turnover (%)

2010

2011

2012

2013

2014

8.00

8.37

8.68

6.90

6.33

Target: <10%

Voluntary staff turnover data demonstrates how successful
we are in retaining essential skills and capabilities in the
businesses, in which we invest to enhance our execution
and performance.

See page 41 for more information.

2010

2011

2012

2013

2014

Target: high single
digit growth

18.5p

(2013: 21.6p)

19.7

22.1

22.6

21.6

18.5

Underlying EPS was 14% lower than the prior year, reflecting
lower trading profit and a higher share count, following the
equity placing in May. Adverse foreign currency translation
also impacted EPS by 3% pts.

Cash generation

Operating cash conversion (%)

2010

2011

2012

2013

2014

Target: >80%

73%

(2013: 85%)

105

The Group generated £208m (2013: £269m) of operating
cash flow. Cash conversion was lower than the prior year
principally due to a cash outflow from working capital,
from an increase in receivables and inventory.

Shareholder value

Return on invested capital (%)

2010

2011

2012

2013

2014

Target: >10%

12.4%

(2013: 15.3%)

18.6

19.4

18.1

15.3

12.4

Return on invested capital was lower than the prior year due
to the Aeroflex acquisition, which is expected to beat the
Group’s cost of capital in the third year of ownership and
also due, in part, to the lower trading profit generated.

Key performance indicator
used by management.
Used as a measure for
determining executive
remuneration.

For definitions, see page 128.

STRATEGIC REPORTCobham plcAnnual Report and Accounts 2014www.cobham.com

Aeroflex Case Study

AEROFLEX: INCREASING
OUR EXPOSURE
TO ATTRACTIVE,
COMMERCIAL MARKETS

Microelectronic Solutions designs and
manufactures high reliability circuits for
growing medical markets, for use in
scanners and ultrasound.

Cobham plcAnnual Report and Accounts 2014www.cobham.comThe acquisition of Aeroflex

Overview
Aeroflex is a leading global provider of high performance
subsystems and components. The acquisition builds on
Cobham’s connectivity strategy, following the 2012
Thrane & Thrane SATCOM acquisition and the 2013
Axell in-building wireless acquisition.

Aeroflex enterprise value

US$1.5bn

Commercial revenue

70%

Approximately 60% of Aeroflex revenue is focused on
microelectronics technology, typically for demanding
and harsh environments including defence, in space, energy
and medical applications. The remaining 40% of its revenue
is in technology led segments of the wireless and
communications market for specialist test applications.
This revenue is predominantly generated in commercial
end markets. The business has made significant investment
in R&D, with the recent launch of a number of new and
innovative technologies and it has good potential for
future revenue growth.

Why we bought Aeroflex
The acquisition of Aeroflex is consistent with Cobham’s
strategy of having leading positions in attractive, high
technology led commercial segments. Aeroflex and
Cobham have complementary products and customers in
microelectronics, with good potential to generate revenue
synergies. Combining the Cobham and Aeroflex businesses
will also generate an estimated US$85m of cost savings,
driven by the significant physical overlap in the US.

Markets (% of revenue)

Defence/security
30%

Commercial
70%

Analysis of commercial markets (%)

Avionics 11%

Space 19%

Communications 51%

Medical & Energy 19%

Company information as of year end 30th June 2013.

The 7100 digital radio test set is a single box
solution for protocol performance and radio
frequency testing of 4G high speed data
cellular devices and components.

For further information visit us
online at www.cobham.com

STRATEGIC REPORTCobham plcAnnual Report and Accounts 2014www.cobham.com
Communications and Connectivity

FOCUSED ON THE
INCREASING DEMAND
FOR DATA, BANDWIDTH
AND CONNECTIVITY

From entertainment to safety,
reliable SATCOM is vital on any aircraft.
Cobham AVIATOR SATCOM systems are
easy to install and provide simultaneous
high speed data and high quality voice
for a range of applications including:
email; internet browsing; voice calls;
data transmission; smartphone
connectivity and streaming video.

Cobham plcAnnual Report and Accounts 2014www.cobham.comHighlights

Provides aircraft and in-building communications
equipment, law enforcement and national security
monitoring solutions, satellite communication equipment
for land, sea and air applications, specialist composite
products for military and commercial applications,
and test and measure instrumentation for radio frequency,
cellular communications and wireless networking.

Revenue
Total revenue increased £19m, due to an initial part year
contribution from the former Aeroflex Test Solutions business
and the full year contribution from Axell. This was partially
offset by a significant adverse impact from foreign currency
translation of £26m. There was an organic revenue decline of
6%, driven by lower defence/security revenue.

The Sector saw organic revenue growth from its
commercial markets, with a good performance from
SATCOM in its marine and aerospace markets. In addition,
there was revenue growth from increased volumes of radio
management systems and antennas into the large transport
and regional jet markets. Within defence/security markets
there continued to be weakness in many of its shorter cycle
land oriented businesses, particularly for counter-improvised
explosive device and surveillance products.

Trading profit
The Sector’s trading profit increased by £3m largely due to
the contribution from Aeroflex and the incremental
contribution from Axell. Trading profit also benefited from
increased volumes in commercial markets and from
proactive implementation of rationalisation and other cost
reduction activities. However, these positive factors were
offset by lower volumes in defence/security markets and
by the adverse impact from foreign currency translation.
The Sector’s trading margin was unchanged at 17.0%.

Sector revenue (£m)

(37)

678

697

800
700
600
500
400
300
200
100
0

2013

Acquisitions
and currency
translation

Organic
growth

2014

Revenue by market (%)

Commercial aerospace/
general aerospace 21%

Commercial maritime/
other 44%

US defence/security
15%

Australia 1%

Asia 16%

RoW 10%

Non-US defence/
security 20%

Revenue by geography (%)

Other EU 30%

UK 11%

USA 31%

Sector trading profit (£m)

Developments impacting the future
− Delivery of the first Airbus A350 wide body aircraft for
which Cobham supplies standard fit content including
audio and radio management systems and antennas;

− The TM/E500 secured a market leading position

in the 4G Radio Access Network wireless load test market,
winning new customers in the US, Australia, France, China
and South Korea;

− Launch of the SAILOR 100 GX SATCOM marine system
with the land based EXPLORER 5075 GX also completed.
This is ahead of the global entry into commercial service
of Inmarsat’s new, next generation GX satellite
constellation, early in the second half of 2015.

125

100

(7)

115

118

2013

Acquisitions
and currency
translation

Net
other

2014

Cobham is an integral part of the Volvo
Ocean Race 2014-2015, with both its
SATCOM and Surveillance businesses
being partner sponsors.

Cobham SATCOM has provided hardware
for every boat, including safety and radio
systems. Cobham Surveillance is providing
the Volvo Ocean Race with broadcast
products enabling live feeds from on-board
and in the air, including drones fitted with
our SOLO7 Nano Transmitter, the smallest
HD transmitter in the world, providing
unique coverage of the race villages.

www.cobham.com/volvo-ocean-race

Revenue growth

% of Group revenue

38%

For further information visit us
online at www.cobham.com

STRATEGIC REPORTCobham plcAnnual Report and Accounts 2014www.cobham.com

Mission Systems

LEADING CAPABILITIES IN
AERIAL REFUELLING AND
SURVIVAL SYSTEMS FOR
EXTREME ENVIRONMENTS

State of the art aerial
refuelling test facility
Cobham’s state of the art aerial
refuelling test facility provides the
crucial function of testing the
performance of Cobham’s refuelling
pods which are being developed
for the latest generation of tanker
aircraft. It provides a realistic simulation
in which pods can be tested in a
in-flight environment with their hoses
fully trailed.

Cobham plcAnnual Report and Accounts 2014www.cobham.comHighlights

Provides safety and survival systems for extreme
environments, aerial 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.

Revenue
Total revenue was lower by £24m, including an adverse
foreign currency translation impact of £12m, primarily
due to the US dollar, and an organic revenue decline of 4%.

The organic decline was driven by a lull in production of
the KC-130 tanker aircraft in the US and lower production
and aftermarket activity in support of the UK Future Strategic
Tanker Aircraft programme’s Airbus A330 MRTT aircraft.
This was partially offset by increasing customer funded
engineering and development revenue on next generation
aerial refuelling programmes, principally the Boeing KC-46
and the Airbus A400M.

Trading profit
The Sector’s trading profit decreased to £36m. This was
in part due to an unfavourable mix in the aerial refuelling
business driven by lower production and aftermarket
revenue, which was partially offset by increased lower
margin engineering and development revenue. In addition
there was an adverse impact from a provision of £15m on
aerial refuelling development programmes. Reflecting the
above factors, the trading margin decreased to 10.8%.

Developments impacting the future
− Following Qatar, Singapore and France announcing they
had selected the Airbus A330 MRTT aircraft, additional
aerial refuelling production orders are expected;

− The Brazilian Air Force signed a contract for 28 Embraer
KC-390 aircraft and a new multi-year order was received
from Lockheed Martin for the KC-130 tanker;

− New orders for weapons carriage and release products

received for the Eurofighter aircraft and for programmes
for the US and for Oman. An order was also booked for
a major upgrade programme on the weapons systems
of the Indian Air Force Jaguar aircraft;

− Fuel tank inerting system orders and revenue continue
to build for commercial aircraft, most notably for the
Boeing 787 and the Mitsubishi Regional Jet programmes.
This market remains attractive with several further
sizeable opportunities to be concluded in 2015, as well
as significant airline retrofit opportunities.

Revenue growth

(7%)

Sector revenue (£m)

400

300

200

100

(12)

358

334

2013

Currency
translation

Organic
growth

2014

Revenue by market (%)

Commercial aerospace/
general aerospace 6%

Commercial maritime/
other 1%

% of Group revenue

18%

Non-US defence/
security 39%

Revenue by geography (%)

Other EU 19%

UK 8%

USA 63%

US defence/security
54%

Australia 1%

Asia 5%

RoW 3%

Sector trading profit (£m)

(2)

(36)

2014

2013

Currency
translation

Net
other

NASA Silver Snoopy Award for
Cobham employee
A Silver Snoopy Award was presented by
NASA astronaut Mike Foreman to Cobham
design engineer Richard Banks to recognise
his outstanding contributions to the quality,
safety and reliability of Cobham products on
NASA’s next generation rocket, the Space
Launch System, which will be the most
powerful rocket ever developed.

Rich’s Silver Snoopy pin was flown aboard
STS-129 (Atlantis) on 16 November 2009,
returning to earth on 27 November 2009.

For further information visit us
online at www.cobham.com

STRATEGIC REPORTCobham plcAnnual Report and Accounts 2014www.cobham.com

Advanced Electronic Solutions

CRITICAL TECHNOLOGY
FOR GATHERING AND
PROCESSING INFORMATION

Cobham Advanced Electronic Solutions
provides customised application
specific integrated circuits for medical,
industrial and security applications.
From specification through production,
design, layout and test, everything is
performed in-house in class 100 clean
rooms with world class foundry partners
delivering production.

Cobham plcAnnual Report and Accounts 2014www.cobham.comHighlights

Provides critical solutions for communication on land,
at sea, and in the air and in space, by moving data through
off-the-shelf and customised products including radio
frequency, microwave, and high reliability microelectronics,
antenna subsystems and motion control solutions.
This incorporates defence, wireless/mobile and fixed
broadband, X-ray imaging, medical, industrial, and point
of sale markets.

Revenue
Total revenue increased by £38m due to an initial part year
contribution from the former Aeroflex Microelectronics
Solutions business, which was partially offset by a significant
adverse currency translation impact from the US dollar of
£19m. Organic revenue was 1% lower, a good performance
notwithstanding the ongoing challenging conditions in US
defence/security, its primary market.

Organic revenue was impacted by reduced revenue from a
number of mature production programmes, including for
legacy electronic warfare and space related programmes,
and lower revenue from foreign military sales. These were
mostly offset by growing revenue from next generation
electronic warfare and radar programmes such as the
Surface Electronic Warfare Improvement Programme
and Joint Strike Fighter.

Revenue growth

10%

Sector revenue (£m)

500

400

300

200

100

(3)

410

372

2013

Acquisition
and currency
translation

Organic
growth

2014

US defence/security
85%

% of Group revenue

22%

Revenue by market (%)

Maritime/other 6%

Commercial aerospace/
general aerospace 5%

Non-US defence/
security 4%

Revenue by geography (%)

Trading profit
The Sector’s trading profit increased by £1m, largely due to
the contribution from Aeroflex, although there was also an
adverse impact from foreign currency translation. Trading
profit was also impacted by the lower volumes from mature
production programmes, which tend to offer the Sector
some of its highest margins. The margin decreased to 15.6%,
also reflecting the factors above.

Other EU 1%

UK 1%

USA 95%

Asia 2%
RoW 1%

Developments impacting the future
− Cobham was part of the winning Raytheon team on
the US Navy AMDR programme, with work already
underway. A significant programme in its own right,
the win has also opened up opportunities on other
programmes, leveraging Cobham’s leading edge digital
receiver/exciter technology, with at least one significant
radar award scheduled for 2015;

− The Motion Control business, formerly part of the
Aeroflex Microelectronics Solutions business, has
won an award on the Joint Polar Satellite System-2
Advanced Technology Microwave Sounder, a next
generation weather forecasting satellite. It has also
won awards on the Joint US National Aeronautics and
Space Administration/Joint Propulsion Laboratory Mars
2020 programme, which will investigate the habitability
of Mars.

Sector trading profit (£m)

(7)

2013

Acquisition
and currency
translation

Net
other

2014

F-35 Lightning II
The Lockheed Martin F-35 Joint Strike
Fighter has more than 100 Cobham
components, including radar and
self-protection modules as well
as pilot personal safety equipment.

For further information visit us
online at www.cobham.com

STRATEGIC REPORTCobham plcAnnual Report and Accounts 2014www.cobham.com

Aviation Services

PROVIDING SPECIALIST
AVIATION SERVICES
FOR MILITARY AND
CIVIL CUSTOMERS

The Embraer 190 is a new generation
of fuel efficient aircraft that sets a
benchmark for dedicated charter
services in Australia. It also reduces
time spent in the air and provides a
new level of passenger comfort.

Cobham plcAnnual Report and Accounts 2014www.cobham.comHighlights

Delivers outsourced aviation services for military and civil
customers worldwide through military training, special
mission flight operations, outsourced commercial
aviation and aircraft engineering.

Revenue
Total revenue increased by £47m, due to strong organic
growth of 8% and the full year impact of the FBH
acquisition. Partially offsetting these was a significant
adverse foreign currency translation impact of £27m from
the Australian dollar.

There was good organic growth in the commercial business,
particularly driven by increased revenue from Qantas, as the
expanded contract which commenced in the second half
of 2013 became fully operational. In addition, there was
increased flight frequency in the Australian natural resources
market. This included a short term contract expansion with
Chevron to operate a jet shuttle between Karratha and
Barrow Island, and a new contract with Goldfields Australia
to provide fly-in fly-out (FIFO) services using jet aircraft
equipped with Cobham’s unique gravel kit capability for
unsealed runways.

In defence/security markets, the Sector also showed good
organic revenue growth, including a new contract to provide
maintenance support to the Qatar Emiri Air Force fleet of
AW139 helicopters and an initial deployment undertaken
relating to the new operational readiness and training
contract with the Royal Saudi Air Force.

Trading profit
The Sector’s trading profit increased by £7m, due to the
incremental contribution from FBH and from organic
growth. This was partially offset by an adverse impact from
foreign currency translation. The trading margin was broadly
unchanged at 13.2%.

Developments impacting the future
− Cobham has been selected to provide search and rescue
services to the Australian government, under a base
12-year AUS$640m contract using long range jet aircraft
that will be specially modified for the role at Cobham’s
Adelaide facility. Flying operations will begin in the second
half of 2016;

− The Chevron FIFO contract in Australia was extended
until 2020, and will include the introduction of the new
Embraer 190 jet aircraft type, the first of its type to be
used in this market.

Revenue growth

13%

Sector revenue (£m)

500

400

300

200

100

412

365

2013

Acquisition
and currency
translation

Organic
growth

2014

Revenue by market (%)

Commercial aerospace/
general aerospace
46%

Non-US
defence/security 54%

% of Group revenue

22%

Revenue by geography (%)

Other EU 2%

UK 30%

RoW 4%

Asia 8%

Sector trading profit (£m)

Australia 56%

2013

Acquisition
and currency
translation

Net
other

2014

In 2014 Cobham secured the Australian
Maritime Safety Authority contract with
the Australian government to provide
an airborne search and rescue capability
for 12 years from 2016, with aircraft
modification and mobilisation activity
commencing in December 2014.

For further information visit us
online at www.cobham.com

STRATEGIC REPORTCobham plcAnnual Report and Accounts 2014www.cobham.com

Financial Review

ENCOURAGING ORDER
INTAKE WITH BOOK-TO-BILL
OF 1.03 TIMES

“ The Group’s primary focus
in 2015 remains the
integration of Aeroflex and
optimising cash generation.”

customer funded R&D investment, primarily driven by
ongoing aerial refuelling development programmes.

Underlying EPS was 18.5p (2013: 21.6p), 14%, lower than the
prior year, primarily reflecting the Group’s lower trading profit
and the higher share count following the May 2014 equity
placing. At constant translation exchange, underlying EPS
was 11% lower.

Operating cash flow was £208m (2013: £269m). Operating
cash conversion was 73% (2013: 85%), which was lower
principally due to a significant cash outflow from an
increase in working capital. This included the impact from
strong year end trading, an increase in debtors in Aviation
Services due to the timing of receipts from customers on
new contracts secured, and an increase associated with the
Group’s development contracts, including its aerial refuelling
programmes.

At the year end, net debt had increased to £1,223m
(2013: £453m), principally due to the acquisition of
Aeroflex. Net debt/EBITDA was 2.6x.

Orders
The Group’s book-to-bill ratio in the year was 1.03x, with all
the Sectors having a book-to-bill ratio above 1x, except for
the Advanced Electronic Solutions Sector which saw some
expected awards slip into 2015. Post acquisition, the Aeroflex
business also saw a book-to-bill ratio above 1x.

Order intake in the year was £1,908m (2013: £1,670m), being
20% higher at constant translation exchange. Excluding the
impact of acquisitions and divestments, order intake was
10% higher than the prior year at constant currency.

Group revenue increased by

Summary of underlying results

(2013: 2%)

Total R&D investment

£198m

(2013: £186m)

£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)

2014
1,852
287
15.5%
(30)
257
(52)
20.3%
205

1,108

18.5

2013
1,790
318
17.7%
(30)
288
(57)
20.0%
231

1,069

21.6

Total revenue increased 3% to £1,852m (2013: £1,790m),
driven by acquisitions. This was partially offset by an
adverse foreign currency translation impact. Organic
revenue was down 2%.

The Group’s trading profit was £287m (2013: £318m),
which included the significant adverse impact from foreign
currency translation. In addition, there was the impact from
a shift in revenue mix, with lower volumes in some of the
more profitable shorter cycle businesses and an increase in
lower margin engineering and development revenue. There
was also a one-off provision of £15m against aerial refuelling
development programmes. The Group’s trading margin
was 15.5% (2013: 17.7%).

Total R&D investment was £198m (2013: £186m), with
higher PV investment which included an initial contribution
from the Aeroflex acquisition. There was also higher

Cobham plcAnnual Report and Accounts 2014www.cobham.com

Organic revenue growth

Commercial

(2013: 7%)

Defence/security

(5)%

(2013: (9)%)

Group

(2)%

(2013: (4)%)

The Group’s order book had increased to £2.51bn
(2013: £2.27bn) at the year end. Within this was £1.19bn
(2013: £1.17bn) relating to the long term Aviation Services
business. At constant translation exchange, the order book
was 10% higher. Excluding the impact of acquisitions and
divestments and at a constant translation exchange, the
order book increased 2% in comparison to the prior year
end, with a corresponding increase in orders due for
delivery in the current year.

Revenue
A summary of changes to Group revenue in the year is
as follows:

FX
translation

Net acquisitions
and divestments

Organic
growth

2013

2014

£1,790m

(£85m)

£173m (£26m) £1,852m

Total Group revenue increased by 3% to £1,852m
(2013: £1,790m), including an initial contribution from
Aeroflex and the full year contributions from Axell and FBH.

There was a significant adverse foreign currency translation
impact of £85m, primarily due to a year-on-year strengthening
in the average rate of sterling against each of the Group’s
principal foreign currencies. The applicable exchange rates
for each of these foreign currencies are set out on page 32.

The Group’s organic revenue increased by 1% year-on-year
in the second half, with full year organic revenue being
down 2%. Full year Group organic revenue was underpinned
by good growth in commercial markets of 5%. This was
driven, in part by a strong performance from the SATCOM
business, which delivered good growth in marine and
aerospace markets. The Group’s Aviation Services business
also showed good growth during the year in Australia from
its outsourced airline services business and its regional
services business, although commercial growth moderated,
as anticipated, in the second half.

In US defence/security, there was a significant sequential
organic revenue improvement in the second half. In part
this was due to increased engineering and development
revenue from the KC-46 aerial refuelling programme and
also to an increase in revenue from some of the Group’s
shorter cycle businesses, including its surveillance business.
Full year organic revenue in US defence/security fell by
4%, driven by a decline in demand in shorter cycle
businesses which are exposed to land related markets.
This included lower revenue from counter-improvised
explosive device products, antennas, composites
and surveillance products. There were also lower volumes
from aerial refuelling production in the year.

Demand conditions also improved in the Group’s non-US
defence/security markets in the second half of the year.
This was primarily driven by Aviation Services’ rotary wing
and Special Mission businesses. These delivered strong
second half growth, including from the new contract to
provide maintenance support to the Qatar Emiri Air Force
fleet of AW139 helicopters and an initial contribution from
the new operational readiness and training contract with
the Royal Saudi Air Force. In the full year, non-US defence/
security organic revenue was 6% lower. In part this was
due to lower aerial refuelling aftermarket revenue, although
this was partially offset by higher engineering and
development revenue from the Airbus A400M and Embraer
KC-390 tanker programmes. There was also a reduction
in volumes from shorter cycle land related revenue, in
particular counter-improvised explosive device and
surveillance products.

Technology investment
Consistent with the Group’s strategy, Cobham further
increased its PV investment in the year to £97m
(2013: £88m), representing 6.7% (2013: 6.2%) of revenue.
This included an initial contribution from Aeroflex.

Total Group R&D investment, including customer funded
projects, was £198m (2013: £186m). The increase in
customer funded R&D was primarily driven by the Group’s
ongoing major development activity on aerial refuelling
programmes. The overall level of the Group’s development
activity on these programmes is anticipated to moderate
in 2015, as the KC-46 and A400M programmes transition
into low rate initial production. These programmes are
underpinned by a significant stream of long term
production and aftermarket revenue.

Trading profit
The Group’s trading profit of £287m (2013: £318m), included
a contribution from acquisitions but also included a significant
adverse impact from foreign currency translation of £13m.
As the Group’s business has evolved there has been a shift in
the business mix which has adversely impacted trading profit.

The lower shorter cycle volumes in defence/security,
particularly relating to land markets, include businesses
which typically offer the Group some of its highest margins.
In the aerial refuelling business, the change in revenue was
from lower production and aftermarket volume partially
offset by lower margin engineering and development
revenue. This business also recognised a provision of £15m
on its aerial refuelling development programmes. In the
Advanced Electronic Solutions Sector there was lower
revenue from mature production contracts.

The Group’s trading margin was 15.5% (2013: 17.7%) and was
adversely impacted by the change in revenue mix and the
provision against aerial refuelling development programmes
which are outlined above. In addition, there was also an
adverse mix impact on the Group’s trading margin from some
of the businesses which delivered good organic revenue
growth in the year, including Aviation Services and SATCOM, as
these have lower than average margins for the Group.

Group statutory operating profit was £57m (2013: £159m).
The most significant additional items not included in the
underlying figure were an unrealised loss of £22m (2013:
£2m gain) in non-hedge accounted derivative financial
instruments, amortisation expense on intangible assets
arising on business combinations of £114m (2013: £104m),
other business acquisition and divestment related items of
£41m (2013: £nil) and business restructuring relating to EiD
of £28m (2013: £56m) and to the Aeroflex integration of
£24m (2013: £nil).

Underlying net finance expense and underlying
profit before tax
The Group’s net underlying finance charge for the year was
£30m (2013: £30m). The underlying net interest expense
on cash and debt holdings was largely stable at £26m
(2013: £27m). This reflected additional interest expense from
the Aeroflex acquisition, offset by a favourable impact from
foreign currency translation and the full year impact from a
change in the mix of fixed and floating rate debt, which was
implemented in 2013. As expected, there was a non-cash net
finance charge from pension schemes of £4m (2013: £3m).
In 2015, the Group’s non-cash net finance charge from
pension schemes is also expected to be £4m.

STRATEGIC REPORTCobham plcAnnual Report and Accounts 2014www.cobham.com

Reconciliation of underlying measures

£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
Business restructuring – Aeroflex integration
Movements in non-hedge accounted derivative financial instruments
Amortisation of intangible assets arising on business combinations
Exceptional legal costs
Impairment of goodwill
Revaluation gain arising on equity interests in FBH
Business acquisition and divestment related items
Total operating reconciling items
Trading profit
Underlying profit before tax is calculated as follows:
Profit before taxation
Adjusted to exclude:
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)

2014

2013

57
–
57

28
24
22
114
1
–
–
41
230
287

230
3
257
(52)
205
18.5

156
3
159

56
–
(2)
104
–
63
(62)
–
159
318

127

159
2
288
(57)
231
21.6

The Group’s underlying profit before taxation was £257m
(2013: £288m).

Taxation
The Group’s underlying tax rate increased to 20.3%
(2013: 20.0%), from an underlying tax charge of £52m
(2013: £57m). The rate is calculated by taking the underlying
tax charge and dividing it by the underlying profit of £257m
(2013: £288m), excluding the share of post-tax results of
joint ventures of £nil (2013: £3m).

The Group’s underlying tax rate increased due to the
impact of the Aeroflex transaction. For 2015, it is estimated
that the full year impact of Aeroflex will result in the Group’s
underlying tax rate increasing to 21.0%-21.5%.

The Group’s operating cash conversion was lower than
the prior year principally due to a cash outflow of £71m
(2013: £32m) from working capital, driven by an increase
in debtors and inventory. The working capital outflow
included an impact from strong year end trading, an
increase in debtors in Aviation Services due to the timing
of receipts from customers on new contracts secured,
and an increase associated with the Group’s development
contracts, including its aerial refuelling programmes.

In addition, net capital expenditure increased to £74m
(2013: £61m) largely due to Aviation Services, where there
has been increased investment. This has been primarily in
the aircraft fleet as a result of its recent success in winning
multi-year contract awards.

Earnings per share (EPS)
Underlying EPS was 18.5p (2013: 21.6p), 14%, lower than
the prior year, primarily reflecting the Group’s lower trading
profit and the higher share count in the year following the
issuance of new shares in the May 2014 equity placing.
At constant translation exchange, underlying EPS was
11% lower.

Free cash flow was £114m (2013: £155m), which is stated
after £32m (2013: £51m – EiD only) of EiD restructuring and
Aeroflex integration costs, underlying net interest payments
of £25m (2013: £29m) and tax payments of £37m (2013:
£38m). Following the Group taking full control of the FBH
joint venture in 2013, there were £nil (2013: £4m) dividends
received from joint ventures.

Basic EPS was 2.6p (2013: 10.7p), principally due to the
impact of the items set out in the paragraphs on trading
profit, statutory operating profit and underlying EPS above.

Cash flow and net debt
Operating cash flow, which is stated after net capital
expenditure but before interest and tax payments, was
£208m (2013: £269m). Operating cash conversion was
73% (2013: 85%).

Out of free cash flow the Group paid a dividend of £108m
(2013: £97m). The higher dividend payment reflects the
Group’s progressive dividend policy and the impact of the
additional 60 million shares issued in the placing, with these
additional shares issued qualifying for the Group’s
November interim dividend payment.

Acquisition payments of £897m principally reflected the
acquisition of Aeroflex, together with smaller contingent
payments relating to acquisitions completed in prior years.
The prior year cash outflow of £152m principally related
to the acquisition of Axell and FBH and an investment
in the FSTA consortium.

Operating cash flow

£208m

(2013: £269m)

Cobham plcAnnual Report and Accounts 2014www.cobham.com Financial Review continuedCash flow

£m
Trading profit

Less: Share of post-tax results of joint ventures
Trading profit (excluding joint ventures)
Depreciation, amortisation and other items
Pension contributions in excess of service cost and administration cost
Increase in working capital

Net capital expenditure
Operating cash flow
Operating cash/trading profit (excluding joint ventures)
Underlying net interest paid
Taxation paid
Dividends received from joint ventures

Free cash flow before restructuring costs
Restructuring costs – EiD and Aeroflex integration
Free cash flow
Dividends paid
Acquisition payments less divestment proceeds and other related costs
Placing and net settlement of treasury shares

Exchange movements

Increase in net debt

Opening net debt

Closing net debt

Cash conversion

73%

(2013: 85%)

2014
287

–
287
83
(17)
(71)

(74)
208
73%
(25)
(37)
–

146
(32)
114
(108)
(897)
180

(59)

(770)

(453)

(1,223)

2013
(as restated)
318

(3)
315
61
(14)
(32)

(61)
269
85%
(29)
(38)
4

206
(51)
155
(97)
(152)
(2)

(93)

(360)

(453)

Under the terms of its borrowing facilities, the Group 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. For covenant purposes, net debt is typically
expressed at average foreign currency translation rates.
EBITA, EBITDA and net interest numbers include proforma
adjustments related to joint venture interests, acquisitions
and divestments and restructuring.

Debt covenants

Net debt (£m) – balance sheet

Net debt (£m) – average rate

Adjusted EBITDA (£m)

Net debt to EBITDA
(not to exceed 3.5 times)

Adjusted EBITA (£m)

Net interest (£m)

Interest cover
(not less than 3.0 times)

Dec 2014
(1,223)

(1,159)

440

2.6

298

Dec 2013
(453)

(480)

395

1.2

322

10.5

11.9

In addition, the Group received £180m (2013: paid £2m),
principally related to the issuance of 60 million new Cobham
shares, which in part funded the Aeroflex acquisition.

Dividends
The Board is recommending a final dividend for 2014
of 7.746p (2013: 7.04p). This, together with the interim
dividend of 2.904p (2013: 2.64p), will result in a total
dividend per share for 2014 of 10.65p (2013: 9.68p),
an increase of 10%, in line with the Group’s progressive
dividend policy.

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.

Debt and financing
At the year end, the Group’s net debt had increased to
£1,223m (2013: £453m). The increase in net debt was
principally due to the acquisition of Aeroflex. There were
also adverse exchange movements of £59m (2013: £3m
favourable), which were in large part driven by the
strengthening US dollar. It is the Group’s policy to hold a
significant proportion of its borrowings in foreign currency,
as a natural hedge against assets and earnings denominated
in that currency. At the year end, net debt/EBITDA was 2.6x.

Included within net debt are cash deposits, which are
primarily denominated in UK pounds and US dollars,
as well as borrowings. At 31 December 2014, the Group
held total cash and short term bank deposits, all with an
original maturity of three months or less, of £225m
(31 December 2013: £201m).

STRATEGIC REPORTCobham plcAnnual Report and Accounts 2014www.cobham.com Maturity profile of Group’s outstanding debt facilities (£m)

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

1,550

1,155

1,020

678

461

433

273

–

− A US$75m fixed rate agreement which expires in 2031
and under which the lender has a series of put options
exercisable every three years from December 2016.

In addition, the Group also undertook an equity placing in
the year, raising gross proceeds of £180m from the issuance
of 60 million ordinary shares of 2.5p each at a price of 300p
per share. The shares issued represented approximately
5.6% of Cobham’s issued ordinary share capital prior to
the placing.

Foreign currency translation
The following are the average and closing rates for those
foreign currencies that have most impact on the translation
of the Group’s income statement and balance sheet:

£1,223m net debt at
31 December 2014

Income statement – average rate

2014

2013

In May 2014 the Group agreed a US$1,300m acquisition
finance facility to partially finance the acquisition of Aeroflex.

The Group subsequently successfully refinanced the bulk of
this bridge loan facility, securing long term funding facilities
for its core debt in October 2014 from the proceeds of a
US$930m senior note issue. The amount and maturity of
the senior notes raised are as follows:

New private placement amount and maturity
Duration (years)

Amount (US$m)

Total

180

250

425

930

At the year end, a summary of the Group’s other principal
borrowings included the following:

− A US$360m multi-currency credit agreement, of which
US$90m expires in October 2016 and US$270m expires
in October 2018. Interest is payable at the applicable
benchmark rate of the drawn currencies plus margin.
US$286m had been utilised at the year end;

− A EUR70m multi-currency credit agreement expiring
in June 2017. Interest is payable at the applicable
benchmark rate of the drawn currencies plus margin.
EUR67m had been utilised at the year end;

− A DKK525m multi-currency credit agreement expiring
in October 2018. Interest is payable at the applicable
benchmark rate of the drawn currencies plus margin.
DKK174m had been utilised at the year end;

− An AUS$90m multi-currency credit agreement expiring
in October 2018. Interest is payable at the applicable
benchmark rate of the drawn currencies plus margin.
AUS$59m had been utilised at the year end;
− A US$370m acquisition finance facility expiring
in May 2016. Interest is payable at the applicable
benchmark rate plus margin. The facility was fully
drawn at the year end;

− US$1,213m of senior notes maturing in tranches in

2016, 2017, 2019, 2020, 2021 and 2024, with an average
coupon of 4.4%;

− US$155m of senior notes maturing in 2017 and 2018,
with an interest rate at the applicable LIBOR rate plus
margin; and

US$/£

AUS$/£

EUR/£

DKK/£

Balance sheet – closing rate

US$/£

AUS$/£

EUR/£

DKK/£

1.65

1.83

1.24

9.25

1.56

1.91

1.29

9.60

1.57

1.62

1.18

8.79

1.66

1.85

1.20

8.97

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
denominated interest costs due to the Group’s policy, set
out above, of generally funding acquisitions with borrowings
denominated in the same currency. This provides a partial
hedging of currency denominated profits for the Group.

After taking into account the partial hedging of the Group’s
foreign exchange translation exposure within the income
statement, a combined 1 cent movement against the
pound sterling in the average rate over one year for those
currencies above would have a £0.9m impact on Group
profit before tax in 2014. The Group estimates that the
US dollar would account for approximately half of this
movement. Including a proforma full year contribution from
Aeroflex, a 1 cent movement in the average rate over one
year for all these currencies would have an estimated £1.2m
impact on Group profit before tax. The change is principally
related to Aeroflex’s US dollar denominated earnings.

Foreign currency transaction
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 significant.

The chart following summarises the Group’s foreign
currency transaction exposure and the hedging in place
to mitigate it.

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

Senior notes raised

US$930m

Cobham plcAnnual Report and Accounts 2014www.cobham.com Financial Review continuedForeign exchange transaction exposure

2011

2012

2013

2014

2015 Total

Hedging in place

2016

2017 to 2022

US$122m

91% hedged for 2015

US$111m

Avg hedge rate US$1.60: £1

US$15m

US$48m

Avg hedge rate US$1.54: £1

Avg hedge rate US$1.56: £1

Historical average effective rate

Avg hedge rate US$1.56: £1

Avg hedge rate US$1.59: £1

Avg hedge rate US$1.61: £1

2015 US$ transaction
exposure hedged

91%

exposures on long term contracts. Details of the most
significant of these instruments are described in notes
22 and 24 of the notes to the Group Financial Statements.

Some 91% of the Group’s anticipated transaction exposure
to the pound sterling/US dollar exchange rate is hedged for
2015 at an average rate of US$1.60, with additional hedging
in place to partially cover anticipated exposure in
subsequent years.

Interest rates
The Group has various long and short term borrowings
at both fixed and floating rates of interest. The Group
monitors its exposure to movements in interest rates to
bring greater stability and certainty to borrowing cost,
with the policy being to assess the proportion of borrowings
that are fixed and floating in the context of prevailing
market conditions.

Retirement obligations
The Group operates a number of defined benefit pension
schemes, with the largest being the Cobham Pension Plan in
the UK. At the year end, the estimated deficit for accounting
purposes, which is the difference between the value of the
schemes’ assets and the present value of the future liabilities
was £102m before deferred tax (2013: £87m).

Pension deficit at 1 January 2014

Interest charge

Net employer funding

Actuarial losses

£m

(87)

(4)

(28)

Pension deficit at 31 December 2014

(102)

Significant movements within the actuarial losses of
£28m were:

− Higher discount rate assumptions, driven by a decrease
in corporate bond rates, resulting in increased pension
liabilities; and

− Partially offset by investment returns on scheme assets

in excess of expectations.

The £17m reduction in the deficit from net employer
funding relates to employer contributions made in the
year in excess of scheme service costs and administration
expenses.

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. This has included
the undertaking of a significant buy-in transaction in 2013
which eliminated the Group’s exposure to interest rate,
inflation and longevity risks associated with the pension
population at the time of the transaction and in 2014 there
was an investment in liability driven investments to provide
further cover against interest and inflation volatility.

Further details on the Group’s retirement benefit schemes
in the year, including the primary assumptions, the amounts
recognised in operating profit and the changes in value of
defined benefit schemes are given in note 23 of the notes
to the Group Financial Statements.

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 1 to 27 and
the principal risks on pages 34 to 39. In addition, notes 1, 15,
22 and 24 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.

Simon Nicholls
Chief Financial Officer
4 March 2015

STRATEGIC REPORTCobham plcAnnual Report and Accounts 2014www.cobham.com Principal Risks

BEST PRACTICE ENTERPRISE
RISK MANAGEMENT HAS
FURTHER ENHANCED
OUR PROCESSES

The Board sets the policy for managing risk in the business.
It recognises the importance of having effective processes
and procedures for identifying, actively monitoring,
mitigating and managing the financial and non-financial
risks facing the Group. By regularly reviewing the risk
appetite of the business within the COSO ERM framework
(see glossary on page 126 for full definition), and satisfying
itself that the Group’s principal risks are managed within this
appetite, the Board ensures that the Group’s risk exposure
remains appropriate and links into effective delivery of its
strategic objectives. The Board has ultimate accountability
for the execution of risk management systems and controls,
with the Risk Committee, composed of members of the
Group Executive, responsible for overseeing execution of
risk management throughout the Group. The Board has
delegated responsibility for monitoring and reviewing the
effectiveness of the Group’s internal control and risk
managements systems to the Audit Committee. See
pages 52 to 55 for more information.

The process for monitoring and controlling risk, illustrated
below, emphasises continuous evaluation and monitoring
by the Group’s management teams at each appropriate
entity level; business unit, Sector, specialist function or
Group level. The Group’s ERM framework is structured to

ensure that risks are identified promptly by management
teams, to support the achievement of their strategic
objectives and ensure that they are mitigated and
managed appropriately to support the delivery of the
Group’s strategic plan.

The Group manages risk by operating a ‘three lines of
assurance’ risk and control model. The first line consists of
operational management implementing and maintaining
effective internal controls and risk management procedures.
They are supported by a number of horizontally and
vertically integrated Group functions which, together with
their performance management procedures, form the
second line. Internal Audit serves as the third line, entrusted
with reviewing certain 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.
In addition, the Audit Committee takes account of the
views of the external auditors.

Under the sponsorship of the Chief Financial Officer, a
project was commenced during 2014 to further enhance
the Group’s Governance, Risk and Assurance Framework.
The objective of the project is to update this in line with

Risks & Actions
Adopted COSO ERM model,
aligned to new Financial Reporting
Council guidance.

Three Lines
of Assurance

Monitoring
& Assurance
Dedicated
software platform
in place for
facilitating workflow
& audit traceability.

Policy &
Controls
Reviewing existing
portfolio against
newly established
appetite position.

Cobham plcAnnual Report and Accounts 2014www.cobham.com

industry best practice ERM principles, and embed these
into day-to-day operational decision making. An additional
objective is to assist the Group’s compliance with the
updated Financial Reporting Council guidance on risk
management, internal control and related financial
and business reporting.

Building on the ‘three lines of assurance’ model, the Group
has drawn on the COSO ERM Framework to set a rigorous
baseline which has revised the Group’s risk appetite. This
will facilitate effective risk management with appropriate
controls and assurance measures.

Each of the Group’s business units, as well as each
Sector and Group function, has undertaken a review
of their respective Principal Risks using the updated risk
management framework. This exercise has been performed

in the context of the Group’s strategic objectives. The risks
identified during this process have been captured in a
system that is used to track, monitor and document
ownership and management. Data from this system
has been aggregated and themed, reviewed under the
Governance structure outlined above and has been used
as the basis for the Group Principal Risk disclosures on
pages 36 to 39.

The next phase of the project will build on the work
completed to date to review the control and assurance
measures in place to ensure that they are aligned in the
most efficient manner with the Group’s risk appetite.

How we manage risk

The Board

Define strategic objectives

Agree Group’s risk appetite

Oversight of the corporate risk register

Define delegation of authority

Approve corporate framework

Risk Committee

Oversight

Audit Committee

Monitor performance and changes of key risks
facing the business and provide regular reports
to the Board

Oversight of key risks and ensure that they are
appropriately managed

Agree key actions to manage risks

Monitor policies and controls against the Group’s
risk appetite

Monitor assurance and risk management
systems of control

Provide strategic management, policy and
procedure setting, and functional oversight

Drive improvement

Align results

Business Units
and Sectors

Functions Vertical and Horizontal

Internal Audit

External Audit

Identify key risks against strategic objectives

Design controls to mitigate risk

Provide independent challenge and assurance

Design and execute action plans to mitigate threats
and enhance opportunities in the business

Report on progress

Implement Group policies

Report on progress

Provide management assurance

Set entity level controls

Set direction and tone

Design policies

Introduce best practice

Monitor and ensure compliance

Provide assurance oversight

Monitor representation letters and

self-assessment process

Audit of key controls

Audit of ‘assurance providers’

Oversight of entity level controls

Risk and Actions

Policy and Control

Monitoring and Assurance

Cobham plcAnnual Report and Accounts 2014www.cobham.comSTRATEGIC REPORTPrincipal Risks continued

1. Deterioration in the macroeconomic environment

2. Failure to execute strategy for a return to

3. Failure to comply with laws and regulations

4. Failure to embed organisational design

adversely impacting our markets

organic growth, supported by effective value
creating M&A activity

within an effective Governance Framework,

with appropriate skills and talented employees

recruited/retained

Risk

The Group’s revenue is derived from global defence/security and commercial
markets. The level and type of customer spending is dependent on a complex
mix of macroeconomic, fiscal and strategic defence and security imperatives.

Changes in government/customer spending or other external factors could lead
to programme/contract terminations or delays, or changes in market growth.

The Group’s ability to generate profitable organic growth consistently is a
key driver of value creation. Insightful, complementary and well executed
M&A activity in line with the Group’s strategic objectives will supplement
this value creation.

Failure to define and execute the Group’s growth strategy will lead to impaired
business performance.

Cobham operates in a highly regulated environment and is subject to the laws,

Key to the execution of the Group’s strategic plan is the effective

regulations and restrictions of many jurisdictions, including those of the US,

implementation and embedding of the organisation design (OD)

the UK and other countries.

project within an enhanced governance framework.

These include anti-bribery provisions, import and export controls; government

Failure to deliver the OD project, resulting in an appropriately skilled workforce

contracting rules and health and safety.

and management team will see the Group’s ability to deliver against its strategic

plan to return to growth impaired.

Impact

Deterioration in demand affecting shorter cycle businesses or a fundamental
shift in how customers procure products or services could have an adverse
effect on the Group’s future results leading to:

− Missed growth targets
− Reduced earnings
− Failure to win new business, leading to adverse results against strategic plan

Failure to grow leads to an impaired competitive position, reduced trading
margins and a declining return on invested capital.

Sanctions for failure by the Group, its sales intermediaries, or others acting on

This will lead to sub-optimal financial performance, loss of investor confidence

its behalf to comply with laws, regulations and restrictions could include fines,

and a failure to deliver shareholder value.

The Group will experience an impact on employee recruitment and retention,
potential reputational damage and a reduced ability to invest for future growth.

Mitigation

A review of near and long term market trends is conducted as part of the
Group’s annual strategic planning process to ensure that actual and anticipated
impacts from macroeconomic environment risks are minimised and
managed effectively.

Regular review of externally sourced market demand data, with the
re-forecasting and adjusting of internal planning in line with market demand.

Increased emphasis is being placed on identifying adjacent markets in which
the Group’s proven and transferable technologies can be applied.

The Group is creating more balance in its portfolio towards commercial markets,
with the aim to grow through all economic cycles.

Carry out effective strategic planning – maintain robust and dynamic strategic
thinking processes to ensure the Group is exposed to growth markets through
the business cycles.

A continued focus on and investment in programme management to ensure
customer expectations are met, which underpins the Group’s ability to grow.

Continued appropriate investment in future technologies with alignment to
identified market growth areas.

The implementation of rigorous M&A disciplines (both pre- and post-
transaction), aligned with the Group’s strategic planning process, improves
the ability to successfully execute and deliver value from transactions.

A culture of continuous improvement will enable Cobham to have market
leading operating performance, while reducing costs. This will enable Cobham
to grow market share and also remain competitive in the face of volume
declines or price pressures and retain flexibility to adjust the cost base
appropriately to changing market conditions.

Link to KPIs

− Organic revenue growth
− Underlying EPS growth
− Cash conversion
− Return on invested capital

Link to KPIs

− Group PV investment
− Voluntary staff turnover
− Organic revenue growth
− Underlying EPS growth
− Cash conversion
− Return on invested capital

A lack of understanding of legal and regulatory restrictions in force in the

jurisdictions that we operate in could lead to us being in contravention of

a particular law or regulation.

Impact

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.

Impact

Mitigation

and retained.

Cobham continues to drive a culture that ensures that safety, ethics and

The OD project is on track to deliver the desired ‘operating company’ construct

integrity are embodied in all that it does.

for the Group, with a key focus being to ensure that key talent is recruited

Policies and procedures are included in the Group’s corporate framework which

is regularly reviewed and audited, including procedures related to the use of

The CFO led project, to enhance the Governance, Risk and Assurance

sales and marketing representatives, anti-bribery and anti-corruption, gifts

Framework in accordance with best practice enterprise risk management, is on

and hospitality, whistleblowing and investigation of ethics and compliance

course to deliver an appropriate yet flexible level of control across the business,

This will allow appropriate risk taking within the Group’s stated appetite, drive

improvements in performance through application of effective governance

and best practice principles

concerns, along with Cobham’s Code of Business Conduct.

Mandatory training is undertaken by all employees on a variety of

compliance related subjects including US government contracting,

anti-bribery and corruption.

See the Corporate Responsibility and Sustainability section on page 40 to 43

for information on health and safety actions.

Link to KPIs

− Staff safety

− Underlying EPS growth

− Return on invested capital

Link to KPIs

− Voluntary staff turnover

− Return on invested capital

− Cash conversion

− Underlying EPS growth

Risk status indicator

Global macroeconomic conditions remain uncertain.

The Group anticipates organic revenue growth from 2015. The Aeroflex
acquisition was completed in the year, with integration in its early stages.

The regulatory landscape remains broadly unchanged.

The OD project has been implemented and the governance, risk and assurance

initiative commenced to support the execution of the Group’s strategies.

Unchanged

Increasing Risk

Decreasing Risk

Emerging New Risk

Cobham plcAnnual Report and Accounts 2014www.cobham.com

1. Deterioration in the macroeconomic environment

2. Failure to execute strategy for a return to

adversely impacting our markets

organic growth, supported by effective value

creating M&A activity

3. Failure to comply with laws and regulations

4. Failure to embed organisational design

within an effective Governance Framework,
with appropriate skills and talented employees
recruited/retained

Risk

The Group’s revenue is derived from global defence/security and commercial

The Group’s ability to generate profitable organic growth consistently is a

markets. The level and type of customer spending is dependent on a complex

key driver of value creation. Insightful, complementary and well executed

mix of macroeconomic, fiscal and strategic defence and security imperatives.

M&A activity in line with the Group’s strategic objectives will supplement

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.

Key to the execution of the Group’s strategic plan is the effective
implementation and embedding of the organisation design (OD)
project within an enhanced governance framework.

Changes in government/customer spending or other external factors could lead

to programme/contract terminations or delays, or changes in market growth.

Failure to define and execute the Group’s growth strategy will lead to impaired

These include anti-bribery provisions, import and export controls; government
contracting rules and health and safety.

Failure to deliver the OD project, resulting in an appropriately skilled workforce
and management team will see the Group’s ability to deliver against its strategic
plan to return to growth impaired.

this value creation.

business performance.

A lack of understanding of legal and regulatory restrictions in force in the
jurisdictions that we operate in could lead to us being in contravention of
a particular law or regulation.

Impact

Deterioration in demand affecting shorter cycle businesses or a fundamental

Failure to grow leads to an impaired competitive position, reduced trading

shift in how customers procure products or services could have an adverse

margins and a declining return on invested capital.

effect on the Group’s future results leading to:

The Group will experience an impact on employee recruitment and retention,

potential reputational damage and a reduced ability to invest for future growth.

− Failure to win new business, leading to adverse results against strategic plan

Sanctions for failure by the Group, its sales intermediaries, or others acting on
its behalf to comply with 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.

This will lead to sub-optimal financial performance, loss of investor confidence
and a failure to deliver shareholder value.

Mitigation

Cobham continues to drive a culture that ensures that safety, ethics and
integrity are embodied in all that it does.

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, along with Cobham’s Code of Business Conduct.

Mandatory training is undertaken by all employees on a variety of
compliance related subjects including US government contracting,
anti-bribery and corruption.

See the Corporate Responsibility and Sustainability section on page 40 to 43
for information on health and safety actions.

The OD project is on track to deliver the desired ‘operating company’ construct
for the Group, with a key focus being to ensure that key talent is recruited
and retained.

The CFO led project, to enhance the Governance, Risk and Assurance
Framework in accordance with best practice enterprise risk management, is on
course to deliver an appropriate yet flexible level of control across the business,
This will allow appropriate risk taking within the Group’s stated appetite, drive
improvements in performance through application of effective governance
and best practice principles

Link to KPIs

− Staff safety
− Underlying EPS growth
− Return on invested capital

Link to KPIs

− Voluntary staff turnover
− Return on invested capital
− Cash conversion
− Underlying EPS growth

− Missed growth targets

− Reduced earnings

Mitigation

managed effectively.

A review of near and long term market trends is conducted as part of the

Carry out effective strategic planning – maintain robust and dynamic strategic

Group’s annual strategic planning process to ensure that actual and anticipated

thinking processes to ensure the Group is exposed to growth markets through

impacts from macroeconomic environment risks are minimised and

the business cycles.

Regular review of externally sourced market demand data, with the

re-forecasting and adjusting of internal planning in line with market demand.

A continued focus on and investment in programme management to ensure

customer expectations are met, which underpins the Group’s ability to grow.

Continued appropriate investment in future technologies with alignment to

Increased emphasis is being placed on identifying adjacent markets in which

identified market growth areas.

the Group’s proven and transferable technologies can be applied.

The Group is creating more balance in its portfolio towards commercial markets,

transaction), aligned with the Group’s strategic planning process, improves

with the aim to grow through all economic cycles.

the ability to successfully execute and deliver value from transactions.

The implementation of rigorous M&A disciplines (both pre- and post-

A culture of continuous improvement will enable Cobham to have market

leading operating performance, while reducing costs. This will enable Cobham

to grow market share and also remain competitive in the face of volume

declines or price pressures and retain flexibility to adjust the cost base

appropriately to changing market conditions.

Link to KPIs

− Organic revenue growth

− Underlying EPS growth

− Cash conversion

− Return on invested capital

Link to KPIs

− Group PV investment

− Voluntary staff turnover

− Organic revenue growth

− Underlying EPS growth

− Cash conversion

− Return on invested capital

Risk status indicator

Global macroeconomic conditions remain uncertain.

The Group anticipates organic revenue growth from 2015. The Aeroflex

acquisition was completed in the year, with integration in its early stages.

The regulatory landscape remains broadly unchanged.

The OD project has been implemented and the governance, risk and assurance
initiative commenced to support the execution of the Group’s strategies.

Cobham plcAnnual Report and Accounts 2014www.cobham.comSTRATEGIC REPORT

Principal Risks continued

5. Contract risk and effective project and

6. Failure to deliver shareholder value from

programme execution

the Aeroflex acquisition

7. Significant business interruption risk

8. Failure to successfully execute continuous

improvement (CI) programmes, including the

implementation of the IT enterprise resource

planning (ERP) system, across the portfolio

Risk

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
contracts profitably, the supply of defective or delayed product, the occurrence
of other contractually related liabilities, or damages to reputation and
commercial relationships.

Failure to deliver the planned synergies and growth from the Aeroflex
acquisition will have a detrimental impact on the Group’s financial performance.

The Group’s business could be impacted by natural disasters or fire events

Failure to deliver sustainable growth and efficient, reliable and sustainable

affecting its operational locations or suppliers, by other significant events in the

improvements in operational performance.

supply chain or by IT systems failures (including from cyber attack), rendering

critical systems or manufacturing locations unable to function.

Linked to this is the effective deployment of an enterprise resource planning

system across the Group, which underpins the Group’s CI initiatives.

Impact

Poor operational performance could also lead to customers withholding new
and existing business from the Group.

The Aeroflex transaction is important to the achievement of the Group’s
strategic plan.

Unscheduled interruption to business activities would result in reduced profits,

Project, programme, production and service delivery will be adversely affected

loss of customer satisfaction, potential cost outlays, and reputational impact.

increasing costs and reducing customer satisfaction.

Failure to deliver the business case will lead to poor financial results and will
adversely impact the Group’s reputation.

Mitigation

Through the new business win process, 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,
while still customer focused.

Life cycle management (LCM) and programme management procedures are
intended to ensure that the Group’s key contract and programme management
policies and procedures are applied consistently and appropriately across all
areas of the business. These procedures also provide increased focus on
improvements to its LCM and programme management capabilities.

There is monthly reporting of progress against agreed LCM improvement
actions to the Group Executive, and semi-annually to the Audit Committee.

A comprehensive due diligence process was undertaken throughout the
pre-acquisition process.

Post-acquisition, detailed assessments have been undertaken against the
due diligence findings and comprehensive integration plans established.

Aeroflex performance is monitored continuously against the due diligence
plan with regular oversight from the Group’s M&A Committee.

Retention plans are in place for key individuals and the integration programme
is subject to the comprehensive LCM review process.

Link to KPIs

− Organic revenue growth
− Underlying EPS growth
− Cash conversion
− Return on invested capital

Link to KPIs

− Voluntary staff turnover
− Underlying EPS growth
− Cash conversion
− Return on invested capital

The Group maintains major incident/IT failure business continuity plans.

CI benefits are built into budgets with progress monitored at quarterly business

Employees are trained in relevant procedures, as appropriate.

review meetings across the Group.

IT security and capability are continually monitored and strengthened

Sustainability training has been delivered to business management teams.

when needed.

The Group works closely with insurers and other third party experts to

with respect to CI and to identify areas for improvement.

Assessment and accreditation processes have been developed to assess sites

ensure operating infrastructure and processes include robust risk

improvement activities.

See the CR&S section on pages 40 to 43 for further details on mitigating

actions against this risk

Robust management of plans to ensure site readiness and planning of

implementation resources into site budgets for ERP implementation.

Detailed application test planning and ERP execution, including stress and load

tests, application performance, network and security tests.

Link to KPIs

− Staff safety

− Organic revenue growth

− Underlying EPS growth

Link to KPIs

− Organic revenue growth

− Underlying EPS growth

− Cash conversion

− Return on invested capital

Risk status indicator

The company is currently in a significant phase of engineering and development
activity on various new programmes and platforms.

The Aeroflex acquisition was completed in the year, with the multi-year
integration programme in its early stages.

IT security threats continue to escalate. The Group has increased exposure

CI professionals have been embedded in the Business Unit management teams.

to site IT risks through adding Aeroflex sites.

The ERP roll-out has already been completed at one site.

Unchanged

Increasing Risk

Decreasing Risk

Emerging New Risk

Cobham plcAnnual Report and Accounts 2014www.cobham.com5. Contract risk and effective project and

6. Failure to deliver shareholder value from

programme execution

the Aeroflex acquisition

7. Significant business interruption risk

8. Failure to successfully execute continuous

improvement (CI) programmes, including the
implementation of the IT enterprise resource
planning (ERP) system, across the portfolio

Risk

The Group’s business could be impacted by natural disasters or fire events
affecting its operational locations or suppliers, by other significant events in the
supply chain or by IT systems failures (including from cyber attack), rendering
critical systems or manufacturing locations unable to function.

Failure to deliver sustainable growth and efficient, reliable and sustainable
improvements in operational performance.

Linked to this is the effective deployment of an enterprise resource planning
system across the Group, which underpins the Group’s CI initiatives.

Impact

Unscheduled interruption to business activities would result in reduced profits,
loss of customer satisfaction, potential cost outlays, and reputational impact.

Project, programme, production and service delivery will be adversely affected
increasing costs and reducing customer satisfaction.

Mitigation

The Group maintains major incident/IT failure business continuity plans.
Employees are trained in relevant procedures, as appropriate.

CI benefits are built into budgets with progress monitored at quarterly business
review meetings across the Group.

IT security and capability are continually monitored and strengthened
when needed.

The Group works closely with insurers and other third party experts to
ensure operating infrastructure and processes include robust risk
improvement activities.

See the CR&S section on pages 40 to 43 for further details on mitigating
actions against this risk

Sustainability training has been delivered to business management teams.

Assessment and accreditation processes have been developed to assess sites
with respect to CI and to identify areas for improvement.

Robust management of plans to ensure site readiness and planning of
implementation resources into site budgets for ERP implementation.

Detailed application test planning and ERP execution, including stress and load
tests, application performance, network and security tests.

Link to KPIs

− Staff safety
− Organic revenue growth
− Underlying EPS growth

Link to KPIs

− Organic revenue growth
− Underlying EPS growth
− Cash conversion
− Return on invested capital

The Group designs, develops and delivers products and services that are often

Failure to deliver the planned synergies and growth from the Aeroflex

customised, utilising complex technologies, under fixed price contracts that are

acquisition will have a detrimental impact on the Group’s financial performance.

sometimes long term in nature. This gives rise to the risks of failure to execute

contracts profitably, the supply of defective or delayed product, the occurrence

of other contractually related liabilities, or damages to reputation and

commercial relationships.

Impact

Failure by Cobham to execute or deliver a project or programme gives rise to

The Aeroflex transaction is important to the achievement of the Group’s

the risk of increased programme costs, contract penalties, litigation and other

strategic plan.

financial liabilities, reduced future profitability and reputational risk.

Poor operational performance could also lead to customers withholding new

adversely impact the Group’s reputation.

Failure to deliver the business case will lead to poor financial results and will

and existing business from the Group.

Mitigation

Through the new business win process, a thorough review of the business

A comprehensive due diligence process was undertaken throughout the

case and terms and conditions and subsequent variations, prior to signing,

pre-acquisition process.

ensures contract provisions and risks are fairly allocated between parties,

while still customer focused.

Post-acquisition, detailed assessments have been undertaken against the

due diligence findings and comprehensive integration plans established.

Life cycle management (LCM) and programme management procedures are

intended to ensure that the Group’s key contract and programme management

Aeroflex performance is monitored continuously against the due diligence

policies and procedures are applied consistently and appropriately across all

plan with regular oversight from the Group’s M&A Committee.

areas of the business. These procedures also provide increased focus on

improvements to its LCM and programme management capabilities.

Retention plans are in place for key individuals and the integration programme

is subject to the comprehensive LCM review process.

There is monthly reporting of progress against agreed LCM improvement

actions to the Group Executive, and semi-annually to the Audit Committee.

Link to KPIs

− Organic revenue growth

− Underlying EPS growth

− Cash conversion

− Return on invested capital

Link to KPIs

− Voluntary staff turnover

− Underlying EPS growth

− Cash conversion

− Return on invested capital

Risk status indicator

The company is currently in a significant phase of engineering and development

The Aeroflex acquisition was completed in the year, with the multi-year

activity on various new programmes and platforms.

integration programme in its early stages.

IT security threats continue to escalate. The Group has increased exposure
to site IT risks through adding Aeroflex sites.

CI professionals have been embedded in the Business Unit management teams.
The ERP roll-out has already been completed at one site.

Cobham plcAnnual Report and Accounts 2014www.cobham.comSTRATEGIC REPORTCorporate Responsibility and Sustainability

WE AIM TO ENGENDER TRUST
WITH OUR STAKEHOLDERS AND
ENSURE THE COMPANY THRIVES

Approach
Corporate responsibility and sustainability (CR&S) strategy
is developed and implemented through the CR&S function
which is overseen by the CR&S Committee chaired by the
CEO. The role of the function is to engage key stakeholders
to identify current and emerging social and environmental
threats and opportunities to the Group’s business objectives
and strategic plans, monitor and measure CR&S performance
to drive continuous improvement and ensure compliance
with applicable laws and regulations as well as voluntary
requirements (e.g. codes of conduct).

Further details on Cobham’s approach to human rights can
also be found in the COBC, and the RSCM can be found at
www.cobhamsustainability.com/at-a-glance/
downloads.aspx.

Training all employees on the COBC is considered to be an
effective leading measure which ensures that employees
understand the Group’s expectations and requirements.
The incidence of material compliance breaches is
considered to be a measure of the effectiveness of the
Group’s approach.

Material environmental, social and governance risks and
opportunities are included in the CEO’s papers to the Board
as well as through various executive committees such as the
Business Ethics and Compliance Committee and the Safety,
Health and Environment Committee.

Cobham’s CR&S Strategy is designed to align with the
Group’s business model, through four key areas of focus:

Captured in our Principal Risks
Risk 3 – Failure to comply with laws and regulations

(see page 37)

Risk 4 – Failure to embed organisational design within an
effective governance framework, with
appropriate skills and talented employees
recruited/retained (see page 37)

− Striving for the highest ethical standards through
our business ethics and compliance programmes;
− Attracting, retaining and developing highly talented

2014 performance
The Company achieved its target of 100% employee
training on the COBC.

and engaged employees;

− Providing a safe and healthy working environment; and
− Managing environmental impacts.

Highest ethical standards
Cobham complies with relevant laws and regulatory
requirements while also acting ethically and with integrity.
This approach is enshrined in the Cobham Code of Business
Conduct (COBC), on which all employees receive training.
Cobham sees acting ethically as a source of potential
competitive advantage. It is a key contributor to a high
performance culture, helps meet key stakeholder
expectations, protects the Group’s reputation and supports
its financial performance.

In addition, Cobham is in the process of adopting best
practice in managing its supply chain responsibly on a risk
prioritised basis. It prefers those suppliers that support
responsible and sustainable business practices, including
human rights (e.g. through the potential for conflict minerals
usage in purchased parts and components, preventing child
labour and preventing discrimination). Cobham’s approach
is set out in its Responsible Supply Chain Management
Policy (RSCM) which is contained within the COBC.

In 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., a US-based
operating location. The matter has been fully investigated
and concluded with the DoJ during the year, with no
material cost or sanction for the Group.

As part of the integration of the Aeroflex acquisition,
Cobham is undertaking an exercise to ensure that the
best of the Aeroflex and Cobham ethics and compliance
programmes are adopted across the Group.

The use of agents, distributors and value added resellers
continued to be subject to due diligence and approvals,
subject to well defined criteria and including appropriate
legal review.

Cobham has voluntarily engaged with Transparency
International (TI), an international movement dedicated
to working with government and business, to put in place
measures to tackle corruption. This will enable the Group
to benchmark its policies and practices against the TI
Defence Companies Anti-Corruption Index, which is due
to be published in 2015.

Code of Business
Conduct training

100%

Target:100%
(2013: 100%)

Cobham plcAnnual Report and Accounts 2014www.cobham.comVoluntary staff
turnover

6.3%

Target: <10%
(2013: 6.9%)

Training on the Company’s RSCM policy was also rolled out
across its principal locations during 2014. An initial review
has identified the categories of hazardous materials, conflict
minerals, resource efficiency and environmental protection
as the most significant risk areas in the supply chain.

Cobham in action
Cobham has transitioned the manufacture of make-to-print
refuelling pod structures from a UK provider to a provider in
India. The Cobham Mission Systems Sector (CMS) utilised
the RSCM policy and approach to identify key risks for
supplier selection, and included mitigation actions within
sourcing documents, business agreements and
management governance protocols. All vendors were
researched and audited prior to the bid process. The
selected supplier is required to comply with Cobham’s
RSCM policy and CMS retains full audit rights to ensure
the supplier’s obligations are being fulfilled. CMS continues
to actively manage the supplier through quarterly business
reviews and audits to ensure compliance requirements
are met.

The Airbus A330 MRTT features two Cobham wing mounted 905E
aerial refuelling pods, with the manufacture of pod structures now
outsourced to India.

Looking forward
The Group will continue training on the implementation
of the COBC and will complete the roll out of the Group’s
Corporate Framework to integrate it with existing
governance policies and procedures in the former
Aeroflex business.

Talented and engaged employees
Having talented and engaged employees supports
Cobham’s ability to execute and deliver on key programmes
and on its growth objectives. Cobham’s approach is to
attract and retain employees with the right skills and
capabilities through strategic workforce planning,
competitive reward practices, diversity and inclusion
and development of a high performance culture. It is
now utilising a streamlined management and reporting
structure, aligned with the Group’s growth objectives.

Cobham sees voluntary staff turnover as a key metric for
determining the effectiveness of its talent management
and employee engagement approach.

Captured in our Principal Risks
Risk 3 – Failure to comply with laws and regulations

(see page 37)

Risk 4 – Failure to embed organisational design within

an effective governance framework, with
appropriate skills and talented employees
recruited/retained (see page 37)

2014 Performance
Cobham’s voluntary employee turnover has remained
below its target of 10% or less. However, the Group intends
to further improve this performance by regularly measuring
its employee engagement, commencing with a Group
wide employee engagement project designed to enhance
performance and support for the Group’s integrated
operating company model. The initial steps have involved
an employee survey from Great Place to Work®, which was
completed in the second half of the year. For further details
see ‘Cobham in action’ below.

Cobham also believes that embracing diversity brings
business benefits as it deepens the Group’s talent pool
for skills and capabilities and broadens its perspectives.
Cobham’s overall gender diversity profile increased from
27% female in 2013 to 28% female in 2014. Using the
statutory definition, which is Directors of a legal entity,
female senior managers increased from 13% (2013) to
16% (2014). Under the Cobham definition, which is
employees of Vice President grade and above, female
Senior Managers increased from 9% (2013) to 15% (2014).
Female representation on the Board increased from
11% (2013) to 22% (2014).

The Group has focused on the implementation of its new
organisational design with the strengthening of its senior
management and reporting structure, and with certain key
support functions now reporting into the centre. Some 70%
of the leadership roles created through the organisational
design programme were sourced internally from alumni of
Cobham’s senior management development programme.

Cobham has continued to build on its development
programmes with further expansion of the Cobham
high potential, graduate and apprenticeship programmes.
Cobham also signed up to the 5% club, a UK initiative
which commits employers to hiring 5% of their intake as
graduates or apprentices within five years.

In addition, Cobham has also developed and piloted
its Institute of Leadership & Management accredited
programme which is designed to enhance the Group’s
management skills and capabilities.

Cobham in action
Cobham has partnered with the Great Place to Work®
Institute to train over 300 Executives and Senior Managers
in building the key components of high trust and high
performance teams; to assess the Group’s human resources
policies and practices and to conduct a Group wide
employee survey. Over 80% of Cobham employees
responded to the survey and the results were reported
back to all employees. Work will continue on this initiative
through 2015 to build on and sustain engagement
with employees.

Over 80% of Cobham employees participated in the Great Place
to Work® employee engagement scheme.

Cobham plcAnnual Report and Accounts 2014www.cobham.comSTRATEGIC REPORT
Corporate Responsibility and Sustainability continued

Looking forward
Cobham will focus on embedding its approach to
strategic workforce planning to ensure it has the right skills
and capabilities in place. Looking further ahead, the Group
is aiming to drive functional excellence further through
development of competency frameworks, established
career path development and the building of strong
partnerships with academia and subject matter experts.
Over time, the Company will identify its changing
requirements for core capabilities and build a pipeline of
talent able to respond to current and future needs. Cobham
will also continue to invest in its development programmes,
providing all of its line managers with the opportunity
to participate in an accredited, in-house certificate
in management.

Initially the Group intends to focus its diversity and inclusion
approach on establishing geographic councils, setting
policies and associated metrics.

2014 performance
Cobham had no fatalities during 2014. However, there has
been an increase in the major accident incident rate in 2014
to 423 per 100,000 employee equivalents, representing a
total of 45 work place injuries and illnesses. Of these, 21
occurred in the Aviation Services Sector, which represents
a higher work place safety risk environment than the other
Sectors. The Group will continue to review the controls in
place and to ensure that health and safety issues are being
fully addressed.

33 of 38 of the Group’s business units achieved the internal
SHE management standard targets set for them and the
remainder are expected to achieve these in 2015, with
management systems at all principal locations expected to
be of an equivalent standard to OHSAS18001 by the end
of 2015. This excludes the recently acquired Aeroflex sites,
where work is commencing to assess and improve their
SHE performance.

Safe working environment
Cobham strives to provide a safe working environment for
employees, contractors, and visitors. Cobham recognises
that a good health and safety record drives an enhanced
production performance and excellence in other areas of
its operations.

The Group’s approach is to promote a safety culture
that strives to minimise injuries and illnesses in the
workplace and to promote employee wellbeing. The
Group consistently applies a set of ten Safety, Health
and Environment (SHE) management standards that
are mapped directly to OHSAS18001, an international
health and safety standard, and to ISO14001, an
international environmental standard, and a set of 12
technical standards that address common SHE
management processes and risks.

An organisational design project was undertaken for
the SHE function across the Group. As part of this, SHE
professionals have commenced being assessed and
development plans initiated to close gaps identified.

Cobham in action
Several principal sites have undertaken live emergency
response simulations to ensure that their response standards
are in line with best practice in business continuity. Exercises
have been undertaken in conjunction with local fire
authorities with positive results and good feedback.
There are also live simulations planned for 2015.

SHE best practice is more generally being shared across the
Group, with health and safety events held in North America,
Europe and Australia. These have involved over 100 SHE
practitioners from across the Group.

Aviation safety is Cobham’s most significant safety risk. In
terms of workplace risks, manual handling, repetitive strain
and slip and trip injuries are the most common safety risks.

Cobham captures numerous leading and lagging workplace
safety indicators to measure its safety performance.
Management is focused on driving the correct behaviours
through its lagging indicators while safety performance
such as fatalities and the major accident incidence rate
(the number of cases with three or more lost work days
per 100,000 full time employee equivalents) demonstrate
the effectiveness of the Group’s approach.

Further details on Cobham’s Group Safety, Health
and Environment Policy can be found at
www.cobhamsustainability.com/at-a-glance/
downloads.aspx.

Captured in our Principal Risks
Risk 3 – Failure to comply with laws and regulations

(see page 37)

Risk 4 – Failure to implement organisational design within
an effective governance framework, with
appropriate skills and talented employees
recruited/retained (see page 37)

Risk 7 – Significant business interruption risk

(see page 39)

ttitud e

u
r

ompet e n

c y

Cobham strives for excellence in safety, health and environment

Looking forward
The objective for 2015 is to close all gaps in meeting 2014
SHE management standard targets.

Over the medium to longer term, the Group’s intention is for
all its principal and aviation locations to mature their safety
management systems and certify them to the OHSAS
18001 international standard.

Major accident incident rate*

423

Target: 400
Aspiration: zero
(2013: 326)
*per 100,000 employees

Cobham plcAnnual Report and Accounts 2014www.cobham.comManagement systems at most principal locations, but
excluding the recently acquired Aeroflex sites, are now
of an equivalent standard to ISO14001. All principal
manufacturing locations have maintained the highly
protected risk status through compliance with insurers’
standards, which enables Cobham to mitigate risks
associated with extreme weather events such as flooding.

Facility energy
intensity reduction

Target: (10%)
(2013: (1%))

Cobham in action
Cobham participates in the CDP climate change survey.
CDP is backed by over 800 institutional investors
representing in excess of US$95 trillion in assets, giving
investors access to a global source of year-on-year
information that supports long term objective analysis,
evidence and insight into companies’ greenhouse gas
emissions and strategies for managing climate change risks.
This survey ranks companies in relation to both their
disclosure and performance in carbon management.
Cobham has steadily improved its rating since 2009.
In 2014 it was placed in the top 10% of nearly 2,000
participating companies worldwide.

Cobham achieved the title of CDP Climate Performance
Leader in 2014

Looking forward
Cobham is focused on its foundation of operational
excellence by driving a continuous improvement culture.
It will also be making operational efficiency improvements
at former Aeroflex locations, with a number of integrations
also planned. These actions should contribute to a
decreasing energy intensity from its facilities over the
coming years.

Managing environmental impacts
Cobham recognises that its operations, activities, products
and services have an impact on the environment and that
the environment also impacts the business. The Group
promotes an environmentally responsible culture, to comply
with increasing environmental legislation and customer
requirements, to reduce operating costs and to minimise
business interruption in its operations and those of its
critical suppliers.

In addition to aviation fuel use, energy consumption
and greenhouse gas emissions are Cobham’s most
significant environmental impacts. The Group seeks to
manage its environmental impact by using a series of
measures including:

− Transitioning to fuel efficient aircraft where it is
appropriate to do so. For example, the Aviation
Services business in Australia has introduced the
Embraer 190, a next generation aircraft, and the first
of its type to be engaged in the closed charter fly-in,
fly-out market there;

− Investing in technology to reduce the size, weight and
power consumption of products e.g. satellite ASICs.
For further details see the CEO’s Statement on page 10;
− Reducing facility level greenhouse gas emissions through
energy efficiency measures, including: lighting, heating,
ventilation and air conditioning upgrades, sensor lighting
and destratification fan installations at various sites
across the world;

− Building business continuity and effective emergency
response planning, to be prepared for adverse weather
events and natural disasters.

The Group measures a number of environmental metrics
(further information can be found at http://www.
cobhamsustainability.com/environment.aspx).
However, the Group’s most significant environmental
impacts stem from its greenhouse gas emissions in
operating contract aviation services and
in its manufacturing operations. The Group measures its
aviation and non-aviation greenhouse gas emissions and
obtains third party limited assurance on this data.

Captured in our Principal Risks
Risk 3 – Failure to comply with laws and regulations

(see page 37)

Risk 4 – Failure to implement organisational design within
an effective governance framework, with
appropriate skills and talented employees
recruited/retained (see page 37)

Risk 7 – Significant business interruption risk (see page 39)

2014 performance
Cobham’s overall energy and carbon footprint grew in 2014
due to Aviation Services’ success in winning new contracts,
leading to additional flying activity over which Cobham may
have no direct control to influence aircraft type or flight
plans e.g. QantasLink. The Aeroflex acquisition has also
increased the size of the Group and so added to its
footprint. Overall, the energy intensity of the Group’s
facilities increased by 1%. However, it decreased by 8%
if Aeroflex sites are excluded, slightly short of the annual
energy intensity (Mwh/£m) reduction target, which the
Group set for itself, at 10%. Further details on the Group’s
emissions and energy usage are provided in the Directors’
Report (see pages 66 and 67).

Cobham plcAnnual Report and Accounts 2014www.cobham.comSTRATEGIC REPORT
Board of Directors

Chairman

Executive Directors

Non-executive Directors

1. John Devaney
Non-executive Chairman
BEng, CEng, FIMechE, FIEE
Age 68

2. Robert (Bob) Murphy
Chief Executive Officer, Executive Director
Age 57

4. Mike Wareing
Senior Independent Non-executive Director
CMG, FCA, FCCA, MCSI
Age 61

Appointed: Director February 2010, Chairman May 2010
Skills and experience: John’s executive career was built
in engineering companies within the Varity Group. John has
previously served as Non-executive Director of Northern
Rock Asset Management (between 2007 and 2010),
Chairman of Marconi plc, later renamed Telent, and
Chairman of National Express Group plc. 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 NATS
(National Air Traffic Services) in August 2014.
External appointments: None.
Committee membership: Chair 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 Electronic Systems, Land and
Armaments and Platform Solutions sector. 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 Company (GE) 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: Chair of the Executive
Directors Committee.

Appointed: December 2010
Skills and experience: Mike 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. Mike retired from
his role as Non-executive Director and Chairman of the
Audit Committee of Wolseley plc in November 2014.
External appointments: Senior Independent
Non-executive Director and Chairman of the Audit
Committee of Intertek Group plc, and Economic
Development Adviser to the Government of Afghanistan.
Committee membership: Chair of the Audit Committee
and member of the Nomination Committee.

3. Simon Nicholls
Chief Financial Officer, Executive Director
BSc (Hons), ACA
Age 50

5. Alison Wood
Independent Non-executive Director
MA, MBA
Age 51

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.

Appointed: July 2011
Skills and experience: Alison is engaged with a mix of
not for profit, investment and non-executive activities in the
UK and New Zealand. She was formerly Global Director
Corporate Development and 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: Non-executive Director and
Senior Independent Director of e2v technologies plc.
Non-executive Director and Chairman of the Remuneration
Committee of Costain Group plc. Non-executive Director
for British Standards Institution, a Royal Charter company,
from September 2014.
Committee membership: Chair of the Remuneration
Committee and member of the Nomination Committee.

Cobham plcAnnual Report and Accounts 2014www.cobham.com Non-executive Directors

10.

6. Mark Ronald
Independent Non-executive Director
CBE, BA, BScEE, MScEE
Age 73

8. David (Jonathan) Flint
Independent Non-executive Director
CBE, MBA, BSc, FREng, FInstP
Age 54

10. Alan Semple
Independent Non-executive Director
BA, CA
Age 55

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. Mark was also a
Non-executive Director of Aeroflex Holdings Inc. until the
acquisition of the Group by Cobham plc in September 2014.
External appointments: Senior adviser of Veritas Capital
LLC and a management consultant.
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.
Committee membership: Member of the Audit
and Nomination Committees.

Appointed: February 2015
Skills and experience: Alan is currently Director and
Chief Financial Officer at John Wood Group plc, a role he
has held since 2000 and will retire from during 2015. Prior
to this, he held a number of senior finance roles in the
Group from 1996. Alan previously served as the Group
Finance Director of GRT Bus Group plc from 1994 to 1995,
one of two companies which merged to form FirstGroup
plc. Between 1987 and 1994, he was Finance Director at
Seaforth Maritime Group Limited.
External appointments: Chief Financial Officer of
John Wood Group plc.
Committee membership: Member of the Audit
and Nomination Committees.

7. Mike Hagee
Independent Non-executive Director
Age 70

9. Birgit Nørgaard
Independent Non-executive Director
MA, MBA
Age 56

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 Commission on Energy and Geopolitics,
Non-executive Director of SGI Corp., DynCorp International
Inc. and Remington Outdoor Company Inc., and Outside
Manager 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: April 2014
Skills and experience: Birgit, a Danish national, currently
holds a number of non-executive roles in the private and
public sectors in the UK and overseas. Birgit’s last executive
role was as both the Chief Executive Officer of Grontmij Carl
Bro, the Danish engineering consultancy group as well as the
Chief Operating Officer of Grontmij NV, the Dutch parent
company. An economics graduate from Copenhagen
Business School, Birgit has an MBA from INSEAD.
External appointments: Non-executive Director of IMI
plc. Birgit is a Non-executive Director at WSP Global Inc, a
global consulting engineering company listed in Canada,
DSV A/S an international transportation company listed on
the Copenhagen stock exchange and Kvaerner ASA, an
engineering, procurement and construction company listed
in Norway. She also holds board positions in private
companies and public sector positions.
Committee membership: Member of the Remuneration
and Nomination Committees.

Cobham plcAnnual Report and Accounts 2014www.cobham.com CORPORATE GOVERNANCECorporate Governance Report

CREATING A MORE SIMPLIFIED,
STREAMLINED ORGANISATION
– REBALANCED TOWARDS
COMMERCIAL MARKETS

“ We made real progress on our
strategic objectives, in particular,
the key objective to position the
Company to return to sustainable
organic growth in 2015.”

Dear Shareholder
During the past 12 months we have made real progress on our strategic
objectives, in particular, the key objective to position the Company to
return to sustainable organic growth in 2015.

The Group has been restructured, creating a more simplified and
streamlined organisation. We have completed our largest ever acquisition:
we welcome the employees of Aeroflex into the Cobham family. We have
made great progress integrating the two companies together and it is
already having a positive impact. The combination broadens our footprint
in the exciting and growing connectivity space, and is helping us to make
considerable headway in rebalancing the portfolio away from defence and
towards the commercial markets.

We launched the Great Place to Work process, so that all of our employees
can work together to achieve Cobham’s full potential and truly become, a
great place to work.

Corporate Governance Index

1. Board of Directors

2. Corporate Governance Report

3. Nomination Committee Report

4. Audit Committee Report

5. Directors’ Remuneration Report

6. Directors’ Report

7. Statement of Directors’ Responsibility

8. Compliance with the UK Corporate Governance Code

This part of the Annual Report describes how the Company has applied,
and complied with the UK Corporate Governance Code published in 2012
(Code). The Code is published by the Financial Reporting Council and
is available from its website www.frc.org.uk.

The Board has overseen the appointment of two new Non-executive Directors:
Birgit Nørgaard, who brings with her experience of the Continental European
markets, along with extensive commercial and business expertise; and
Alan Semple, whose appointment, with his financial and engineering experience,
strengthens the depth of knowledge on the Audit Committee.

Our markets in 2015 will continue to challenge and we will continue to work
hard to respond to those challenges. I trust we can rely on your continued
support for the foreseeable future.

Responsibility statements
Statements relating to the responsibilities of the Directors are on page 68 and
those relating to the auditors are on pages 70 and 118.

Share capital
Details of the share capital of the Company and the powers of the Directors in
relation to allotment, issue and market purchases of shares are given in the
Directors’ Report on page 65.

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 2014 and at the date of this
Annual Report, it was compliant with the provisions of the Code.

Financial reporting
In the Directors’ view, the Annual Report and Accounts for 2014, 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 33.

Cobham plcAnnual Report and Accounts 2014www.cobham.com 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;

− Review and agree Group strategy;
− Ensure that the necessary resources are in place;
− Monitor management performance; and
− Supervise the conduct of the Group’s activities within a framework of

prudent and effective internal controls.

Highlights of 2014
− The Board, in conjunction with senior management, devoted additional time
to the further development of the Group’s strategy and specifically agreed a
new connectivity strategy;

− The acquisition of Aeroflex, a significant transaction for both groups,

including the completion of a placing and bank financing. This acquisition
was borne out of the new connectivity strategy;

− Structural redesign for the business, creating a more simplified and

streamlined organisation;

− The reconstitution of the senior management team has been completed
and new team members are now in post and already contributing to the
achievement of our Strategic Plan;

− Oversight of the restructuring of the portfolio with planned disposals of

businesses which no longer fit our strategy;

− Oversight of the search and appointment of two new Non-executive

Directors, Birgit Nørgaard and Alan Semple; and

− Evaluated and approved two large bid submissions above authority

limits delegated to the Executive Directors outside of the regular Board
meeting agenda.

Priorities for 2015
− Oversight of the return to growth agenda;
− Continue to review performance against agreed strategic enablers;
− Oversight of the Aeroflex integration, including delivery of targeted synergies;
− Continue to focus on market evaluation and strategic development; and
− Continue to rebalance the portfolio in line with strategy and towards

our commercial markets.

Board meeting attendance for 2014
Nine Board meetings were held during the year, attended as follows:

John Devaney

Bob Murphy

Simon Nicholls

Jonathan Flint

Mike Hagee

Birgit Nørgaard1

John Patterson2

Mark Ronald3

Mike Wareing4

Alison Wood

Unable to Attend

Attended

1 Birgit Nørgaard joined the Board on 24 April 2014.
2 John Patterson retired from the Board on 24 April 2014.
3 Mark Ronald was recused from attending all meetings between May and September 2014
due to the acquisition of Aeroflex, for whom he was also a Non-executive Director.
4 Mike Wareing missed one Board meeting due to ill-health.

The Board composition
The Board comprises a Non-executive Chairman (John Devaney), a CEO (Bob
Murphy), a CFO (Simon Nicholls) and seven 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
Birgit Nørgaard and Alan Semple, who joined the Board on 24 April 2014 and
25 February 2015 respectively. John Patterson stood down from the Board,
having completed nine years as a Non-executive Director and Chair of the
Remuneration Committee, at the conclusion of the 2014 AGM.

Biographies of the Directors, giving details of their experience and other
significant commitments, are set out on pages 44 and 45. 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 across the page 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 50, 53 and 57.

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.

All the Non-executive Directors have confirmed that 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, Birgit
Nørgaard, and Alan Semple, are seeking election by shareholders at the 2015
AGM for the first time. The Board has set out in the circular, a resolution to elect
Birgit Nørgaard and Alan Semple as Non-executive Directors and explains why it
believes they should be elected. The Chairman confirms to shareholders when
proposing 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 operational
performance, corporate social responsibility and the development and
implementation of the Group’s strategy. 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 which communication through the
normal channels of Chairman, CEO or CFO has failed to resolve, or where
these contacts are inappropriate.

Cobham plcAnnual Report and Accounts 2014www.cobham.com CORPORATE GOVERNANCECorporate Governance Report continued

Board proceedings
Board meetings, scheduled in accordance with the annual timetable, took
place seven times during the year on a face to face basis and twice by telephone.
There is contact between meetings to progress the Group’s business as required.
Meetings are held in London and at an international operational location. In 2014,
the site visited was Lyngby, in Denmark. 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 also held meetings
with the Non-executives in the absence of the Executive Directors.

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 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.

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 this 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 2014.

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.

Performance evaluation
The Board conducts an evaluation of its activities on an annual basis. During
2014, the Board and its committees undertook an internal evaluation. The
evaluation included the circulation of a questionnaire, with a focus on
governance around the Aeroflex transaction and the Board site visit. The
Board considered the output at their December meeting and has approved
an action plan to address issues arising. A table of actions instigated by
this and the previous performance evaluation is included below. In 2015,
the Board is planning to undertake an external evaluation.

Board and committees performance evaluation

Evaluation year

Observations

Actions taken

Board committees
The Board is supported in its work by a number of committees. The Company
Secretary acts as secretary to all Board committees. Committee chairs provide
oral reports on the work undertaken by their committees at the following Board
meeting. Information relating to the activities of each committee may be found
on the pages that follow. 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 17 occasions during the year and, in addition, as required
to respond to business needs and market conditions.

Board of Directors

Audit
Committee

Nomination
Committee

Remuneration
Committee

Executive Directors
Committee

Management committees
The Group Executive Committee and the other principal management
committees are shown in the table below.

Board of Directors
Group Executive (incorporating the Risk Committee)

Executive Directors
Corporate
Committee
All of the below is in addition to quarterly business reviews, business development
Merger &
Responsibility
Acquisitions
reviews and function reviews, supporting the new organisational design.
& Sustainability
Committee
Committee

Audit
Vertical
Committee
Leadership teams
and Horizontal
Council Meetings

Remuneration
Committee

Nomination
Committee

Group Executive (incorporating the Risk Committee)

Business Ethics
& Compliance
Vertical
Committee
Leadership teams
and Horizontal
Safety, Health
Council Meetings
& Environment
Committee
Business Ethics
& Compliance
Committee

Safety, Health
& Environment
Committee

Merger &
Internal Audit
Acquisitions
Sub-committee
Committee

Corporate
Responsibility
Talent Board
& Sustainability
Committee

Internal Audit
Sub-committee

Talent Board

2013

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.

2014

PV investment.

Presentations from the Group Executive were built in to the Board Work Plan for 2014 (and
going forward). Various opportunities have also been taken for the Board to meet members
of the senior management team both professionally and socially.

The connectivity strategy was agreed during the first part of the year during a scheduled
Board meeting, following which the Aeroflex transaction was identified. A Board meeting
dedicated to strategic discussion was held during late 2014. Although this was delayed by the
acquisition of the Aeroflex Group, the Board felt there had been a big improvement in strategic
materials and subsequent Board discussions. Ongoing strategic updates form part of the rolling
Board agenda.

The continued investment in the products of the business to ensure currency of technology is
recognised as key and more emphasis should be placed on pursuing (and monitoring) strategic
opportunities through such investment.

Continued development of the strategic
planning process.

The Board identified a number of additional pieces of work they would like to see as part of the
2015 Strategic Review. These have now been scheduled into the work cycle for the Strategic
team and the business, where appropriate, for delivery during 2015 Board strategy discussions.

Cobham plcAnnual Report and Accounts 2014www.cobham.com Summary of 2014 investor relations activity

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Interim
Management
Statement*

Preliminary
2013 results

Webcast &
conference
call

Interim 2014
results

Webcast &
conference
call

Interim
Management
Statement*

Industry
exhibition

Investor
conference

Industry
exhibition

Capital Markets
Day

Investor conferences

Site visits

Site visit

Investor meetings

* The Interim Management Statement is a short quarterly update on the Group’s trading, significant events and financial position.

Shareholder relations
The Board recognises the importance of maintaining an effective two-way
communication programme with shareholders and potential shareholders.
This assists investors’ understanding of the Group’s strategy, business model
and remuneration structure and allows the Board to understand shareholder
views when formulating its strategy and policies, ensuring the interests of the
Company and investors are aligned. Cobham’s programme of shareholder
interaction is intended to meet these aims.

There is also a section of the main Cobham website that is maintained
specifically for investors. This is updated regularly and contains a variety
of information including company summaries and overviews, background
information and company history, news and events, reports and presentations,
financial tools and charts and corporate governance information. During the
year, a major project was undertaken to further develop the look and feel
of the investor website and increase the amount of information available
to shareholders.

During the year presentations were given to investors on the morning of the
announcement of the interim and preliminary results. The presentations were
accompanied by a live webcast and conference call for investors unable to
attend in person. Copies of the associated presentation materials, together
with webcasts, can be accessed on Cobham’s website. The Group also hosted
a presentation, which was also webcast, for shareholders on the day of the
announcement of the Aeroflex acquisition in May 2014.

Cobham’s AGM is attended by all Board Directors and shareholders have the
opportunity to question the Board on its stewardship of the Group and to
meet the Directors informally.

In addition, a full programme of engagement with investors and analysts, both in
the UK and overseas, was undertaken through the year, which is led by the CEO
and CFO. In total there were some 194 meetings in the year with 185 investors.
A summary of the timing of this activity is set out in the table above.

This engagement included one-to-one and group meetings with shareholders,
participation in investor conferences, investor participation in industry exhibitions
and shareholder visits to Cobham operating locations. Site visits and industry
exhibitions are hosted by senior members of management within the business
units and are intended to give investors detailed insight and access to the
business’ products and operations.

The Board receives a report from the CFO at each of its meetings on investor
relations, including significant changes to shareholdings, meetings with and
feedback from shareholders and research recently published on the Group.

I write to major shareholders annually, informing them that I am available to
meet them if they have concerns.

John Devaney
Chairman
4 March 2015

Cobham plcAnnual Report and Accounts 2014www.cobham.com CORPORATE GOVERNANCE
Nomination Committee Report

CONTINUED FOCUS ON THE
KNOWLEDGE, EXPERTISE AND
DIVERSITY IN OUR BOARD ROOM

“ Appointed two new Non-executive
Directors to further strengthen the
experience on our Board, and to
support the Group to achieve its’
Strategic Plan.”

Priorities for 2015
− Continue to review succession plans for the Board members and key roles

across the business; and

− Continue to review Board composition to ensure competencies remain

aligned to the Strategic Plan and that the Board continues to be
appropriately balanced.

The Committee’s terms of reference, which were reviewed during the year, are
available on Cobham’s website or on application to the Company Secretary.

Membership and attendance
Three Nomination Committee meetings were held during the year, attended as follows:

John Devaney (Chair)

Jonathan Flint

Mike Hagee

Birgit Nørgaard1

John Patterson2

Mark Ronald

Mike Wareing

Alison Wood 3

Unable to Attend

Attended

1 Birgit joined the Nomination Committee on joining the Board on 24 April 2014.
2 John retired from the Board (and hence the Nomination Committee) on 24 April 2014.
3 Alison missed one meeting due to a personal commitment.

Other attendees
CEO, by invitation.

Dear Shareholder
A key focus for the year has been the appointment of two Non-executive
Directors. 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 short list of candidates for these roles. The shortlisted candidates
were interviewed by myself and separately by other Board members, including
the Executive Directors. It was pleasing to note that we had a number of
female candidates for our NED roles and that we were able to secure another
female NED who had all the right attributes to add to and complement our
Board expertise.

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 2014
− Continued to refresh and renew non-executive tenure and skill set to ensure
an appropriate balance of skills, knowledge and experience of the Board;

− Conducted a thorough and comprehensive search for two new

Non-executive Directors;

− Completed the appointment of two Non-executive Directors. Birgit has
extensive experience of the Danish market in which Thrane & Thrane
operates, a company we acquired in 2012, and Alan has extensive
financial experience;

− Considered external appointments to the boards of our subsidiaries; and
− Oversight of the new organisation design exercise.

Cobham plcAnnual Report and Accounts 2014www.cobham.com Skills and experience
The table below identifies the skills and experience of the Board members.

Independence

Years with
Cobham

Skills

Strategy
and Risk

UK
Corporate
Governance

Leadership

John Devaney
Bob Murphy
Simon Nicholls
Jonathan Flint
Mike Hagee
Birgit Nørgaard
Mark Ronald
Alan Semple
Mike Wareing
Alison Wood

•
•
•
•
•
•
•

4
2
1
1
6
0
8
0
4
3

•
•
•
•
•
•
•
•
•
•

•
•
•
•

•

•
•
•

Diversity and inclusion
The Committee is cognisant of the need for 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. The representation of women on the
Board increased from 11% in 2013, to 22% in 2014. For recent recruitment, the
profile has also included the requirement for a diverse geographical background
and commercial market experience.

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;
− Their duties, responsibilities and obligations as Directors of a listed

public limited company; and

− Specific duties as a member of one of the Board committees.

This is supplemented by visits to key locations and meetings with, and
presentations by, members of the senior management team.

Development for Directors is available as required and is provided mainly by
means of internal briefing from senior management or advisers and external
courses. 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.

Site visits are considered critical to ensure that the Directors remain close to
the business of the Group. These visits are arranged informally for each Board
member, as necessary, and supplemented by one formal site visit per year
which is attended by all members of the Board.

Experience

Corporate

Engineering

Defence

Finance

US Market

UK Listings

•
•
•
•

•
•
•
•
•

•

•
•
•

•
•
•
•
•

•

•
•

•
•
•
•

•

•
•

•
•
•
•
•

•
•
•
•

•

•
•
•

Succession planning
Succession planning takes place 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 them 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.

John
Devaney

Mark
Ronald

Mike
Hagee

Mike
Wareing

Alison
Wood

Jonathan
Flint

Birgit
Nørgaard

Alan
Semple

2006

2011

2014

2016

2021

2026

1st term

2nd term

3rd term

The current Board composition in relation to the Non-executive Directors in
terms of length of service and current term is shown diagrammatically above.

John Devaney
Nomination Committee Chair
4 March 2015

Cobham plcAnnual Report and Accounts 2014www.cobham.com CORPORATE GOVERNANCEAudit Committee Report

CONTINUOUS MONITORING
OF FINANCIAL REPORTING
AND DISCLOSURE PROCESSES

“ The key focus for 2014 has been
expanding oversight of the Group’s
governance, risk and assurance
system, developing audit tender plans,
and ensuring the controls in relation
to the Aeroflex acquisition were fit
for purpose.”

Dear Shareholder
I am pleased to present the report of the Audit Committee for 2014. At the
conclusion of the 2015 AGM, I will be stepping down as Chair of the Committee,
and handing over the responsibilities of my role as Chair to Alan Semple. I will,
however, remain a member of the Audit Committee. Alan has been CFO,
and a Director, of John Wood Group plc since 2000. Alan’s wealth of financial
experience complements the substantial knowledge already provided by existing
Committee members and further strengthens the level of financial expertise of
the Committee.

2014 has been a busy year for the Audit Committee: we have developed our
future plans for the external audit tender, and continued to carefully assess the
Company’s relationship with the current external auditor; we have provided vital
oversight of the controls in relation to Cobham’s acquisition of Aeroflex; and
we have extensively reviewed programme management, and assisted in the
evolution of the Group’s governance, risk and assurance system.

At the 2015 AGM, both Alan and I will be available to respond to any questions
shareholders may raise on this report or the Committee’s activities.

Highlights of 2014
− Oversight of controls in relation to the Aeroflex acquisition;
− Developed the audit tender plans for 2015;
− Strengthened review of the policy on the provision of non-audit services

for the external auditors;

− Greater scrutiny given to programme management;
− Enhanced review of Safety, Health and Compliance (SHE) compliance

and controls;

− Increased analysis of the Group’s governance framework, including Life
Cycle Management (LCM), Continuous Improvement, and IT controls
(including cyber security); and

− Supported the development and initial implementation of the new

governance, risk and assurance initiative.

Alan Semple
“I am delighted to be taking on
the Audit Committee Chair role
in 2015, and look forward to
working with Mike, other
members of the Committee,
and management.”

Priorities for 2015
− Monitoring of the integration of the Aeroflex business into the Group;
− Implementation of the audit tender plans;
− Continued oversight of the CFO led governance, risk and assurance initiative;
− Ensuring the Group is compliant with the revised UK Corporate Governance

Code and the updated FRC guidance on risk management; and

− Continued focus on the Group’s governance framework including LCM

and IT controls.

Alan joined the Board in February 2015, and will assume the role of Audit
Committee Chair in April 2015. He is a member of the Institute of Chartered
Accountants of Scotland, and has been the Chief Financial Officer of John
Wood Group plc since 2000. Alan brings with him a wealth of financial and
commercial experience in an engineering environment, which will be an
invaluable asset to the work of the Committee.

Cobham plcAnnual Report and Accounts 2014www.cobham.com Responsibilities
The Committee’s terms of reference include all matters indicated by Disclosure
and Transparency Rule 7.1 and the Code. The terms of reference, which were
reviewed in December, are available on Cobham’s website or on application to
the Company Secretary.

The Audit Committee’s main responsibilities 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;

− Oversee the Group’s risk management procedures, and internal control systems;
− Monitor and review the effectiveness of the Group’s internal audit function;
− Make recommendations as to the appointment, remuneration and terms of

engagement of the external auditors;

− Review and monitor the external auditors’ independence and objectivity and

the effectiveness of the audit process;

− Develop and implement a policy on the engagement of the external auditor

to supply non-audit services; and

− Monitor and review the Group’s policies and practices concerning business

conduct and ethics, including whistleblowing arrangements.

Membership and attendance
Five Audit Committee meetings were held during the year, attended as follows:

Mike Wareing (Chair)

Jonathan Flint

Mike Hagee

Unable to Attend

Attended

Other attendees
Meetings of the Committee were attended by the Chairman of the Board,
CEO, CFO, Group Director of Financial Control, Head of Internal Audit, and the
Company Secretary or her representative, none of whom do so as of right. Other
senior executives attend as required to provide information on matters being
discussed which fall into their area of responsibility. The external auditors,
PricewaterhouseCoopers LLP (PwC), also attend each meeting.

Allocation of time (%)

Financial statements and reports
26%

Internal audit
10%

Governance, risk and assurance
28%

External audit
14%

Other
22%

Key issues and activities
Set out in the table below is a summary of matters considered by the Committee
during 2014.

Feb

Apr

Jul

Nov Dec

Financial statements and reports

Full year results
Half year results
Fair, balanced and understandable assessment

External audit

Independence, objectivity and effectiveness of the
external auditor
Appointment recommendation to the Board
Policy on the provision of non-audit services
Approval of non-audit fees
External audit scope and fees
External auditors’ full year report
External auditors’ half year report
Audit tender plans

Internal audit

Effectiveness review of internal audit
Internal audit report
Annual internal audit plan

Governance, risk and assurance
Global Helpline Investigations report
Governance, risk and assurance report
Governance, risk and assurance framework
Internal controls
IT controls
SHE compliance and controls
Use of intermediaries

Other

Updates on accounting and corporate
governance developments
Terms of reference
Effectiveness of the Committee

LCM

Governance
The Audit Committee was in place throughout the financial year, with
Mike Wareing as the Chair. All three members are independent Non-executive
Directors. Mike Wareing was the International Chief Executive of KPMG until
September 2009. During 2014, Mike was also Audit Committee Chair of Wolseley
plc and Intertek Group plc.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 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.

Cobham plcAnnual Report and Accounts 2014www.cobham.com CORPORATE GOVERNANCE
Audit Committee Report continued

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 significant issues in 2014:

Issue

Committee action

Conclusion (with reasoning)

Revenue and profit
recognition on
contracts.

Debated accounting
policies, judgements on
material contracts and
external audit reviews.

Satisfied that accounting
and judgements were
reasonable and
appropriate.

Goodwill and
intangible assets
impairment
assessment.

Challenged internal
papers covering the
basis and quantum
of valuation.

Accounting for the
Aeroflex acquisition.

Discussed accounting
policies, management
reports, detailed
contract appraisals,
legal advice, and
internal/external
audit reviews.

Satisfied that these were
reasonable and
appropriate, and that
the disclosures made
were appropriate.

Considered that
accounting and provisions
were appropriate.

Inventory provisions. Challenged internal
papers covering the
basis and quantum
of provisions.

Considered that
accounting and provisions
were appropriate.

Accounting for
uncertain tax
positions.

Discussed internal
papers covering the
basis and quantum
of provisions.

Business change
restructuring costs.

Debated accounting
policies, and reviewed
management reports
and other internal
papers.

Satisfied that these
were reasonable and
appropriate, and that
the disclosures made
were appropriate.

Satisfied that accounting
was reasonable and
appropriate.

Fair, balanced and understandable report and accounts
At the request of the Board, the Committee considered whether the 2014
Annual Report and Accounts was fair, balanced and understandable, to enable
shareholders to assess the Group’s performance, business model and strategy.
It was satisfied that, taken as a whole, the 2014 Annual Report and Accounts
is fair, balanced and understandable. This assessment was underpinned by
the following:
− The Committee’s own knowledge of the Group, its strategy and

performance in the year;

− Comprehensive guidance issued to contributors at operational level;
− Thorough internal verification of the factual content;
− Comprehensive reviews undertaken at different levels of the Group

to ensure consistency and overall balance;

− Comprehensive review by the senior management team; and
− Comprehensive review by the independent external auditors.

External audit processes
During the year, PwC undertook external audit and certain non-audit work. The
lead audit partner, Pauline Campbell, attended each Audit Committee meeting,
and the 2014 AGM. PwC provided the Committee with information and advice
as well as relevant reports on the financial statements and controls.

In July and November 2014, the Committee reviewed and approved the terms,
areas of responsibility and scope of the December 2014 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 they identify during the course of their audit work. None
were found or reported in 2014. The Independent Auditors’ report to the
members of the Company can be found on pages 70 and 118.

External auditor 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. Prohibited services
include: actuarial services; legal services provided in the resolution of a dispute;
and appraisal or valuation services. All PwC’s fees for non-audit work were
approved in accordance with the Group’s policy covering non-audit services.

In conjunction with the CFO, the Committee Chair, in accordance with the policy
regarding the supply of audit and non-audit services, approved the services of
PwC to undertake and support management’s due diligence work for the
acquisition of Aeroflex. As a result the level of non-audit fees awarded was
greater than the level of audit fees awarded to PwC in 2014. The decision to
appoint PwC to undertake this work was considered by the Committee to be in
the best interests of shareholders. PwC has a deep understanding of Cobham,
placing them at a distinct advantage to support the Board in this regard. The
Committee does not believe that PwC’s independence has been compromised
because of this additional work on behalf of the Company.

The total fees paid to PwC in the year ended 31 December 2014 equal £5.4m,
with non-audit fees of £3.2m representing 59% of the total. The chart below
details the fees paid in 2014, together with a comparison to fees paid in the year
ended 31 December 2013. Further disclosure of the type of work undertaken,
and the amount of the non-audit fees paid during the year can be found in note
4 to the Group Financial Statements.

Total fees paid to the external auditors (2014)

Audit fees
£2.2m (41%)

Non-audit fees
£3.2m (59%)

Total fees paid to the external auditors (2013)

Audit fees
£2.1m (55%)

Non-audit fees
£1.7m (45%)

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.

Cobham plcAnnual Report and Accounts 2014www.cobham.com 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. Pauline Campbell replaced Stuart Watson as lead audit
partner in 2014.

The Committee is satisfied that the external auditors remain independent.

External auditor effectiveness and reappointment
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. The 2014 review was conducted in February 2015 and overall, the
feedback was positive. Having undertaken its review, in the opinion of the
Committee, the relationship with the external auditors works well, and the
Committee remains satisfied with their effectiveness.

The Committee has recommended that a resolution be proposed at the AGM
to re-appoint the external auditors and to allow the Audit Committee to set their
remuneration. There are no contractual obligations restricting the Company’s
choice of external auditor.

External auditor tendering
PwC have been the auditors of Cobham plc for many years. Following regulatory
clarity, during 2014 the Committee discussed and developed its plans for the
tender of the Group’s external audit. The Committee has decided to conduct a
tender exercise in 2015, for the 2016 year end. Following a rigorous tender
process, the Committee shall provide the Board with their recommendation,
before putting the appointment of the external auditors to a shareholder vote
at the 2016 AGM.

Internal audit
The Head of Internal Audit formally reports to the Committee Chair, and was
present in each of the five scheduled Committee meetings. The findings of each
internal audit review are summarised and the Committee focuses its discussions
on unsatisfactory findings and on the action plans in place to address them.
Particular areas of focus during 2014 included IT security and the amalgamation
of the acquired Aeroflex sites.

The Committee approved the Internal Audit Work Plan for 2015, including the
proposed audit approach, coverage and allocation of resources. The Committee
also received updates against the 2014 internal audit programme throughout
the year.

In February 2015, the Committee conducted an annual review of the
effectiveness of the Group’s internal audit function, taking into account the
views of Directors and senior management on matters such as independence,
proficiency, resourcing, and audit strategy, planning and methodology. The
review confirmed that the internal audit function was independent and
objective and remained an effective element of the Group’s corporate
governance framework.

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 internal controls. The Committee’s
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, the three lines of assurance, are
outlined in the diagram shown on page 35. 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.

Risk management is an integral part of the system of internal control. Sector
Presidents are required to ensure that appropriate processes, including the
maintenance of business unit and sector 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.

In 2014, a significant project was commenced to further enhance the Group’s
governance, risk and assurance framework. The Committee provided oversight
throughout the project’s development, and has been greatly encouraged by
progress to date. The Committee will continue to monitor the initiative
throughout 2015.

The Principal Risks and the enhanced risk management process are highlighted
on pages 34 to 39.

The Group operates under a system of internal controls which have 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 a 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 consisting of 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, provides appropriate coverage of the Group’s activities. Where
weaknesses have been identified, plans for remedying them are developed and
progress monitored.

Cobham Code of Business Conduct violations and fraud
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, are provided
in the CR&S section of this report, on pages 40 to 43. The Committee regularly
received reports providing details of these cases, their outcome, and the
corrective actions taken. In addition, the Committee received reports providing
details of any fraud losses.

Mike Wareing
Audit Committee Chair
4 March 2015

Cobham plcAnnual Report and Accounts 2014www.cobham.com CORPORATE GOVERNANCEDirectors’ Remuneration Report

ALIGNING REMUNERATION
TO THE DELIVERY
OF STRATEGIC GOALS

“ Evolving remuneration strategy to
support the execution of the Group’s
strategy in challenging market
conditions remains a key priority.”

Dear Shareholder
I am pleased to deliver my first report as Chair of the Remuneration Committee
and would like to thank John Patterson for his Chairmanship of the Committee
over the last nine years.

There are no proposed changes to the Remuneration Policy so no binding vote
will be put forward at the 2015 AGM. The current policy, as approved by
shareholders at the 2014 AGM, can be accessed on Cobham’s website.

Remuneration philosophy underpinning decisions
− The overall remuneration philosophy is linked to the long term success of the
Company. This is achieved by aiming to be market competitive to attract and
retain executives of the quality required to deliver the Group’s strategy, whilst
taking into account an individual’s experience and personal contribution to
the Group’s Strategic Plan.

− Paying for performance is the guiding principle of Cobham’s Total

Compensation Philosophy. Compensation decisions are closely linked to
Cobham’s performance development system.

− Cobham’s intent is to deliver premium actual total compensation comparable

to the upper quartile of our aerospace and defence peer competitors if
sustained upper quartile performance is achieved. For strong performance,
actual total compensation delivered is targeted at the market median.

How company performance during the year is reflected in the
remuneration outcome
− The Company has been operating in a challenging market environment over
the last 12 months. We operate a diverse portfolio of businesses and while
some of the businesses performed well, those exposed to defence in general
and the US defence market in particular, had another difficult year.

− Despite the challenges, the Company has made good strategic progress

during the course of 2014, shifting the balance of the business away from
defence and towards commercial end markets and customers.

− This included the acquisition of Aeroflex, which was widely regarded as an
appropriate and astute move by investors, and other recent acquisitions,
such as Axell Wireless, have been successfully integrated into the business.
− With a book to bill ratio of 1.03x and order intake 10% higher before M&A
the Group is now positioned to return to growth from 2015 as anticipated.

− 2014 has seen excellent returns to shareholders with TSR increasing 22%

over the period in comparison to FTSE250 growth of 4%.

− Despite the good progress outlined above, the financial targets set at the

start of the year upon which the remuneration arrangements are based have
not been met. Both operating profit and cash flow targets under the annual
bonus have not been met resulting in zero pay out under the Annual
Incentive Plan (AIP). In addition, the threshold level of EPS was not met and
TSR performance was below median over the three year performance period
for the 2012 Performance Share Plan (PSP), resulting in awards lapsing.

The key challenges and issues that the Remuneration Committee
addressed during the year
− First year of implementing the new Remuneration Policy which was approved

by over 98% of shareholders at the 2014 AGM.

− 2014 was a year of organisational change for the Group: First full year for the
new CFO; and stable Executive Director population but Group Executive and
the business radically changed due to organisation redesign.

− During the year, the AIP has been redesigned, in line with the policy, to

simplify the short term bonus arrangements and to further align with the
developing strategy. The AIP for 2015 will adopt an additive rather than a
multiplicative approach.

− Reviewed mechanisms to target retention of key staff including future

potential leaders.

− Aligned remuneration to support retention of key staff as part of the

Aeroflex integration.

Cobham plcAnnual Report and Accounts 2014www.cobham.com

The intended remuneration arrangements for the current year
and the key future issues to be addressed by the Remuneration
Committee
− Remuneration arrangements for 2015 have been developed in line with

the Remuneration Policy.

− Base salary increases for the CEO and CFO, to be effective from 1 March

2015, have been set at 5.0% and 6.8% respectively. These salary increases are
above the average increase provided to the wider workforce of c.3.0% but are
considered to be appropriate in the context of: the successful acquisition of
Aeroflex, which has resulted in an increase to the size and complexity of the
Group, and subsequently the scope of the two executive’s roles; the strategic
progress during the course of 2014; and the performance and contribution
of the two Executive Directors in driving the business forward.

− From 2015 onwards, the Bonus Co-investment Plan (BCP) is to be removed

from the CEO’s remuneration package in order to simplify the overall
remuneration package and align the CEO’s remuneration structure with the
rest of the senior management team. The CEO will therefore no longer be
entitled to receive a matching award on any bonus deferred. However, he
will still be required to defer 25% of any bonus earned into shares for a period
of three years. This will reduce the maximum opportunity of the CEO’s
remuneration package by 60% of salary.

− In recognition of the changes outlined above, the maximum annual bonus
opportunity for the CEO is to be increased from 120% of salary to 150%
of salary which remains within the Remuneration Policy approved by
shareholders at the 2014 AGM. This provides partial compensation for the
loss of opportunity under the BCP and also recognises the increase in the
size and complexity of the business following the largest acquisition in the
Company’s history. The annual bonus opportunity for the CFO is to be
increased from 100% of salary to 120% of salary to reflect the increase
in the size and complexity of the Group. The changes to the annual bonus
opportunities also reflect the continued contribution of the Executive
Directors to the business and the Board’s confidence in the executive’s ability
to build on the solid progress made during 2014 and deliver further growth,
strong financial performance and value to shareholders in 2015 and beyond.
− We have noted changes to the Code (e.g. on malus and clawback), which are

already in place in all incentive plans.

− We are proposing to do a review of our LTI arrangements during 2015 for

awards to be made in 2016.

A summary of any discretion applied by the Remuneration
Committee during the year
− There has been no discretion applied during the year.

Comment on any stakeholder engagement conducted during
the year
− No material consultation has been undertaken during the year but we do

consider shareholder views and feedback to be important and will consult
on any proposed changes to the LTI strategy during the year.

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.

Membership and attendance
Seven Remuneration Committee meetings were held during the year, attended as follows:

John Patterson1 (Chair)

Alison Wood2 (Chair)

Birgit Nørgaard3

Mark Ronald4

Unable to Attend

Attended

1 John retired as Chair of the Committee at the conclusion of the 2014 AGM.
2 Alison was appointed Chair to replace John as Chair of the Committee on 24 April 2014.
3 Birgit was appointed as an additional member of the Remuneration Committee on
24 April 2014.
4 Mark was recused between 24 April 2014 and 12 September 2014 from all business
of the Group during the consideration of and up to the conclusion of the Aeroflex
transaction.

Other attendees
Executive Vice President HR, Vice President Compensation and Benefits,
Deloitte LLP, and Company Secretary. The CEO and the Chairman of the
Board attend by invitation.

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.

Key issues and activities
Set out in the table below is a summary of matters considered by the
Committee during 2014:

Feb

Apr

Jul

Sep Oct Nov Dec

Committee only sessions with advisers

Compensations awards – previous year

Compensation awards – current year
Retention awards
LTI performance dashboards
Chairman remuneration
Group Executive objectives

Aeroflex remuneration
Transition plans
Retention strategy

Remuneration strategy
AIP review
LTI review

Other
Updates on corporate
governance developments
Terms of reference
Effectiveness of the Committee
Remuneration Policy and Annual Report
review
Approval of Executive Share Option
Scheme, Conditional Share Plan and
Sharesave – new rules
Committee work planning

Alison Wood
Remuneration Committee Chair
4 March 2015

Cobham plcAnnual Report and Accounts 2014www.cobham.com CORPORATE GOVERNANCE

Directors’ Remuneration Report continued

Introduction

Our remuneration structure
The Directors’ Remuneration Policy (the Policy) set out in our 2013 Annual Report and Accounts was approved by over 98% of our shareholders at our AGM held on
24 April 2014. The full Policy is available on the Company’s website. As context for the rest of this report, the main elements of the Policy, as well as how the policy
was implemented during the year, are summarised below:

The Annual Incentive Plan
(AIP) is designed to drive
and reward annual
performance against
financial and operational
KPIs as well as individual
objectives, which are
directly linked to the
Group’s strategic plan.

LTI – The Performance
Share Plans (PSP) and
The Bonus Co-Investment
Plan (BCP) are designed
to drive sustainable
profitable growth and align
Executive Directors with
shareholders’ interests.

Key elements

Key features

How it was implemented in 2014

Base salary

Reviewed annually with changes typically effective from 1 March.

Increases awarded on 1 March 2014:

Maximum salary increases typically in line with the outcomes of the
annual review and typically in line with the average increase for the
wider workforce.

CEO – 3%

CFO – 3%

Cash bonus

Maximum opportunity under the Policy is 150% of salary.

2014 awards:

For target performance, 50% of maximum bonus opportunity
will be received.

Measured over a one year performance period based on a
combination of financial and individual metrics.

Malus and clawback provisions are in place.

CEO – 120% of base pay opportunity

CFO – 100% of base pay opportunity

No payment has been made in relation to
the 2014 award as performance targets
were not met.

Deferred bonus

75% paid in cash and up to 25% mandatorily deferred into company
shares for a period.

Deferred 2014 AIP (payable early 2015):

Not applicable

Malus and clawback provisions are in place.

LTI – PSP

PSP allows for conditional share awards or nil-cost options up to 150%
of base salary may be granted annually.

Threshold level of vesting is 16.7% of maximum award.

As with matching shares, performance assessed over more than one
year, usually three years against key financial metrics.

Malus and clawback provisions are in place.

Matching shares – BCP

Up to an additional 25% of the annual bonus can be voluntarily
deferred into BCP.

Matching awards on up to 50% of bonus:

Maximum 1:1

Threshold 0.5:1

Performance assessed over more than one year, usually three years
against key financial metrics.

Malus and clawback provisions are in place.

Awards of 150% of salary were made in
2014 with performance conditions as set
out on page 61.

The BCP is awarded to the CEO only.
There has been no previously deferred
bonus under the BCP plan which vested
during the year.

Share Ownership
Guidelines

There is a requirement to retain a percentage of salary in shares, which
must be built up from shares vesting from executive incentive plans.

The CEO is required to retain 200% of annual
salary, and the CFO, 100%.

Aligning remuneration with strategy
We continue to take a disciplined approach to ensure that our remuneration
strategy supports the seven strategic priorities which are set out on pages
14 to 17. Our incentive framework is designed to underpin the delivery of
sustainable growth in earnings and shareholder value together with the
generation of free cash flow.

The 2014 AIP framework supports our priorities of driving continuous
improvement in operational excellence and programme execution with
inclusion of operational KPIs and by directly targeting growth in trading profit
and free cash flow. In addition, individual objectives were set as part of the
2014 AIP to specifically address the strategic development of the Group’s
portfolio, particularly seeking to promote M&A and leveraging our technology
across the Group to access more commercial end markets.

In 2015, the AIP will continue to focus on delivering superior operational
performance. As described on page 56, we have redesigned and simplified the
AIP framework and have increased the weighting given to achieving key strategic
execution measures whilst retaining the discipline of aligning with Group and
Sector operating financial metrics.

The LTI plans are designed to encourage the necessary actions and leadership
behaviours to promote investment in innovation, development of required
technical skills and leadership capabilities and accelerating the adoption of our
technologies to underpin the delivery of long term sustainable growth in
shareholder value.

Cobham plcAnnual Report and Accounts 2014www.cobham.com The annual report on remuneration

Single total figure of remuneration for each Executive Director
(audited information)
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.

£2,058

£1,196

Salary and fees
Taxable benefits
AIP
LTI
Pensions

£621

£435

£k

2500

2000

1500

1000

500

Taxable benefits

The taxable benefit figures are as follows:

Benefit
Car and private petrol allowance
Private medical insurance, disability
cover and life insurance
Expatriation allowance
Allowance to cover financial/tax
advice
Total

Bob Murphy
£k
19

Simon Nicholls
£k
18

15
122
18

174

2
–
–

Notes:
1. Bob Murphy’s employment terms and conditions allow for annual expatriation allowance.

Annual Incentive Plan

The 2014 AIP is designed to drive and reward annual performance against
financial and operational KPIs as well as individual objectives, which are directly
linked to the Group’s strategic plan. In setting the performance levels for the
2014 AIP, the Committee considered the budget/forecast approved by the Board
for the relevant year, and set threshold and maximum targets at appropriately
stretching levels either side of the budget.

2014

2013

Bob Murphy

2014

2013

Simon Nicholls

Details of the AIP measures, weightings and targets as well as performance against
each of the targets is provided in the table below:

Single total figure table

Salary
and fees

Taxable
benefits

AIP

LTI

Pensions

Total

Metric
Trading profit

£k

Bob Murphy

2014

2013

Simon Nicholls

2014

2013

669

680

410

267

174

294

–

280

–

104

228

687

108

–

621

435

125 1,196

117 2,058

Free cash flow
(before restructuring)

Weighting Performance
70% Threshold
Target
Maximum

30% Threshold
Target
Maximum

Actual
£m

The threshold level
of performance
was not met under
either metric and
so the bonus
payment was zero

Full year
£m
310
320
330

256
288
320

Notes:
1. Simon Nicholls was appointed 1 May 2013.

Additional disclosures in respect of the single total figure of
remuneration (audited information)
The Company has obtained written confirmation from each Director that they
have disclosed all other items in the nature of remuneration.

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 for tax purposes and these are the figures used in the above table.
Bob’s 2014 salary, effective from 1 March 2014, was US$1,103,400. Bob’s
salary in UK pounds was lower during 2014 as opposed to 2013 due to
changes in the exchange rate.

Simon Nicholls’ 2014 salary, effective from 1 March 2014, was £412,000
per annum.

Trading profit and cash flow metrics are adjusted for the impact of acquisitions
and disposals during the year. Performance conditions are set at fixed 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 at note
2 to the Group Financial Statements and in the KPI definitions on page 17.

For 2014, the AIP adopted a multiplicative formula whereby performance
against the financial metrics is converted into a Business Performance Factor
(BPF), which is then multiplied by an Individual Performance Factor (IPF) based
on an assessment of an individual’s achievement against personal objectives
to provide an overall bonus outcome.

As the threshold financial performance targets were not met, this resulted
in a zero BPF. As the bonus is multiplicative this results in a zero bonus
payment overall regardless of an individual’s performance against their
personal objectives.

As mentioned earlier, the structure of the bonus for 2015 has been redesigned
and further details are provided on page 64.

Cobham plcAnnual Report and Accounts 2014www.cobham.com CORPORATE GOVERNANCE
Directors’ Remuneration Report continued

Long term incentives

The PSP is designed to drive sustainable profitable growth in shareholder value
and align executive directors with shareholders’ interests.

The performance targets for the PSP were not met for the three performance
years ended on 31 December 2014 therefore no awards made in 2012 will result
in any payout and will lapse.

PSP awards vesting in 2014
The performance targets for the PSP awarded in 2012 are set out below:

Metric

TSR

Weighting

50%

Performance
Threshold
(Index)

EPS

50%

Maximum
(Index +10%)
Threshold (3%
per annum)

Maximum
(11% per
annum)

Award vesting at
that level %

Result
16.7% Performance
targets for the
TSR have not
been met

100%

16.7% Performance
targets for the
EPS have not
been met

100%

Notes:
1. EPS is defined in the KPI definitions on page 17.

TSR Peer Group
The companies in the TSR comparator group for awards granted in 2014 are:

BAE Systems
Esterline
Finnmeccanica
FLIR Systems
Harris
ITT Industries

L-3 Communications
Meggitt
Northrop Grumman
QinetiQ
Raytheon
Rockwell Collins

Smiths Group
Teledyne Technologies
Thales
Ultra Electronics

The LTI plans are an important element of our remuneration strategy with their
focus on driving the longer term strategic priorities and underpinning the
sustainable growth of the Group’s portfolio. We will be reviewing the design of
the LTI plans in 2015, seeking opportunities to both simplify the arrangements
and to ensure these continue to be effective in both driving shareholder value
and enabling Cobham to attract, retain and develop the leadership talent
essential to its future success.

Buy-out Awards vesting in 2014
Bob Murphy’s long term incentives figure covers the vesting of one award made
to him as a buy-out award to compensate for forfeited equity from his previous
employer as a result of leaving to join Cobham. This award, which was disclosed
in full in the 2012 Annual Report and Accounts, is set out below:

Awards vesting

Date of vest

(pence per share) Amount vested (£k)

72,305

18 December 2014

314.8

228

Valuation

Simon Nicholls’ long term incentives figure covers the vesting of one award made
to him as a buy-out award to compensate for forfeited equity from his previous
employer as a result of leaving to join Cobham. This award, which was disclosed
in full in the 2013 Annual Report and Accounts, is set out below:

Awards vesting

34,025

Date of vest

(pence per share) Amount vested (£k)

29 May 2014

316.0

108

Valuation

There has been no change in the composition of the TSR Peer Group during
the year.

All buy-out shares included above have been valued at market price achieved on
the date of vesting.

The resulting shares, after settlement of statutory deductions, have been retained
against the relevant Director’s share ownership guidelines.

TSR performance Cobham vs FTSE350

£
200

180

160

140

120

100

31 Dec
2008

31 Dec
2009

31 Dec
2010

31 Dec
2011

31 Dec
2012

31 Dec
2013

31 Dec
2014

Source: Kepler Associates

Cobham

FTSE350

The graph above illustrates the TSR performance (share price growth plus
dividends) of Cobham against the FTSE350 Index over the past six years.
The graph shows the value of £100 invested over the six year period ending
31 December 2014. The FTSE350 Index was chosen as it is a recognised
broad equity market index of which Cobham was a member during 2014
and is currently, as at 4 March 2015, ranked at 103rd.

Cobham plcAnnual Report and Accounts 2014www.cobham.com

Long-term incentives awarded during the financial year (audited information)
The following table sets out the awards made under the LTI plans to Executive Directors during the year.

Bob Murphy

Type of award

PSP (performance
share award)

Basis of which
award is made

Date of award

Face value of award
(No. of shares awarded)

Performance period

Performance conditions

150% of base salary

27 May 2014

£979,347
(319,912)

1 January 2014 to
31 December 2016

Equal split between
TSR, EPS and Cash
Conversion; see note
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
below giving details
of the performance
conditions.

BCP (performance
share award)

Mandatory retained,
earned AIP

27 May 2014

£44,530
(14,546)

1 January 2014 to
31 December 2016

Simon Nicholls

PSP, nil-cost options
(performance share
award)

150% of base salary

27 May 2014

£618,000
(201,875)

1 January 2014 to
31 December 2016

Notes:
1. All awards have been made in accordance with the relevant scheme rules.
2. 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.

Metric

TSR

Performance Conditions for the PSP awarded in 2014 are set out in
the table below:

Weighting

Performance

Award vesting at
that level %

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 noted below
and the contributions to each are shown in the table:
− A qualified 401k plan which has limits on the level of contribution which

33.3%

Threshold (Index)

16.7%

can be made to it; and

Maximum (Index +10%)

100%

EPS

33.3%

Threshold (3% per annum)

16.7%

− An executive retirement plan, non-qualifying.

£k
Contributions to 401k plan
Contributions to executive retirement plan

Maximum (10% per annum)

100%

Total

2014
15
110

125

2013
10
107

117

Cash conversion 33.3%

Threshold (over 90% per annum) 16.7%

Maximum (100% per annum)

100%

Notes:
1. EPS and Cash Conversion are defined in the KPI definitions on page 17.
2. The TSR Peer Group remains unchanged for the 2014 awards, see page 60.

Simon Nicholls’ pension figure is a combined amount of £40,000 to an executive
defined contribution plan and £42,500 paid as a cash allowance in lieu of
additional defined contribution arrangements. Together these payments
represent a rate of 20% of his base salary.

Cobham plcAnnual Report and Accounts 2014www.cobham.com CORPORATE GOVERNANCEDirectors’ Remuneration Report continued

Non-executive Directors (audited information)
The 2014 remuneration and current fees of the Non-executive Directors,
including the Chairman, are stated below:

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):

£k
John Devaney
(Chairman)
Mike Wareing
Jonathan Flint
Mike Hagee
Birgit Nørgaard
(from April 2014 )

Mark Ronald
Alison Wood
Marcus Beresford
(to April 2013)
John Patterson
(to April 2014)
Total

Full year additional fees

Actuals payable

Base
fee
270

Committee
fee
–

Senior
Independent
Director
–

2014
270

2013
270

55
55
55

55
55

–
–

10
2.5
5

2.5

2.5
10

–
–

10
–
–

–

–
–

75
58
65

62
63

–
22

72
38
65

–

63
58

23
68

654

657

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. Non-executive Directors do not have a permanent place of work specified in their

service contract, all reasonable and properly incurred expenses incurred in performance
of duties as Board members are reimbursed by the Company.

3. 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 £5k per annum in
respect of travelling time for the two Directors based in the US.

4. All of the above Directors are members of the Nomination Committee but do not

receive any additional fees.

No increase in Non-executive Director fees was awarded in 2014.

Total aggregate Directors’ fees for the year, including the Executive
Director fees as per the single figure table on page 59, amount to
£2,471,000 (2013: £3,944,000).

Statement of Directors’ shareholding and share interests
(audited information)
The interests of the Non-executive Directors and their families in ordinary
shares were:

Share awards
subject to
performance
conditions

Share awards
subject to
continued
employment

Unvested options
subject to
performance
awards

Award

Bob Murphy

PSP 2012

451,917

PSP 2013

453,924

BCP 2013

7,564

PSP 2014

319,912

BCP 2014

14,546

Total

1,247,863

Simon Nicholls

Buy-out award
2013

PSP 2013

PSP 2014

Deferred AIP
2014

Total

–

52,417

–

204,151

201,875

3,822

–

56,239

406,026

Share ownership requirements
Ownership guidelines require the Executive Directors to maintain ordinary shares.
These guidelines state that the CEO retain the value of at least two years’ salary,
and the CFO retain the value of at least one year’s salary. In addition, the CEO and
CFO are to retain a minimum of 50% of net vested PSP and BCP matching shares
until the relevant shareholding level is met. There is no time frame 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 retained the
required shares resulting from LTI vests and have complied with the guidelines in
this respect, but have yet to meet their targets due to the length of their tenure.

Shares held by Executive Directors as at 31 December 2014
against share ownership

John Devaney
Mike Wareing
Jonathan Flint
Mike Hagee
Birgit Nørgaard
John Patterson
Mark Ronald
Alison Wood

31.12.14
30,000
20,000
5,000
5,000
5,000
N/A
5,000
5,000

68%

1.1.14
30,000
20,000
5,000
5,000
N/A
5,000
5,000
5,000

Bob Murphy

2014

2013

Simon Nicholls

2014

2013

Nil

35%

17%

Non-executive Directors are required, within six months of election to the Board,
to acquire and hold a shareholding of 5,000 ordinary shares.

Shares held outright
Beneficially held shares
Target share ownership

100

125

150

175

200

Shares owned as percentage of Base Salary

Interests at 4 March 2015, 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 2014.

The market price of the ordinary shares as at 31 December 2014 was 323.9
pence per share and the closing price range during the year was 263.7 pence
to 327.8 pence.

Cobham plcAnnual Report and Accounts 2014www.cobham.com

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 2014, 7.8m (0.69%) and 5.8m (0.51%)
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)
There were no payments made to past Directors during the year.

Payments for loss of office (audited information)
There were no payments made for loss of office during the year.

Historic CEO total remuneration
The table below shows historic CEO total remuneration, calculated on the
same basis as that used in the single figure table on page 59.

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:

£m

800

700

600

500

400

300

200

100

608.8

566.0

204.8 230.8

108.3 96.6

96.9

88.0

2014

2013

2014

2013

2014

2013

2014

2013

Aggregate
employment
costs of Group
employees

Underlying
profit after tax

Dividends

Annual bonus
payout against
maximum
opportunity %
(£k)
0.0% (Nil)

Long term
incentive vesting
rates against
maximum
opportunity %
(£k)
N/A

CEO Single figure of
total remuneration
(£k)
1,196

The aggregate employment cost of Group employees is detailed at note 4 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 2. Dividends are shown at note 7. PV
relates to the amount of profit the Group spends on research and development,
refer to note 4.

2,058

34.3% (280)

753

48.5% (182)

N/A

1,283

45.0% (267)

58.0% (202)

1,916

92.5% (555)

85.0% (546)

1,478

33.5% (201)

87.0% (471)

1,496

93.0% (567) 100.0% (238)

Year
2014

2013

2012

2011

2010

2009

CEO
CEO3
Bob Murphy

CEO3
Bob Murphy

CEO3
Bob Murphy
CEO2
Andy Stevens

CEO2
Andy Stevens

CEO1
Allan Cook

Percentage change in remuneration of CEO
The following table shows the year on year change in respect of the three
remuneration elements shown in table for the CEO as compared to that of
UK employees generally:

Remuneration element
Salary
Benefits
AIP

CEO
3.0%
(41%)
(100%)

Average employee per capita figure
2.7%
(22%)
(78%)

The UK payroll has been chosen for comparison as this is the location of the
head office.

Cobham plcAnnual Report and Accounts 2014www.cobham.com CORPORATE GOVERNANCEAdvisers to the Remuneration Committee
The Committee received advice during the year from Deloitte LLP. The
Committee is satisfied that the advice they have 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 their
performance evaluation. Total fees for advice provided to the Committee during
the year amounted to £96,050 and were provided on a time/cost basis.

Adviser

Appointed by

Deloitte LLP

Remuneration
Committee in
November 2009

Services Provided
to the Committee

Remuneration
strategy

Incentive design

Market data

Other services
provided to the
Company

Tax and
consultancy on
the governance,
risk and assurance
initiative

Additional advice was received from the Executive Vice President
Human Resources, Vice President Compensation and Benefits and the
Company Secretary.

Whilst 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.

2014 voting at the Annual General Meeting
At the AGM held on 24 April 2014, shareholders approved the Directors’
Remuneration Policy and voted on the Directors’ Remuneration Report for
the year ended 31 December 2013. Below are the results in respect of those
resolutions, which required a simple majority (i.e. 50%) of the votes cast to
be in favour in order for the resolution to be passed. The votes ‘for’ include
discretionary votes given to the Chairman of the Board.

Directors’ Remuneration Policy

Votes for

21,552,175

98.36

Votes withheld 59,533

Directors’ Remuneration Report

Votes for

20,659,173

97.05

Votes withheld 689,305

Votes against

359,215

1.64

Votes against

622,446

2.95

Alison Wood
Remuneration Committee Chair
4 March 2015

Directors’ Remuneration Report continued

Statement of implementation of remuneration policy in the
current financial year
Set out below is an explanation of the way the approved policy will be
implemented in the current year.

Element of
Directors'
Remuneration
Policy

Base Pay

Other benefits/
retirement
benefits

AIP

BCP

PSP

Change

Rationale for any change

Current salaries for the CEO
and the CFO, effective from
1 March 2015, are £742,665
(US$1,158,600) and £440,000
respectively.

These represent a 5% increase
for the CEO and a 6.8%
increase for the CFO. These
above average increases are in
recognition of the increase in
the size and complexity of the
Group, and subsequently the
increase in scope of the two
executive’s roles and their
continued strategic progress
of the business.

No change.

Not applicable.

The maximum opportunity
for the CEO has increased
from 120% of salary to 150%
of salary. The maximum
opportunity for the CFO has
increased from 100% of salary
to 120% of salary.

The maximum bonus
opportunity for the CEO
has been increased to
partially compensate him
for the removal of the BCP
(see below).

The increase for the CEO
and CFO also recognises
the increase in the size and
complexity of the Group
following the acquisition of
Aeroflex and the impact this
has had on the two executive
roles. In addition, the increases
reflect the Board’s confidence
in the executive’s ability to
build on the progress made
during 2014 and deliver
further growth, strong
financial performance
and value to shareholders
in 2015 and beyond.

The BCP has been removed
for the CEO to simplify
remuneration arrangements
and align his remuneration
structure with the rest of the
executive team.

Not applicable.

The structure of the plan has
also been redesigned and will
be operated on an additive
basis. Awards will be assessed
against the following metrics,
each with a 25% weighting:
− Group Revenue
− Underlying Operating Profit
− Group Cash Conversion
− Key strategic measures linked

to personal objectives

As in 2014, 25% of any bonus
earned will be required to be
deferred into shares for a
period of three years.

Removed from the
remuneration structure.

No change. Awards to the
value of 150% of salary will
be made in March 2015.
Performance will be equally
weighted between EPS
growth, relative TSR against
a comparator group, see
page 60, and cash conversion.

Non-executive Director fees are reviewed annually. There has been no change
to Non-executive Director fees during the year.

Cobham plcAnnual Report and Accounts 2014www.cobham.com 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 2014.
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.

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 is the holder. None of the
ordinary shares carry any special rights with regard to control of the Company.

Dividends
An interim dividend of 2.904 pence per ordinary share of 2.50 pence each in the
capital of the Company (ordinary shares) (2013: 2.64 pence) was paid in November
2014. The Directors are recommending a final dividend of 7.746 pence per ordinary
share (2013: 7.04 pence) payable on 29 May 2015 to ordinary shareholders on the
register as at 1 May 2015, making a total ordinary dividend for the year of 10.65
pence (2013: 9.68 pence). Details of the total dividend paid out is covered in note 7.

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 are or were 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 page 62.

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.

At the AGM held on 24 April 2014, the Company was authorised to purchase
up to 107,857,590 ordinary shares. This authority will expire at the conclusion
of the 2015 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.

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. On 20 May 2014, 60,000,000 ordinary shares of the Company were
created as the result of a private placing.

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.

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.

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 Company following
a takeover bid. Such contractual arrangements include supply of equipment,
goods and services to third parties, including 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 18 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 under the LTI arrangements
appears within the remuneration policy table available on the Company’s website.

Employee share schemes – rights of control
If required to do so by the Company, the trustee of the Cobham Share
Incentive Plan (SIP) will, on receipt of notice from the Company of any
offer, compromise arrangement or scheme which affects shares held in the
SIP, 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 SIP in respect of
which it has received no directions nor will the trustee vote in respect of any
shares which are unallocated under the SIP.

The trustees of the Employee Benefit Trust (which, as at 31 December 2014,
hold 6,279,557 2.50 pence 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.

CORPORATE GOVERNANCECobham plcAnnual Report and Accounts 2014www.cobham.com Directors’ Report continued

Greenhouse gas emissions
The majority of Cobham’s total greenhouse gas (GHG) emissions (86%) come
from its aviation activity (figure 1), primarily being from the aviation services
business. Growth in this business inflates Cobham’s scope 1 and 3 emissions
which yields an increase in Cobham’s absolute emissions (figure 1) and emissions
intensity (figure 2).

Figure 3 – GHG emissions: Aeroflex vs. Legacy Cobham (tCO2e %)

Scope 1

Scope 2

Aeroflex

Legacy Cobham

Figure 1 – 2014 GHG emissions (tCO2e %)

Aeroflex

Legacy Cobham

Scope 1 15.3%
Aviation 87%
Non-aviation 13%

Scope 2 8.4%
Non-aviation 100%
Aviation 0%

Year

Aviation
tCO2e

Scope 1

2014*

81,165

Scope 2

2013

77,066

2014*

2013

–

Scope 3

2014

443,689

2013

384,860

Total

524,854

–

* Included in the scope of external assurance.

Non-aviation
tCO2e

12,167

14,277

51,532

100

51,532

48,276

100

22,161

5 465,850

21,640

85,860

14 610,714

Figure 2 – Emissions intensity (tCO2e/£m)

Scope 1

2014

2013

Scope 2

2014

2013

Scope 3

2014

2013

Scope 1

Scope 2

Scope 3

Aviation

Non-aviation

Aviation

Non-aviation

Aviation

Non-aviation

100

150

200

250

300

Year

2014
2013
2014
2013
2014
2013

Aviation

Non-aviation

% Total Change

44
43
–
–
240
216

7
5
28
27
12
12

Cobham’s scope 2 emissions, generated from electricity consumption, increased
by 4% despite implemented energy efficiency measures rolled out during 2014.
The increase relates to the recent acquisition of Aeroflex whose Q4 scope 2
emissions accounted for 17% of the Group’s scope 2 emissions for the year
(figure 3). This is expected as the nature of the Aeroflex business is energy
intensive.

Excluding Aeroflex, total electricity consumption decreased by 13%. Cobham’s
target of reducing its energy consumption per £m by 10% year on year was
narrowly missed with a reduction of 8%. 2015 will therefore become a new
baseline for energy targets.
66

Scope 3 76.3%
Non-aviation 5%
Aviation 95%

Scope 3

Aeroflex

Legacy Cobham

100

Aeroflex

Legacy Cobham (incl. Aviation)

Scope 1*

Scope 2*

Scope 3

Total
tCO2e

93,332

Total

tCO2e

1,114

1.2

9,002

17.5

320

10,436

0.1

1.7

tCO2e

92,218

42,530

465,530

600,278

98.8

82.5

99.9

98.3

* Included in the scope of external assurance.

Definitions
Scope 1 comprises direct emissions from Cobham owned and controlled 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-Cobham owned and
controlled plant and equipment, including aviation fuel and business travel
(train, air and car).

Methodology and data verification
Cobham collects data annually, as per our financial year, on greenhouse gas
emissions from its wholly-owned operational subsidiaries. Cobham uses the
World Business Council for Sustainable Development, World Resources Institute
Greenhouse Gas Protocol method as of 31 December 2014 and the Carbon
Disclosure Standards Board 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.
Further information is provided at www.cobhamsustainability.com.

100% of Cobham’s wholly-owned operations have been reviewed internally to
identify omissions and significant variations from the prior year.

Data assurance
As per last year, we engaged KPMG LLP to undertake a limited assurance
engagement, reporting to Cobham plc, using the assurance standards ISAE 3000
and ISAE 3410 over selected information included in The Cobham Performance
Summary 2014 report for the year ended 31 December 2014, available at
www.cobhamsustainability.com/at-a-glance/downloads.aspx. Some of
that selected information has been included in this report, identified with “*”.
KPMG LLP’s full assurance statement (as well as their 2013 assurance statement) is
available at www.cobhamsustainability.com/at-a-glance/downloads.
aspx, and they have provided an unqualified opinion on the selected information
within their scope of work. 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 Head Office. A summary of the work they performed is included within
their assurance opinion.

Cobham plcAnnual Report and Accounts 2014www.cobham.com Compliance with Listing Rule 9.8.4 R
The table below gives the location of information required to be included in the
Annual Report and Accounts.

Information

Response

Amount of interest capitalised and amount
and treatment of tax relief.

Not applicable:
no interest capitalised.

Information required by Listing Rule 9.2.18
regarding the prior publication of unaudited
financial information.
Rule deleted.

Not applicable.

Listing Rule

LR 9.8.4 (1)

LR 9.8.4 (2)

LR 9.8.4 (3)

LR 9.8.4 (4)

LR 9.8.4 (5)

LR 9.8.4 (6)

LR 9.8.4 (7)

LR 9.8.4 (8)

LR 9.8.4 (9)

LR 9.8.4 (10)

LR 9.8.4 (11)

LR 9.8.4 (12)

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 information in the context of KPMG LLP’s
full limited assurance statement and the reporting criteria as set out in the
Cobham reporting guidelines available at www.cobhamsustainability.com/
at-a-glance/downloads.aspx.

Further detail on Cobham’s CR&S approach, objectives and performance is also
available on page 43.

Major interests in shares
As at 31 December 2014, the Company had been notified of the following
interests in the ordinary shares:

Schroders plc

Aberdeen Asset Managers Limited

Number of shares
at the date of
notification

47,347,952

75,769,343

Massachusetts Financial Services Company

114,757,138

Percentage at date
of notification

4.159

7.020

10.079

Since the year end and up to 4 March 2015, 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 15, 22 and 24 to the Group Financial Statements and note 10 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
The Group is committed to equal opportunities for all its employees. The Group
aims to ensure the workplace is free from discrimination. Recruitment, selection
and career development are based on competence and job requirements,
irrespective of age, race, gender, 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 remain in employment,
wherever practicable.

Research and development
The Group continues to invest in the important area of research and development,
further details can be found on page 29. During the year the Group expended
£96.9m (2013 £88.0m) on non-customer funded research and development.

Events after the balance sheet date
There are no significant post balance sheet events to report.

Political donations and expenditure
No contributions were made to political organisations during the current
or prior year.

Annual General Meeting
The Company’s AGM will be held at 10 a.m. on Thursday, 23 April 2015
at the offices of Allen & Overy LLP, One Bishops Square, London, E1 6AD, UK.

The Company arranges for the Notice of AGM and related papers to be sent
to shareholders at least 20 working days before the meeting.

Long-term incentive schemes where only
participant is a director or prospective
director of the company and the
arrangement is established specifically
to facilitate the recruitment of retention
of the director.
Arrangements under which a director has
waived or agreed to waive emoluments
from the company or any subsidiary
undertaking.
Agreements with a director to waive
future emoluments.

Details of shares allotted during the period
under review which have been allotted to
existing shareholders in proportion to their
shareholdings and which have not been
specifically authorised by the company’s
shareholders.
Shares allotted in major subsidiary
undertakings during the period under
review which have not been allotted
to existing shareholders in proportion
to their shareholdings.
Details of any parent undertaking’s
participation in any placing during the
period under review.
Details of any contract of significance
(as defined by the Listing Rules) existing
between Cobham, or any of its subsidiaries,
in which either a director is materially
interested or one of the parties is a
controlling shareholder of Cobham.
Details of any contract for the provision
of services to Cobham, or any of its
subsidiaries, by a controlling shareholder.
Details of any arrangement under which
a shareholder has waived or agreed to
waive any dividends.

LR 9.8.4 (13)

LR 9.8.4 (14)

Details of any arrangement under
which a shareholder has agreed to
waive future dividends.
Agreements with any controlling
shareholder.

By order of the Board

Lyn Colloff
Company Secretary
4 March 2015

Not applicable: no
such arrangement
was entered into during
the reporting period.

Not applicable: no such
arrangement exists.

Not applicable: no such
agreement exists.

On 20 May 2014,
60,000,000 ordinary
shares of the Company
were created as the result
of a private placing.

Not applicable: no
individual subsidiary
is a major subsidiary
undertaking as defined
by the Listing Rules.
Not applicable: Cobham
does not have a parent
undertaking.
Not applicable: no
such contract of
significance exists.

Not applicable: Cobham
does not have a
controlling shareholder.
The trustees of the
employee benefit trust
have elected to waive
dividends, except in
circumstances where they
may be holding shares
beneficially owned by
participants.
As noted above.

Not applicable: Cobham
does not have a
controlling shareholder.

CORPORATE GOVERNANCECobham plcAnnual Report and Accounts 2014www.cobham.com Statement of Directors’ Responsibility

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 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 Group and 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. 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.

Directors’ Responsibility Statement
Each of the Directors, whose names and functions are listed on pages 44 and 45,
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:
− So far as the Director is aware, there is no relevant audit information

of which the Group’s auditors were unaware; and

− 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
4 March 2015 and signed on its behalf by:

Bob Murphy
Chief Executive Officer
4 March 2015

Simon Nicholls
Chief Financial Officer
4 March 2015

Cobham plcAnnual Report and Accounts 2014www.cobham.com Compliance with the UK Corporate Governance Code

A. Leadership
A1. The Board’s role
In 2014, the Board met nine times, 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 also sets the Group’s
risk appetite, and monitors the Company’s risk management processes. 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
on page 48.

A2. A clear division of responsibilities
The Board’s policy is that the roles of 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 agendas for meetings, manages the meeting timetable
and facilitates open and constructive dialogue during the meetings.

A4. Role of the Non-executive Directors
The Board has appointed a Senior Independent Director to provide a sounding
board for the Chairman and to serve as an intermediary for the other Directors
where necessary. The Senior Independent Director is available to shareholders,
should they have concerns which contact through the normal channels of
communication has failed to resolve.

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 Board currently consists of ten individuals, the Chairman, two Executive
Directors, and seven independent Non-executive Directors. The composition
of the Board is reviewed regularly by the Nomination Committee to ensure
that there is an appropriate mix of skills, and a range of diverse experience.
Board members’ biographies are provided on pages 44 and 45 and identify
the experience each Director brings to the Board. A table identifying the
skills and experience of the Board members may also be found on page 51.
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.

B2. Board appointments
The appointment of new directors to the Board is led by the Nomination
Committee. The Nomination Committee’s Terms of Reference, as published
on the Company website, document their responsibility regarding Board
appointments. The Committee consists of all the Non-executive Directors
and the Chairman. Further details of the appointments undertaken during
the year and succession planning, including the Board’s policy on diversity,
including gender, can be found on page 51.

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 51.

B5. Provision of information and support
The Chairman, in conjunction with the Company Secretary, ensures that all
Board members receive accurate and timely information. All the Directors have
access to independent professional advice, at the Company’s expense, where
the Directors judge it necessary to discharge their responsibilities.

B6. Board and Committee performance evaluation
The Board and the Board Committees undertook an internal evaluation in 2014.
Details of the process undertaken, and a table of actions instigated by this
evaluation are included on page 48. The Senior Independent Director also held a
meeting with the Non-executives in the absence of the Chairman to appraise the
Chairman’s performance.

B7. Directors re-election
All directors were subject to shareholder election or re-election, as appropriate,
at the AGM.

C. Accountability
C1. Financial and business reporting
The statement of the Director’s responsibilities is set out on page 68, and the
independent auditor’s report is on page 70. 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 conducts a robust assessment
of the principal risks, along with an annual review of the effectiveness of the
Company’s risk management, and internal control systems. The activities of both
the Audit and Risk Committee, which assist the Board with its responsibilities in
relation to risk management, reporting and assurance, are set out on pages 34
and 35.

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 is provided in the Audit Committee
Report on pages 52 to 55. The Terms of Reference for the Audit Committee are
reviewed annually and are available on the Company website.

D. Remuneration
D1. Levels and components of remuneration
The Board believes that the Group’s remuneration policy is appropriately
designed to promote the long-term success of the Company, while enabling
the Group to attract, retain and motivate the executive talent required for
the delivery of its business strategy. For further information, see the Directors’
Remuneration Report, and summarised Remuneration Policy, on pages 56 to 64.

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 is of paramount
importance to the continued success of the Company. The Company maintains
a relationship with shareholders through a series of road shows completed
through the year, which are usually attended by the Chief Executive Officer and
the Chief Financial Officer. In 2014, the Chairman also invited the largest of the
Company’s shareholders to meet with him independently. Further details can be
found in the Corporate Governance Report on page 49.

E2 Constructive use of general meetings
The Board values all general meetings as an important opportunity to engage
with investors. Attendees at general meetings have the opportunity to ask
questions to the Board and to speak to individual Directors following the formal
business of the meeting.

CORPORATE GOVERNANCECobham plcAnnual Report and Accounts 2014www.cobham.com Independent Auditors’ report to the members of Cobham plc

Report on the Group Financial Statements

Our opinion
In our opinion, Cobham plc’s Group Financial Statements
(the financial statements):
– Give a true and fair view of the state of the Group’s affairs as
at 31 December 2014 and of its 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.

What we have audited
Cobham plc’s financial statements comprise:
– The Consolidated Balance Sheet as at 31 December 2014;
– The Consolidated Income Statement and Consolidated Statement

of Comprehensive Income for the year then ended;

– The Consolidated Cash Flow Statement for the year then ended;
– The Consolidated Statement of Changes in Equity 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.

Certain required disclosures have been presented elsewhere in the Annual
Report and Accounts (the Annual Report), rather than in the notes to the
financial statements. These are cross-referenced from the financial statements
and are identified as audited. The financial reporting framework that has been
applied in the preparation of the financial statements is applicable law and
IFRSs as adopted by the European Union.

Our audit approach
Overview

Materiality:
– Overall Group materiality: £13m which represents 5% of underlying profit before taxation.

Materiality

Audit scope:
– We conducted audit work in five countries covering 36 reporting units. We paid particular attention to the

material Aeroflex acquisition which took place in the year;

– Taken together, the reporting units where we performed our audit work accounted for 76% of Group revenues

Audit scope

Areas of Focus

and 73% of Group underlying profit before taxation.

Areas of focus:
– Revenue and profit recognition on contracts;
– Goodwill and intangible assets impairment assessment;
– Accounting for the Aeroflex acquisition;
– Inventory obsolescence provisions;
– Accounting for uncertain tax positions; and
– Business restructuring costs.

The scope of our audit and our areas of focus
We conducted our audit in accordance with International Standards
on Auditing (UK and Ireland) (ISAs (UK and Ireland)).

We designed our audit by determining materiality and assessing the risks
of material misstatement in the financial statements. In particular, we looked
at where the Directors made subjective judgements, for example in respect
of significant accounting estimates that involved making assumptions and
considering future events that are inherently uncertain. As in all of our audits,
we also addressed the risk of management override of internal controls,
including evaluating whether there was evidence of bias by the Directors
that represented a risk of material misstatement due to fraud.

The risks of material misstatement that had the greatest effect on our audit,
including the allocation of our resources and effort, are identified as areas
of focus in the table below. We have also set out how we tailored our audit
to address these specific areas in order to provide an opinion on the financial
statements as a whole, and any comments we make on the results of our
procedures should be read in this context. This is not a complete list of all
risks identified by our audit.

Cobham plcAnnual Report and Accounts 2014www.cobham.com
Area of focus

How our audit addressed the area of focus

Revenue and profit recognition on contracts
Refer to page 54 (Audit Committee Report) and page 81 (note 1, Accounting
policies, management judgement and estimation uncertainty – contract risk
and programme execution).

For revenue from the sale of goods, we focused on cut-off around
the year end because material revenue transactions can occur close
to that date.

The Group also has a number of significant contracts which span more than
one accounting period. In particular, we focused on complex development
and production contracts on aerial refuelling aircraft (including KC-46, KC-390,
A400M and A330MRTT). 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. Costs incurred can significantly exceed amounts estimated at
inception as a result of material enhancements to the specifications originally
assumed under the contracts. For these contracts, we focused on:
– The recognition of significant revenue milestones which often involve

judgement surrounding the achievement of those milestones;

– The amount of revenue assumed as recoverable from customer claims

which are subject to commercial negotiation;

– Whether contracts with the same customer should be accounted for as

separate or linked;

– Whether the profit recognised on revenue in the year is appropriate; and
– Whether associated assets held on the balance sheet (work in progress

and accrued income) are recoverable or whether a contract loss provision
should be recorded.

We tested the recognition of revenue transactions close to the period
end to establish whether they were recorded in the correct period.
This included agreement to signed goods despatch notes or authorised
milestone documentation, with customer acceptance where appropriate.
No material misstatements were identified.

We assessed the basis of profit recognition on the Group’s significant contracts,
together with whether it is appropriate to account for them as separate or linked
contracts. We evaluated the accounting in the context of the Group accounting
policies and contract terms. We found the accounting, in all material respects,
to be in accordance with the policies and contract terms.

We examined the assumptions behind estimated costs to complete, challenging
the reasonableness of these in light of supporting evidence such as purchase orders
for material or subcontractor costs and engineering estimates for labour hours.
We found the assumptions to be supported by the evidence we examined.

We agreed total contracted revenue to the original signed customer contracts
and approved change orders. We evaluated the reasonableness of estimated
revenue for customer claims submitted to recover additional costs incurred,
including considering correspondence with the customer and legal advice
received where appropriate.

We assessed the contract loss provisions recorded through a combination
of the procedures above in respect of the overall margin anticipated on the
contract and validating that fixed overheads had been appropriately excluded.

No material misstatements were identified.

Goodwill and intangible assets impairment assessments
Refer to page 54 (Audit Committee Report), page 81 (note 1, Accounting
policies, management judgement and estimation uncertainty – impairment
of goodwill) and pages 93 to 94 (note 10, Intangible assets).

Management conduct an annual impairment test of goodwill balances and
intangibles are reviewed whenever there is an indicator that an asset may be
impaired. The Group has goodwill of £1,220m and intangibles of £777m on its
Balance Sheet. Of this, the majority relates to businesses that have substantial
headroom through a combination of growth since acquisition and the
amortisation of intangibles acquired which has reduced the carrying value being
considered for impairment. The risk that we focused on in the audit was whether
the remaining businesses that have less substantial headroom could be impaired.

We evaluated the Directors’ future cash flow forecasts and tested the underlying
value in use calculations. We compared the Directors’ forecast to the latest Board
approved five year strategic plan and no inconsistencies were noted.

We challenged:
– The Directors’ key assumptions for long term growth rates in the forecasts

by comparing them to economic forecasts; and

– The discount rate by assessing the cost of capital for the Company and

comparable organisations.

No material inconsistencies were identified between these specific assumptions
and external data examined.

In particular, following the goodwill impairment charge recognised in 2013,
we focused on the estimated values in use of the Tactical Communications and
Surveillance (TCS) businesses to assess whether the remaining goodwill balance
of £45m is recoverable. As TCS was written down to its recoverable value in 2013,
there is now minimal headroom such that any reduction in the future estimated
cash flows could result in further impairment.

We performed sensitivity analysis around the key assumptions above to ascertain
the extent of change in those assumptions that either individually or collectively
would be required for goodwill or intangibles to be impaired. In particular this
focused on the growth rates assumed in the first five years of the cash flow
forecasts and included a comparison between the 2015 forecast cash flow
and 2014 actual results. No material misstatements were identified.

For TCS, the key assumption we focused on was the anticipated recovery of sales
to the US market (the speed at which it would return to the pre-recession levels).
We also considered the movement between the 2014 actual results and the
forecast 2015 cash flows and we obtained explanations for the movements
and agreed to supporting documentation, such as the closing order book.
No material issues were identified in this respect.

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2014www.cobham.com

Independent Auditors’ report to the members of Cobham plc

Area of focus

How our audit addressed the area of focus

Accounting for the Aeroflex acquisition
Refer to page 54 (Audit Committee Report), page 81 (note 1, Accounting
policies, management judgement and estimation uncertainty – business
combinations) and pages 113 to 114 (note 28, Business combinations).

The Group completed the acquisition of Aeroflex in September 2014 at a
cost of £573m. The cost of the acquisition is accounted for by determining
the fair value of assets and liabilities acquired, including intangible assets,
with the balance being allocated to goodwill. This acquisition resulted in
the recognition of goodwill of £387m and intangible assets of £517m in
the Balance Sheet. The fair values of net assets acquired are provisional
and subject to potential adjustment

The Directors determined that there were five separate business streams
acquired, valuing each separately and then allocating the purchase price
between them.

The process of determining the value of intangible assets requires the use
of multiple estimates. The risk we focused on during the audit is whether
the valuation of the intangible assets was misstated.
In particular, we focused on:
– The allocation of the purchase price between the five business

streams acquired;

– The opening balance sheet, considering fair value adjustments recognised;
– The identification of intangibles;
– The cash flow forecasts and discount rate used in the intangibles’

valuation process; and

– The useful economic lives used in amortising intangibles.

Inventory obsolescence provisions
Refer to page 54 (Audit Committee Report), page 81 (note 1, Accounting
policies, management judgement and estimation uncertainty – inventory
provisions) and page 96 (note 14, Inventories).

The nature of much of the Group’s business means that the products developed
can become technically obsolete. It is also necessary to hold additional spare
parts in order to support key customers and programmes should the products
require replacement or servicing. The Group had gross inventory of £480m and
provisions for obsolescence of £48m on its Balance Sheet.

We focused on this area because inventory provisions include subjective
estimates and are influenced by assumptions concerning future revenue.
In addition, the methods used for this estimate vary between reporting
units depending on the nature of the business and inventory.

We tested the methodology and mechanics of the underlying models used to
calculate the acquisition related balances, including intangible assets and other fair
value adjustments to assets and liabilities acquired. This included a comparison
of the forecasts used in these calculations to the projections used by the Board
before approving the acquisition. No material inconsistencies were identified.

We have utilised our industry knowledge to compare the intangibles assets
identified by management and consider whether there were any other types
of intangibles we would expect to see. We did not identify any material omissions.

We examined the key assumptions used in the calculation of the value allocated
to intangible assets including cash flow forecasts and discount rates, challenging
the reasonableness of these in light of supporting evidence. The main assumptions
challenged were:
– Discount rate – we calculated our own independent rate using both internal
rate of return and Capital Asset Pricing Model (CAPM) methodologies and
found that management’s rate was within an acceptable range;

– Technology rates – we assessed management’s rate against independent
expectations based on the margins in each business and the relevant
PV spend with no material differences identified; and

– Customer retention and technology decay rates – we have determined that
assumptions within the model were reasonable through discussions with
operational staff within the businesses.

We assessed the useful economic lives determined by management through
comparison to the life cycle of the asset under consideration and benchmarking
against similar acquisitions. No material inconsistencies were identified.

We visited the three largest sites acquired to perform year end audit procedures,
focusing in particular on inventory existence and valuation. No material
misstatements were identified.

We inspected the predecessor auditor working papers for the five largest
components of the acquired group and examined the reconciliation from
US GAAP to IFRSs performed by management to provide support for the
opening balance sheet.

Based on the information available to date, no material misstatements
were identified.

We assessed the process, methods and assumptions used to develop the
provision for slow moving, excess or obsolete items. This included comparing
management’s calculations for consistency against those used in the prior year
and considering whether there was any indication of management bias such
as manual overrides to the established methodology. Manual overrides are
typically in respect of spares held for the servicing of products on aircraft
which have a long service life. Where overrides were material, we considered
the appropriateness of management’s judgement based on historical usage
and future usage expectations.

We tested the reliability of the underlying data used by management to
calculate the inventory obsolescence provisions, typically an aged inventory
analysis showing last movements, by re-performing the ageing calculation
driven by the system. We also tested the accuracy of the resultant calculation
by assessing the calculation criteria and recalculating the provision for a sample
of products.

No material misstatements were identified.

Cobham plcAnnual Report and Accounts 2014www.cobham.com Area of focus

How our audit addressed the area of focus

Accounting for uncertain tax positions
Refer to page 54 (Audit Committee Report), page 81 (note 1, Accounting
policies, management judgement and estimation uncertainty – taxation).

The Group has a wide geographic footprint and is subject to tax laws in a
number of jurisdictions. The Group has a number of open tax enquiries and
has recognised provisions against uncertain tax positions, the valuation of
which is a highly judgemental area. Where tax positions are not settled with
the tax authorities, the Directors take into account precedent and the advice
of experts.

Business restructuring costs
Refer to page 54 (Audit Committee Report), page 87 (note 2, Underlying
measures).

The financial statements include business restructuring costs of £52m which
are disclosed as non-underlying and are excluded from underlying operating
profit. We focused on this area because IFRSs do not define which items
may be excluded from underlying operating profit and it therefore requires
judgement around the justification for such exclusion. Consistency in identifying
and disclosing items to be excluded from underlying operating profit is important
to maintain comparability of the results year on year.

In addition, for reporting units where closure and integration had been
announced by the year end, such as the closure of Lowell (within Cobham
Advanced Electronic Solutions), we focused on the provisions and asset write
downs recognised to ensure that they were complete and not misstated.

We discussed with management the known uncertain tax positions and, where
appropriate, read communications from taxation authorities on open tax enquiries.

We assessed the adequacy of the Directors’ taxation provisions by considering
factors such as the risk profile of each matter and whether the provision addresses
possible penalties and interest. We met with senior management and challenged
the judgements and evaluated the appropriateness of the provisions made.

We formed our own views on the key judgements with respect to open tax
positions and found the judgements made by management were reasonable.

We tested the presentation of the business restructuring costs as non-underlying
by assessing whether the classification was in line with the Group’s accounting
policy on such items on page 82 of the financial statements. This included testing
the costs incurred to supporting evidence such as external purchase invoices and
redundancy agreements. We also assessed the appropriateness of this policy and
no material issues were identified.

For reporting units which were in the process of integrating at the year end,
we tested the associated closure costs to supporting evidence. Redundancy
provisions were assessed against communications with employees and payroll
data. Onerous lease provisions were compared to rentals payable under the
original lease agreements. No material misstatements were identified.

How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed enough work
to be able to give an opinion on the financial statements as a whole, taking into
account the geographic structure of the Group, the accounting processes and
controls, and the industry in which the Group operates.

Where subsidiary audit teams performed work at the reporting unit level
on behalf of the Group team, this work was performed to lower materiality
levels appropriate to the individual units. These materiality levels ranged
from £0.7m to £5m.

The Group is structured along four reported Sectors, being Advanced Electronic
Solutions, Aviation Services, Communications and Connectivity, and Mission
Systems. The Group Financial Statements are a consolidation of 75 reporting units
within these Sectors, comprising the Group’s operating businesses and centralised
functions. Accordingly, of the Group’s 75 reporting units, we identified 17 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 (typically including at least revenue and inventory) were
performed at a further 19 reporting units. Audit procedures were performed at all
principal manufacturing locations, all significant Aviation Services reporting units
and at the three largest components of the Aeroflex acquisition in the year.

The reporting units in scope covered 73% of the Group’s underlying profit
before taxation and 76% of the Group’s revenue. This, together with additional
procedures performed at Group level, gave us the evidence we needed for our
opinion on the financial statements as a whole. For reporting units which were
not in scope, we performed a high level risk analytic on each to understand key
balances and transactions in the year and performed additional procedures on
any unusual balances identified.

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 evidence had been obtained as a basis for
our opinion on the financial statements as a whole. This included attending
the audit close meetings at which the outcome of each subsidiary audit was
discussed and visiting a number of larger subsidiary audit teams during their
fieldwork including the two key reporting units with the aerial refuelling
development and production contracts.

Materiality
The scope of our audit was influenced by our application of materiality.
We set certain quantitative thresholds for materiality. These, together with
qualitative considerations, helped us to determine the scope of our audit
and 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 financial statements as a whole as follows:

Overall Group materiality

How we determined it

£13m (2013: £14m).
5% of underlying profit before taxation.

Rationale for benchmark
applied

Underlying profit before taxation is defined in
the Annual Report on page 82. We believe that
underlying profit before taxation represents an
appropriate metric for assessing the performance
of the Group and provides us with a consistent
year on year basis for determining materiality.
It is the amount reported by management both
internally and externally to the market. We also
considered our overall Group materiality in the
context of the Group’s revenue, noting that it
represents less than 0.8%.

We agreed with the Audit Committee that we would report to them
misstatements identified during our audit above £0.5m (2013: £0.5m)
as well as misstatements below that amount that, in our view, warranted
reporting for qualitative reasons.

Going concern
Under the Listing Rules we are required to review the Directors’ statement,
set out on page 33, 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 financial
statements using the going concern basis of accounting. The going concern

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2014www.cobham.com
Independent Auditors’ report to the members of Cobham plc

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 68, the Directors are responsible for the preparation of the
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 financial statements
in accordance with applicable law and ISAs (UK and 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 Parent 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.

What an audit of financial statements involves
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.

We primarily focus 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. We test and examine
information, using sampling and other auditing techniques, to the extent we
consider necessary to provide a reasonable basis for us to draw conclusions.
We obtain audit evidence through testing the effectiveness of controls,
substantive procedures or a combination of both.

In addition, we read all the financial and non-financial information in the
Annual Report to identify material inconsistencies with the audited 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.

Other matter
We have reported separately on the Parent Company Financial Statements of
Cobham plc for the year ended 31 December 2014 and on the information in
the Directors’ Remuneration Report that is described as having been audited.

Pauline Campbell
(Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
4 March 2015

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.

Other required reporting

Consistency of other information
Companies Act 2006 opinions
In our opinion:
– The information given in the Strategic Report and the Directors’ Report
for the financial year for which the financial statements are prepared
is consistent with the financial statements; and

– The information given in the Corporate Governance Statement
set out on pages 46 to 55 with respect to internal control and risk
management systems and about share capital structures is consistent
with the financial statements.

ISAs (UK and Ireland) reporting
Under ISAs (UK and 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 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

– Otherwise misleading.

The statement given by the Directors on page 46, in
accordance with provision C.1.1 of the UK Corporate
Governance Code (the Code), 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 is materially inconsistent with our
knowledge of the Group acquired in the course of
performing our audit.

We have no
exceptions to
report arising from
this responsibility.

The section of the Annual Report on page 53, as required
by provision C.3.8 of the Code, describing the work of the
Audit Committee does not appropriately address matters
communicated by us to the Audit Committee.

We have no
exceptions to
report arising from
this responsibility.

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 are
not made. We have no exceptions to report arising from this responsibility.

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 Parent Company’s compliance with
ten provisions of the UK Corporate Governance Code. We have nothing to
report having performed our review.

Cobham plcAnnual Report and Accounts 2014www.cobham.com
Group Financial Statements Index

Consolidated Income Statement

Consolidated Statement of Comprehensive Income

Consolidated Balance Sheet

Consolidated Statement of Changes in Equity

Consolidated Cash Flow Statement

Notes to the Group Financial Statements

1. Accounting policies

2. Underlying measures

3. Revenue and segmental information

4. Operating costs

5. Finance income and costs

6. Taxation

7. Dividends

8. Earnings per ordinary share

9. Cash and cash equivalents and net debt

10. Intangible assets

11. Property, plant and equipment

12. Investment properties

13. Investments in joint ventures and associates

14. Inventories

15. Financial instruments

16. Trade and other receivables

17. Non-current assets and disposal groups held for sale

18. Borrowings

19. Trade and other payables

20. Provisions

21. Deferred tax

22. Derivative financial instruments

23. Retirement benefit schemes

24. Financial risk management

25. Share capital

26. Other reserves

27. Share based payments

28. Business combinations

29. Operating lease arrangements

30. Contingent liabilities

31. Related party transactions

32. Subsidiaries

100

101

102

103

104

105

107

111

112

113

114

115

116

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2014www.cobham.com Consolidated Income Statement
For the year ended 31 December 2014

£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
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
Exceptional legal costs
Other business acquisition and divestment related items
Trading profit

Note
3

5
5

Note

2014
1,851.7
(1,290.1)
561.6
(100.3)
(403.9)
0.2
57.6
6.4
(39.7)
24.3
4.7
29.0

28.8
0.2
29.0

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

114.3
0.2
114.5

2.60p
2.58p

10.70p
10.65p

2014
57.6

52.2
21.8
113.6
–
–
0.8
40.7
286.7

2013
158.8

56.1
(2.2)
103.9
63.0
(62.1)
–
0.1
317.6

Underlying EPS

18.48p

21.60p

The definitions of trading profit and underlying EPS are shown in note 1.

Cobham plcAnnual Report and Accounts 2014www.cobham.com Consolidated Statement of Comprehensive Income
For the year ended 31 December 2014

£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 (expense)/income for the year

Attributable to:
Owners of the parent
Non-controlling interests

Note

23
23
6

26
26
26
6

2014
29.0

(27.7)
(0.7)
5.0
(23.4)

(18.7)
1.3
1.6
(0.9)
(16.7)

(40.1)

(11.1)

(11.3)
0.2
(11.1)

2013
114.5

(25.6)
–
4.1
(21.5)

(11.1)
4.5
0.6
(1.2)
(7.2)

(28.7)

85.8

85.6
0.2
85.8

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2014www.cobham.com Consolidated Balance Sheet
As at 31 December 2014

£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 associated with assets classified as held for sale

Non-current liabilities
Borrowings
Trade and other payables
Provisions
Deferred tax
Derivative financial instruments
Retirement benefit obligations

Net assets

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

Note

2014

2013

10
11
12
13
16
15
21
22

14
16

22
9
17

18
19
20

22
17

18
19
20
21
22
23

1,997.2
390.0
10.4
3.1
53.3
6.1
10.5
7.6
2,478.2

431.4
436.6
0.4
8.7
225.6
2.1
1,104.8

(1.5)
(503.6)
(54.1)
(119.2)
(20.7)
–
(699.1)

(1,446.8)
(36.2)
(13.3)
(157.8)
(15.5)
(102.0)
(1,771.6)

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

(48.1)
(370.3)
(34.4)
(112.2)
(4.6)
(5.2)
(574.8)

(606.0)
(38.0)
(8.6)
(52.9)
(7.4)
(87.3)
(800.2)

1,112.3

1,044.2

30.4
301.9
42.7
736.4
1,111.4
0.9
1,112.3

28.9
126.6
55.2
832.7
1,043.4
0.8
1,044.2

The financial statements on pages 76 to 117 were approved by a duly appointed and authorised committee of the Board on 4 March 2015 and signed on its
behalf by:

Bob Murphy
Directors

Simon Nicholls

Cobham plcAnnual Report and Accounts 2014www.cobham.com

Consolidated Statement of Changes in Equity
For the year ended 31 December 2014

£m
Total equity at 1 January 2013

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 7)
Share based payments (note 27)
Release of hedge reserve
Transfers of other reserves to retained earnings
Tax effects (note 6)
Total equity at 31 December 2013

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 expense for the year

Issue of shares (note 25)
Net proceeds from treasury shares
Dividends (note 7)
Share based payments (note 27)
Transfers of other reserves to retained earnings
Tax effects (note 6)
Foreign exchange adjustments
Total equity at 31 December 2014

Share
capital
28.9

Share
premium
account
126.6

Other
reserves
(note 26)
64.2

Total
attributable
to owners of
the parent
1,053.8

Non-
controlling
interests
0.6

Retained
earnings
834.1

–
–
–
–

–
–
–
–
–
–
28.9

–
–
–
–

1.5
–
–
–
–
–
–
30.4

–
–
–
–

–
–
–
–
–
–
126.6

–
–
–
–

175.3
–
–
–
–
–
–
301.9

–
–
(7.2)
(7.2)

–
–
(1.7)
1.5
(4.2)
2.6
55.2

–
–
(16.7)
(16.7)

–
–
–
6.1
(3.3)
1.5
(0.1)
42.7

114.3
(21.5)
–
92.8

(1.8)
(96.6)
–
–
4.2
–
832.7

28.8
(23.4)
–
5.4

–
3.3
(108.3)
–
3.3
–
–
736.4

114.3
(21.5)
(7.2)
85.6

(1.8)
(96.6)
(1.7)
1.5
–
2.6
1,043.4

28.8
(23.4)
(16.7)
(11.3)

176.8
3.3
(108.3)
6.1
–
1.5
(0.1)
1,111.4

0.2
–
–
0.2

–
–
–
–
–
–
0.8

0.2
–
–
0.2

–
–
–
–
–
–
(0.1)
0.9

Total
equity
1,054.4

114.5
(21.5)
(7.2)
85.8

(1.8)
(96.6)
(1.7)
1.5
–
2.6
1,044.2

29.0
(23.4)
(16.7)
(11.1)

176.8
3.3
(108.3)
6.1
–
1.5
(0.2)
1,112.3

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2014www.cobham.com Consolidated Cash Flow Statement
For the year ended 31 December 2014

£m

Operating profit
Non-cash items:

Share of post-tax profits of joint ventures and associates
Revaluation gain arising on equity interests in FBH
Depreciation and amortisation including impairment
Profit 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 pension charges
Share based payments
Operating cash movements:
Increase in inventories
Increase in trade and other receivables
Increase/(decrease) in trade and other payables
Increase/(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
Proceeds on disposal of property, plant and equipment
Investment in other financial assets
Loans repaid by joint ventures
Investment in loan notes
Acquisition of subsidiaries net of cash or debt acquired
Contingent consideration paid
Proceeds of business divestments
Net cash used in investing activities

Cash flows from financing activities
Issue of share capital
Dividends paid
Purchase of treasury shares
Proceeds on allocation of treasury shares
New borrowings
Repayment of borrowings
Net cash from/(used in) financing activities

Net increase/(decrease) in cash and cash equivalents
Exchange movements
Cash and cash equivalents at start of year
Cash and cash equivalents at end of year

A reconciliation of cash and cash equivalents to the Balance Sheet and movement in net debt is detailed in note 9.

Note

22
23
27

9
9

2014

57.6

(0.2)
–
190.8
(0.3)
23.8
21.8
(16.9)
6.1

(11.9)
(68.3)
17.3
12.9
(37.0)
(31.5)
3.7
167.9

–
(63.7)
(12.4)
2.3
–
–
(9.0)
(846.1)
(28.5)
6.6
(950.8)

176.8
(108.3)
(5.5)
8.8
1,467.5
(699.9)
839.4

56.5
(31.2)
199.0
224.3

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

Cobham plcAnnual Report and Accounts 2014www.cobham.com Notes to the Group Financial Statements

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).

Failure by Cobham to execute or deliver a project or programme gives rise
to the risk of increased programme costs, contract penalties, litigation and
other financial liabilities, reduced future profitability and reputational risk.
Judgement is therefore required as regards the final costs of technical solutions,
the outcome of negotiations with customers, the amounts recoverable under
these contracts and any provisions required.

Basis of preparation
These consolidated financial statements have been prepared in accordance
with International Financial Reporting Standards (IFRS) as adopted by the EU,
interpretations of the IFRS Interpretations Committee and those parts of the
Companies Act 2006 applicable to companies reporting under IFRS.

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 matters, the timing and determination
of the total costs or amount of any payments under any claims could
differ from the amounts provided.

These financial statements have been prepared on a going concern basis
under the historical cost convention, unless otherwise stated.

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 2014 are:

– 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: transition 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 ; and

– IFRIC 21, Levies.

No changes to previously published accounting policies or other adjustments
were required on their adoption.

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:

Contract risk and programme execution
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. In addition, 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.

Intangible assets recognised on acquisition (note 28)
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 (note 10)
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.

Inventory provisions (note 14)
The nature of much of the Group’s business means that inventory held
can become technically obsolete. It is also necessary to hold additional
spare parts in order to support key customers and programmes. Judgement is
required in assessing the level of provision required for obsolete, slow moving
and defective items of inventory, reflecting assumptions concerning future
orders and revenue streams.

Taxation (notes 6 and 21)
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 (note 23)
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.

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2014www.cobham.com Notes to the Group Financial Statements continued

Definitions
Underlying measures (note 2)
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 businesses
including those available for sale until the point of sale.

Trading profit (note 2)
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, revaluation gains and losses arising on the original
equity interests on stepped acquisitions, 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 to
the integration of the Aeroflex businesses acquired in 2014 and the EiD
programme. The EiD programme, to be completed by the end of 2015,
relates to the design and implementation of Standard Operating Frameworks
within the principal locations, development costs of a new ERP computer
system, together with site consolidation, consequential asset write downs
and workforce reduction costs.

Underlying earnings (note 2)
Underlying earnings are defined as trading profit less net underlying finance
costs, which excludes acquisition related items, and after deducting associated
taxation and non-controlling interests.

Net debt (note 9)
Net debt is defined as the net of borrowings less cash and cash equivalents
at the balance sheet date.

Free cash flow (note 2)
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 acquisition related activities.

Operating segments (note 3)
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 44 to 49.

The Group reports four operating segments whose revenue and results
are reported to the Board. These are Communications and Connectivity,
Mission Systems, Advanced Electronic Solutions 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 20 to 27.

Segment net assets are disclosed voluntarily in note 3 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 Other Comprehensive Income (OCI) in respect 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.

Joint ventures are entities where the parties that have joint control have rights
to the net assets of the arrangement. Associates are entities where the Group
has significant influence. 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.

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 (note 28)
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. Amounts denominated in foreign currencies are
translated at the exchange rates at the date of business combination.

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.

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 consolidated basis.

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

Cobham plcAnnual Report and Accounts 2014www.cobham.com for as gains or losses recognised through profit or loss and excluded from
trading profit and underlying earnings.

Revenue recognition
Revenue is measured at the fair value of the right to consideration, net of
returns and other allowances.

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.

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.

Dividends (note 7)
Dividends are recognised as a liability in the period in which they are
fully authorised.

Intangible assets (note 10)
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.

Revenue excludes intercompany sales, value added tax and other sales taxes.

These intangible assets are amortised over the asset’s estimated useful life
on a straight-line basis as follows:

Taxation including deferred taxation (note 6 and 21)
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.

Customer relationships
Technology based assets
Development costs
Order book and trade names
Software and other intangible assets

5 to 15 years
5 to 15 years
2 to 10 years
6 months to 10 years
2 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 (note 11)
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:

50 years
Freehold buildings
Period to next break clause
Leasehold properties
Plant and machinery
3 to 15 years
Fixtures, fittings, tools and equipment 3 to 15 years

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2014www.cobham.com
Notes to the Group Financial Statements continued

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.

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.

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.

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 (note 12)
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.

Impairments
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 of
disposal 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 (notes 11 and 29)
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.

Inventories (note 14)
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 (note 17)
Non-current assets and disposal groups classified as held for sale are stated at the
lower of carrying amount and fair value less costs of disposal. 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
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.

Non-financial assets and liabilities measured at fair value include net assets
classified as held for sale. 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 (note 15)
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.

Cobham plcAnnual Report and Accounts 2014www.cobham.com 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.

Financial assets and liabilities are presented on an offset basis when there
is a legally enforceable right to offset the recognised amounts and there
is an intention to settle on a net basis.

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 24, 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.

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 and a limited number of specific
foreign exchange contracts. 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 generally 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 and foreign exchange contracts 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.

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2014www.cobham.com Notes to the Group Financial Statements continued

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.

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.

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.

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.

Provisions (note 20)
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.

Pensions (note 23)
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.

Share capital (note 25)
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 (note 25)
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 (note 27)
For grants made under the Group’s equity settled share based payment
schemes, amounts which reflect the fair value of awards 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 2015 are as follows:

– Amendment to IAS 19, Defined Benefit Plans;
– Annual Improvements 2012;
– Annual Improvements 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 2016 or later years. These include:

– IFRS 15, Revenue from Contracts with Customers;
– IFRS 9, Financial Instruments.

Defined benefit schemes are funded, with the assets of the scheme held
separately from those of the Group, in separate trustee administered funds.

Based on an initial review, IFRS 9 is not expected to have a material impact on
the results of the Group. IFRS 15 is under review to determine the potential
impact on the Group.

Cobham plcAnnual Report and Accounts 2014www.cobham.com
2. Underlying measures
Underlying measures, defined in note 1 on page 82, are derived from operating profit as set out below:

£m
Operating profit
Business restructuring – Excellence in Delivery
Business restructuring – Aeroflex integration
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
Exceptional legal costs
Other business acquisition and divestment related items

Acquisition related costs
Pre-acquisition profit element of inventory written off
Release of contingent consideration
Divestment and adjustments to businesses held for sale

Trading profit
Net underlying finance costs
Underlying profit before taxation
Taxation charge on underlying profit (effective rate 20.25%)
Non-controlling interests
Underlying profit after tax attributable to owners of the parent

Underlying basic EPS
Underlying diluted EPS

Note

2014
57.6
28.1
24.1
21.8
113.6
–
–
0.8

21.4
19.6
–
(0.3)
286.7
(29.7)
257.0
(52.0)
(0.2)
204.8

2013
158.8
56.1
–
(2.2)
103.9
63.0
(62.1)
–

1.7
4.1
(11.9)
6.2
317.6
(29.6)
288.0
(57.0)
(0.2)
230.8

18.48p
18.38p

21.60p
21.51p

Underlying administrative expenses, which exclude the reconciling items in the table above, amounted to £174.8m (2013: £169.6m), representing 9.4% (2013: 9.5%)
of revenue.

Business restructuring costs relate to the restructuring of the Group’s portfolio, under its EiD and Aeroflex integration programmes, which are incremental to
normal operations. The EiD programme relates exclusively to the 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. Costs in respect of the Aeroflex integration
are consequential to the acquisition of the Aeroflex group in September 2014 and are in line with the Company’s plans announced in the shareholder circular
of 16 June 2014, which set out the synergies and cost savings expected to be derived by the integration of Aeroflex with the existing Cobham businesses.

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
Proceeds on disposal of property, plant and equipment
Acquisition related costs paid
Free cash flow

2014
167.9
–
(63.7)
(12.4)
2.3
20.3
114.4

2013
210.6
3.7
(58.0)
(11.0)
8.0
1.7
155.0

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2014www.cobham.com 3. 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

2014
1,368.2
483.5

1,851.7

2013
(as re-presented)
1,376.7
413.0

1,789.7

Revenue from services includes service contracts in the Aviation Services Sector together with logistics support, maintenance and repairs in other Sectors;
comparatives have been re-presented to reflect this allocation.

Operating segments

£m
Communications and Connectivity
Mission Systems
Advanced Electronic Solutions
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 liabilities

Total net assets

Revenue
2013
(as re-presented)
678.1
357.7
371.9
365.2

(4.1)
1,768.8
20.9
1,789.7

2014
697.1
333.5
410.1
412.2

(5.2)
1,847.7
4.0
1,851.7

2014
118.3
35.9
64.0
54.5

14.1
286.8
(0.1)
286.7

Trading profit
2013
(as re-presented)
115.3
73.9
63.4
48.0

Segment net assets
2013
(as re-presented)
739.9
274.2
389.8
322.8

2014
1,071.5
303.0
1,085.9
284.0

14.5
315.1
2.5
317.6

(24.5)
2,719.9
–
2,719.9

3.1

(1,610.7)

1,112.3

42.5
1,769.2
(3.1)
1,766.1

3.1

(725.0)

1,044.2

The Group reports four segments whose revenue and results are reported to the Board. During the year the Aerospace and Security segment was renamed
Communications and Connectivity, and the Defence Systems segment became Advanced Electronic Solutions. The comparative segmental analysis of
revenue and trading profit shown above has been re-presented on a basis consistent with the Sectors as reported during 2014, which includes the transfer
of the Exeter, New Hampshire business from Communications and Connectivity to Advanced Electronic Solutions. The remaining non-core businesses were
divested during the year.

Trading profit is reconciled to profit before taxation as follows:

£m
Trading profit
Business restructuring
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

Exceptional legal costs

Other business acquisition and divestment related items
Net finance costs

Profit before taxation

Note

2
22

10
28

2014
286.7
(52.2)
(21.8)

(113.6)
–
–

(0.8)

(40.7)
(33.3)

24.3

2013
317.6
(56.1)
2.2

(103.9)
(63.0)
62.1

–

(0.1)
(32.2)

126.6

Cobham plcAnnual Report and Accounts 2014www.cobham.com Notes to the Group Financial Statements continuedDepreciation 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
Communications and Connectivity
Mission Systems
Advanced Electronic Solutions
Aviation Services
Head office, other activities and elimination of inter-segment items
Core Group
Non-core businesses
Total Group

Details of employees analysed by operating segment can be found in note 4.

2014
18.9
5.0
12.5
38.8
2.0
77.2
–
77.2

2013
(as re-presented)
16.1
5.7
14.0
30.6
1.4
67.8
0.4
68.2

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 2014
Year to 31 December 2013

228.3
235.2

USA

814.4
812.5

Australia Other EU countries

Asia

Rest of the world

247.2
249.8

286.5
277.4

169.9
132.8

105.4
82.0

Total

1,851.7
1,789.7

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 2014
At 31 December 2013

509.6
402.4

USA

Denmark Other EU countries

Australia

Rest of the world

1,419.7
588.9

229.9
272.6

87.1
101.2

87.6
90.5

66.8
70.4

Total

2,400.7
1,526.0

4. Operating costs
Cost of sales in the Income Statement includes £628.8m (2013: £592.7m) for the cost of materials.

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

2014
96.9

2013
88.0

Note

23
27

2014
519.9
43.8
31.0
6.1
600.8

2013
497.0
41.1
29.6
(1.7)
566.0

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2014www.cobham.com The average number of employees during the year, analysed by segment and including the proportional impact of Aeroflex employees, is as follows:

Communications and Connectivity
Mission Systems
Advanced Electronic Solutions
Aviation Services
Head office and other activities
Core Group
Non-core businesses
Total Group

2014
3,841
1,465
2,802
2,405
393
10,906
35
10,941

2013
(as re-presented)
3,735
1,424
2,512
1,931
359
9,961
129
10,090

Compensation of key management personnel
The remuneration of Directors and other members of key management during the year was as follows:

£m
Salaries and other employee benefits
Post-employment benefits
Share based payments

2014
5.8
0.4
1.6
7.8

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
Fees payable for audit services

Tax compliance services
Other tax advisory services
Other audit related assurance services
Services relating to corporate finance transactions
Fees payable for other services

Total fees payable to the auditors

2014
1.0
1.2
2.2

0.3
1.3
0.1
1.5
3.2

5.4

A description of the work of the Audit Committee is set out in the Corporate Governance Report on pages 52 to 55 and includes an explanation of how auditor
objectivity and independence are safeguarded when non-audit services are provided by the auditors.

5. Finance income and costs

£m
Bank interest
Other finance income
Total finance income

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

2014
4.5
1.9
6.4

(30.9)
(3.6)
(5.2)
(39.7)

(29.7)
(3.6)
(33.3)

Other finance expense above includes £2.6m of arrangement fees for the Aeroflex acquisition finance facility and unwinding of acquisition related discounting
of £1.0m (2013: £2.6m). These costs are excluded from underlying profit in note 2.

2013
6.2
0.7
(0.5)
6.4

2013
1.0
1.1
2.1

0.3
1.2
0.2
–
1.7

3.8

2013
3.3
2.0
5.3

(29.6)
(2.8)
(5.1)
(37.5)

(29.4)
(2.8)
(32.2)

Cobham plcAnnual Report and Accounts 2014www.cobham.com Notes to the Group Financial Statements continued6. Taxation

£m
Charge for the year
Adjustments to tax charge in respect of prior years
Current tax

Credit for the year
Adjustments to tax charge in respect of prior years
Impact of change in tax rates
Deferred tax

Total tax (credit)/charge for the year

Note

2014
46.6
(14.3)
32.3

(41.9)
5.6
(0.7)
(37.0)

(4.7)

2013
44.1
(14.7)
29.4

(16.5)
0.2
(1.0)
(17.3)

12.1

Income tax is calculated on the estimated assessable profit for the year at the rates prevailing in the relevant tax jurisdiction. The total tax (credit)/charge for the year
includes a credit of £5.5m (2013: £7.7m charge) for the UK.

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 21.5% (2013: 23.25%)
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 (credit)/charge for the year

In addition the following charges/(credits) have been included in OCI and equity:

Included in OCI

£m
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

£m

Share based payments

The rate of UK corporation tax will reduce from 21% to 20% from 1 April 2015.

2014
24.3

5.2
–
(2.9)
(2.1)
–
–
(8.7)
3.8
(4.7)

2013
126.6

29.4
(0.7)
1.0
(3.7)
(14.4)
14.6
(14.5)
0.4
12.1

2014

2013

(4.7)
(0.3)
(5.0)

0.9

2014

(1.5)

(4.1)
–
(4.1)

1.2

2013

(2.6)

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2014www.cobham.com 7. Dividends

£m
Final dividend of 7.04 pence per share for 2013 (2012: 6.4 pence)
Interim dividend of 2.904 pence per share for 2014 (2013: 2.64 pence)
Total dividend authorised and paid during the year

2014
75.5
32.8
108.3

2013
68.5
28.1
96.6

In addition to the above, the Directors are proposing a final dividend in respect of the financial year ended 31 December 2014 of 7.746 pence per share at
an estimated total cost of £87.7m. 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 29 May 2015 to shareholders who are on the register of members as at 1 May 2015. The total
dividend in respect of the financial year ended 31 December 2014 will therefore be 10.65 pence per share (2013: 9.68 pence). The total amount payable in
respect of 2014 will be £120.5m.

8. Earnings per ordinary share

Basic earnings per share (EPS)
Earnings attributable to owners of the parent
Effect of potentially dilutive securities
Diluted EPS

Weighted
average number
of shares
million

Earnings
£m

28.8

1,108.0
6.4
1,114.4

2014

Per share
amount
pence

2.60

2.58

Weighted
average number
of shares
million

Earnings
£m

114.3

1,068.7
4.3
1,073.0

2013

Per share
amount
pence

10.70

10.65

Potentially dilutive securities are unvested awards under the Group’s share based payment schemes described in note 27.

9. Cash and cash equivalents and net debt

Reconciliation of cash and cash equivalents and net debt

£m
Cash and cash equivalents per Cash Flow Statement
Bank overdrafts
Cash and cash equivalents per Balance Sheet
Borrowings – current liabilities
Borrowings – non-current liabilities
Net debt at 31 December

Note

18
18

2014
224.3
1.3
225.6
(1.5)
(1,446.8)
(1,222.7)

2013
(as re-presented)
199.0
1.7
200.7
(48.1)
(606.0)
(453.4)

Details of the offsetting of overdrafts with cash and cash equivalents and other financial instruments can be found in note 15.

Reconciliation of movements in net debt

£m
Net debt at 1 January
Increase/(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

2014
(453.4)
56.5
(1,467.5)
699.9
(58.2)
(1,222.7)

2013
(359.9)
(36.8)
(67.0)
7.7
2.6
(453.4)

New borrowings include US$1,300m drawn under an acquisition finance facility and US$930m fixed rate senior notes. Repayment of borrowings includes US$930m
of the acquisition finance facility which was repaid following the issue of the senior notes. Further details are provided in note 18.

Cobham plcAnnual Report and Accounts 2014www.cobham.com Notes to the Group Financial Statements continued10. Intangible assets

£m

Cost
At 1 January 2013
Additions
Recognised on business combinations
Disposals and derecognitions
Foreign exchange adjustments
Reclassifications
At 1 January 2014
Additions
Recognised on business combinations
Disposals and derecognitions
Foreign exchange adjustments
Reclassifications
At 31 December 2014

Accumulated amortisation and
impairment
At 1 January 2013
Amortisation charge for the year
Impairment provision
Disposals and derecognitions
Foreign exchange adjustments
Reclassifications
At 1 January 2014
Amortisation charge for the year
Disposals and derecognitions
Foreign exchange adjustments
Reclassifications
At 31 December 2014

Carrying amount
At 31 December 2014
At 31 December 2013
At 1 January 2013

Customer
relationships

Arising on business combinations
Order book and
trade names

Technology based
assets

Development
costs

Software
and other

302.3
–
59.2
(60.9)
2.3
–
302.9
–
307.7
(20.4)
12.6
–
602.8

116.2
53.0
–
(60.9)
(0.1)
–
108.2
50.3
(20.4)
3.5
–
141.6

461.2
194.7
186.1

173.2
–
25.4
(34.3)
2.3
–
166.6
–
189.8
–
2.2
–
358.6

71.7
39.9
–
(34.3)
0.4
–
77.7
47.5
–
(1.2)
–
124.0

234.6
88.9
101.5

3.1
–
46.1
(3.5)
0.1
–
45.8
–
16.4
–
0.8
–
63.0

1.6
10.4
–
(3.5)
–
–
8.5
15.8
–
–
–
24.3

38.7
37.3
1.5

4.7
–
–
(2.7)
0.1
–
2.1
–
–
–
(0.1)
–
2.0

2.5
1.2
–
(2.7)
0.1
–
1.1
0.6
–
–
–
1.7

0.3
1.0
2.2

42.4
11.0
–
(2.4)
(0.5)
1.0
51.5
12.9
3.5
(1.8)
0.8
3.4
70.3

20.7
4.4
–
(2.4)
(0.5)
0.5
22.7
4.2
(1.7)
0.6
1.8
27.6

42.7
28.8
21.7

Goodwill

789.1
–
86.9
–
(1.5)
–
874.5
–
385.4
–
22.8
–
1,282.7

–
–
63.0
–
–
–
63.0
–
–
–
–
63.0

1,219.7
811.5
789.1

Total

1,314.8
11.0
217.6
(103.8)
2.8
1.0
1,443.4
12.9
902.8
(22.2)
39.1
3.4
2,379.4

212.7
108.9
63.0
(103.8)
(0.1)
0.5
281.2
118.4
(22.1)
2.9
1.8
382.2

1,997.2
1,162.2
1,102.1

Amortisation charged during the year relating to intangible assets recognised on business combinations was £113.6m (2013: £103.9m). This has been excluded from
underlying profit in note 2. All amortisation charges are included within administrative expenses in the Income Statement.

Business combinations during the year represent the acquisition of Aeroflex Corp. which is organised into five business units. Further details can be found in note 28.
Business combinations in 2013 related to 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.

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. Other intangible assets represent
purchased patents, licences and trademarks. Intangible assets recognised on business combinations are derecognised when they have been fully amortised.

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2014www.cobham.com 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 Business Units.

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. In 2013 an impairment loss of £63.0m was recognised in respect of the Cobham Tactical
Communications and Surveillance business.

The calculation of recoverable value for CGUs based on value in use includes the following key assumptions:

– Cash flow forecasts for the following five years prepared as part of the annual strategic planning process and 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
rates (which range from -1% to 10% and at a Group level are consistent with mid-single digit revenue growth) assume that demand for the Group’s products
in the US and in the UK remains broadly in line with the underlying economic environment. Taking into account the expectation of future market conditions,
management believe that the evolution of selling prices and direct costs will reflect past practices;

– Growth rates assumed after this five year period are based on long-term GDP projections of the primary market for the CGU. The long term projections

used are in the range 1.5% to 2.0% (2013: 2.0% to 2.5%);

– Cash flows are discounted using the Group’s WACC, adjusted for country and currency risks in the principal territories in which the Group operates.

These pre-tax discount rates are within the range 8.3% to 10.5% (2013: 8.1% to 10.7%);

– Cash flows include the impact of working capital requirements, typically assuming a 90% cash conversion rate; and
– Cash flows include management charges which allocate central overheads to the CGUs.

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
SATCOM
Integrated Electronic Solutions

Operating segment
Communications and Connectivity
Advanced Electronic Solutions

Goodwill
carrying value
£m
197
147

Headroom
£m
322
273

Pre-tax
discount rate
8.5%
8.9%

Projected 5 year
growth rate
4.4%
1.0%

Projected GDP
growth rate
1.5%
2.0%

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.

The allocation of goodwill arising on the acquisition of Aeroflex is disclosed as provisional and subject to potential adjustment. A detailed impairment review of the
carrying value of this goodwill will be performed in the year ended 31 December 2015 and sensitivity disclosures will be made for individually significant CGUs.

Cobham plcAnnual Report and Accounts 2014www.cobham.com Notes to the Group Financial Statements continued11. Property, plant and equipment

£m
Cost
At 1 January 2013
Additions
Acquired with business combinations
Reclassified as held for sale
Disposals
Foreign exchange adjustments
Reclassifications
At 1 January 2014
Additions
Acquired with business combinations
Disposals
Foreign exchange adjustments
Reclassifications
At 31 December 2014

Accumulated depreciation
At 1 January 2013
Depreciation charge for the year
Eliminated on disposals
Reclassified as held for sale
Foreign exchange adjustments
Reclassifications
At 1 January 2014
Depreciation charge for the year
Eliminated on disposals
Foreign exchange adjustments
Reclassifications
At 31 December 2014

Carrying amount

At 31 December 2014
At 31 December 2013
At 1 January 2013

Land and buildings

Freehold

Long leases

Short leases

Plant and
machinery
(including aircraft
and vehicles)

Fixtures,
fittings, tools
and equipment

Payments on
account and
assets under
construction

91.2
2.7
–
(2.1)
(2.8)
(2.9)
2.3
88.4
0.7
11.3
(0.8)
1.9
3.6
105.1

27.4
4.5
(1.3)
(1.5)
(1.1)
–
28.0
3.4
(0.4)
0.5
–
31.5

73.6
60.4
63.8

37.0
2.0
–
–
(7.4)
(0.2)
0.7
32.1
0.7
3.0
(2.1)
0.9
0.8
35.4

15.7
2.5
(3.6)
–
(0.1)
–
14.5
4.5
(1.9)
0.5
0.3
17.9

17.5
17.6
21.3

10.0
0.1
–
–
(3.7)
–
0.2
6.6
1.6
0.5
(0.4)
0.4
(0.2)
8.5

7.0
1.2
(2.9)
–
(0.1)
0.1
5.3
1.0
(0.4)
0.4
(0.1)
6.2

2.3
1.3
3.0

562.7
33.4
74.8
–
(31.3)
(36.3)
2.5
605.8
37.1
29.7
(16.0)
(0.2)
5.5
661.9

381.4
45.8
(27.0)
–
(20.9)
(1.8)
377.5
52.0
(14.9)
–
(0.1)
414.5

247.4
228.3
181.3

86.5
4.4
2.4
–
(6.6)
(3.2)
4.2
87.7
8.4
2.9
(6.0)
0.7
0.1
93.8

62.1
8.8
(5.8)
–
(2.4)
1.2
63.9
11.2
(5.8)
0.3
(1.9)
67.7

26.1
23.8
24.4

11.0
18.0
1.6
–
–
(0.3)
(10.9)
19.4
15.1
1.2
–
0.6
(13.2)
23.1

–
–
–
–
–
–
–
–
–
–
–
–

23.1
19.4
11.0

At 31 December 2014, the Group had commitments for the acquisition of property, plant and equipment of £48.5m (2013: £13.6m).

Total

798.4
60.6
78.8
(2.1)
(51.8)
(42.9)
(1.0)
840.0
63.6
48.6
(25.3)
4.3
(3.4)
927.8

493.6
62.8
(40.6)
(1.5)
(24.6)
(0.5)
489.2
72.1
(23.4)
1.7
(1.8)
537.8

390.0
350.8
304.8

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2014www.cobham.com 12. Investment properties

£m

Carrying amount at 1 January

Acquired with business combinations

Disposals

Depreciation

Foreign exchange adjustments

Carrying amount at 31 December

2014

9.9

0.8

(0.3)

0.3

10.4

2013

10.7

–

(0.3)

(0.4)

(0.1)

9.9

The total fair value of the Group’s investment properties has been assessed to be £13.9m (2013: £14.2m). For 2014, these values are based on Directors’ estimates
using observable market data, taking into account current lease terms. In 2013 estimated market prices for UK properties were provided by external valuers and the
fair value of the US property was a Directors’ estimate; both were based on observable market data.

Property rental income earned by the Group from its investment properties amounted to £1.4m (2013: £1.9m), which is net of all direct costs associated with the
leasing of the properties except depreciation. The buildings are leased to commercial users on operating leases with terms of between 5 and 25 years, commencing
between 1998 and 2013.

13. 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

Aviation Services

Joint venture

Communications and Connectivity

France

USA

Associate

Communications and Connectivity

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.

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 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, Seongnam-si, Gyeonggi-do, South Korea.

14. Inventories

£m

Raw materials and consumables

Work in progress

Finished goods and goods for resale

Allowance for obsolescence

2014

191.8

221.4

66.4

(48.2)

431.4

2013

139.0

187.0

36.8

(46.9)

315.9

Work in progress includes £59.9m (2013: £72.2m) which relates to customer funded engineering development contracts.

During the year £17.4m (2013: £15.2m) was provided, £9.3m (2013: £6.1m) was utilised and £8.1m (2013: £6.4m) 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 £18.1m (2013: £39.0m).

Cobham plcAnnual Report and Accounts 2014www.cobham.com Notes to the Group Financial Statements continued15. Financial instruments
The Group’s financial assets and liabilities are categorised as follows:

£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
Other financial liabilities
Derivative contracts (not hedge accounted)

Hedging instruments

Assets
Liabilities

Net financial liabilities at 31 December 2014

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

Note

Loans and
receivables

Fair value through
profit or loss

Amortised cost

Derivatives used
for hedging

Total carrying
amount

Fair value

16
16
9
22

18
19

19
22

22
22

16
16
9
22

18
19

19
19
22

331.4
120.9
225.6
–
–

–
–
–
–
–

–
–

238.3
76.9
200.7
–
–

–
–
–
–
–
–

–

–
–
–
13.6
–

–
–
–
–
(32.9)

–
–

–
–
–
11.7
–

–
–
–
(27.4)
–
(8.8)

–

–
–
–
–
6.1

(1,448.3)
(145.0)
(133.3)
(103.8)
–

–
–

–
–
–
–
6.1

(654.1)
(117.1)
(99.6)
–
(47.8)
–

–
–
–
–
–

2.7
(3.3)

–
–
–
–
–

–
–
–
–
–
–

–

(3.2)

331.4
120.9
225.6
13.6
6.1

(1,448.3)
(145.0)
(133.3)
(103.8)
(32.9)

2.7
(3.3)
(1,166.3)

238.3
76.9
200.7
11.7
6.1

(654.1)
(117.1)
(99.6)
(27.4)
(47.8)
(8.8)

(3.2)
(424.3)

331.4
120.9
225.6
13.6
6.1

(1,549.1)
(145.0)
(133.3)
(103.8)
(32.9)

2.7
(3.3)
(1,267.1)

238.3
76.9
200.7
11.7
6.1

(687.5)
(117.1)
(99.6)
(27.4)
(47.8)
(8.8)

(3.2)
(457.7)

Borrowings are held at amortised cost which equates to fair value except for the Group’s fixed rate borrowings. At 31 December 2014 the fair value of those
borrowings was £926.5m (2013: £299.8m) compared to their book value of £825.7m (2013: £262.0m). The fair value of the fixed rate borrowings and derivative
financial instruments have been determined by reference to observable market prices and rates.

Cash and cash equivalents include term deposits in Australia equivalent to £6.2m (2013: £6.4m) which are held to provide security over the residual value of leased
assets under an agreement which expires in 2020.

Other financial assets relate to Cobham plc’s investments in connection with the Voyager (FSTA) project which are held at cost, totalling £6.1m (2013: £6.1m).

Gains and losses on financial assets and liabilities held at fair value through profit or loss are shown in notes 19 and 22. 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 5.

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2014www.cobham.com Offsetting financial assets and liabilities
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 24. 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

At 31 December 2014

Financial assets

Cash and cash equivalents
Derivative financial assets

Financial liabilities

Bank overdrafts
Derivative financial liabilities

At 31 December 2013

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

250.6
16.3

(26.3)
(36.2)
204.4

343.9
11.7

(144.9)
(12.0)
198.7

(25.0)
–

25.0
–
–

(143.2)
–

143.2
–
–

225.6
16.3

(1.3)
(36.2)
204.4

200.7
11.7

(1.7)
(12.0)
198.7

(3.3)
(14.6)

1.3
16.6
–

(1.4)
(5.9)

1.7
5.6
–

Net
amount

222.3
1.7

–
(19.6)
204.4

199.3
5.8

–
(6.4)
198.7

Cobham plcAnnual Report and Accounts 2014www.cobham.com Notes to the Group Financial Statements continued16. Trade and other receivables

Current

£m

Trade receivables (net of provision for impairment)

Accrued income

Loans and other receivables

Prepayments

Non-current

£m

Accrued income

Loans and other receivables

Impairment of trade receivables

£m

Trade receivables

Provision for impairment of trade receivables
Net trade receivables

2014

331.4

47.7

19.9

37.6
436.6

2014

20.4

32.9
53.3

2014

334.1

(2.7)
331.4

2013

238.3

38.2

16.5

24.7
317.7

2013

–

22.2
22.2

2013

239.9

(1.6)
238.3

A significant proportion of the Group’s business is directly with government agencies or in respect of large government funded military programmes, where credit risk
is considered to remain low. Information concerning management of credit risk is shown in note 24. Movements in the provision for impairment of trade receivables
during the current and prior year were not individually significant.

The credit quality of trade receivables can be analysed as follows:

£m
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
Less than 1 month overdue
1 month overdue
2 months overdue
3 or more months overdue

Other classes of financial assets within trade and other receivables do not include any overdue or impaired assets.

2014
258.8
71.3
4.0
334.1

2014
44.1
12.1
5.6
9.5
71.3

2013
186.0
51.1
2.8
239.9

2013
34.3
10.1
2.8
3.9
51.1

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2014www.cobham.com 17. Non-current assets and disposal groups held for sale

£m
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

Total non-current assets and disposal groups held for sale

2014
2.1
–
–
2.1

–
–
–

2.1

2013
1.9
2.8
3.5
8.2

(4.7)
(0.5)
(5.2)

3.0

Non-current assets and disposal groups held for sale include 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.

18. Borrowings

£m
Bank overdrafts
Senior notes
Finance leases
Total current borrowings

Bank loans
Senior notes
Finance leases
Total non-current borrowings

Total borrowings

2014
1.3
–
0.2
1.5

2013
(as re-presented)
1.7
46.2
0.2
48.1

569.8
877.0
–
1,446.8

1,448.3

341.7
264.1
0.2
606.0

654.1

Amounts drawn under revolving multi-currency credit agreements have been re-presented as non-current liabilities in accordance with the maturity dates
of the relevant agreements. These had previously been reported as current liabilities as the drawdowns are for periods not exceeding three months.

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.
Bank loans comprise the following:

£m
Fixed rates

Agreement date

Maturity date

US$75m credit agreement

December 2008 December 2016

Floating rates

US$360m multi-currency revolving credit
agreement comprising:

October 2011

US$90m
US$270m

EUR70m multi-currency revolving facility
DKK525m multi-currency revolving facility
AUS$90m multi-currency revolving facility
Acquisition finance facility

June 2012
June 2012
February 2014
May 2014

October 2016
October 2018
June 2017
October 2018
October 2018
May 2016

Floating rate bank loans accrue interest at LIBOR plus margin.

2014

48.1

45.8
137.5
52.2
18.1
30.8
237.3
569.8

Amount drawn
2013

Undrawn facilities
2013

2014

45.3

–

51.7
155.2
36.8
52.7
–
–
341.7

11.9
35.7
2.1
36.6
16.4
–
102.7

2.6
7.9
21.4
5.8
–
–
37.7

100

Cobham plcAnnual Report and Accounts 2014www.cobham.com Notes to the Group Financial Statements continuedIn September 2014, US$1,300m was drawn under an acquisition finance facility agreed in May 2014 and US$930m of this was repaid in October 2014
following the issue of US$930m fixed rate senior notes.

Under the US$75m agreement, which expires in 2031, the lender has a series of put options exercisable every three years from December 2016.

Senior notes with a total principal value of US$1,367.5m (2013: 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
US$930m fixed rate comprising:

US$75m
US$180m
US$250m
US$425m

Issue date
March 2009
March 2009
May 2010

January 2010
March 2009
October 2012
October 2014

Maturity date
March 2014
March 2016
May 2017
February/
March 2018
March 2019
October 2020

October 2017
October 2019
October 2021
October 2024

2014
-
51.9
32.1

67.3
101.0
28.3

48.1
115.4
160.3
272.6
877.0

2013
46.2
48.9
30.2

63.4
95.0
26.6

–
–
–
–
310.3

The 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 shown on page 31. There have been no breaches of the terms of agreements or
defaults during the current or comparative periods.

19. Trade and other payables

Current liabilities

£m
Payments received on account
Trade payables
Other taxes and social security
Accruals and deferred income
Contingent consideration
Amounts outstanding on purchase of shares of Aeroflex Holding Corp.
Other liabilities

Non-current liabilities

£m
Payments received on account
Trade payables
Accruals and deferred income
Contingent consideration
Other liabilities

2014
82.2
145.0
31.7
149.6
–
51.3
43.8
503.6

2014
8.6
–
18.7
–
8.9
36.2

2013
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

101

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2014www.cobham.com Movements in the fair value of contingent consideration during the year are as follows:

£m
At 1 January 2014
Amounts paid
Gains or losses recognised in profit or loss:

Unrealised change in fair value – discounting included in finance costs

Foreign exchange adjustments
At 31 December 2014

Contingent consideration paid during the year includes early settlement of the final amounts payable in respect of the acquisition of Axell Wireless which was
included as a non-current liability in the comparatives above.

20. Provisions

£m
Current liabilities
Non-current liabilities

Movements in provisions during the year are as follows:

£m
At 1 January 2014
Additional provisions in the year
Acquired with business
combinations
Utilisation of provisions
Unused amounts reversed in the year
Reclassifications
Foreign exchange adjustments
At 31 December 2014

Provisions related
to businesses
divested
10.8
–

Restructuring

provisions Warranty claims
10.5
3.9

6.6
12.4

Contract loss
provisions
4.4
13.3

Aircraft
maintenance
provisions
3.4
2.1

–
–
–
–
–
10.8

–
(1.6)
(3.1)
–
0.8
15.1

2.2
(2.9)
(1.3)
(0.1)
(0.2)
12.1

–
(4.9)
(1.0)
–
–
11.8

–
(2.3)
(0.2)
0.3
(0.1)
3.2

2014
54.1
13.3
67.4

Other
7.3
1.4

8.2
(1.4)
(1.3)
–
0.2
14.4

27.4
(28.5)

1.0
0.1
–

2013
34.4
8.6
43.0

Total
43.0
33.1

10.4
(13.1)
(6.9)
0.2
0.7
67.4

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.

Restructuring provisions relate to announced business restructuring in connection with EiD and the integration of Aeroflex into the Cobham Group.
These are generally expected to be utilised within one year.

Provisions for warranty claims and contract losses are generally expected to be utilised 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 seven years.

Other provisions include amounts provided in respect of legal claims and environmental obligations and are mostly expected to be settled within one year.

102

Cobham plcAnnual Report and Accounts 2014www.cobham.com Notes to the Group Financial Statements continued21. Deferred tax

£m
Deferred tax assets
Deferred tax liabilities

The following are the major deferred tax assets and liabilities recognised by the Group, and the movements thereon:

£m
At 1 January 2013
(Credit)/charge to income statement
(Credit)/charge to other comprehensive income
Credit to reserves
Business combinations
Foreign exchange adjustments
Reclassifications
At 1 January 2014
(Credit)/charge to income statement
(Credit)/charge to other comprehensive income
Credit to reserves
Business combinations
Business divestments
Foreign exchange adjustments
At 31 December 2014

Accelerated tax
depreciation
18.4
2.3
–
–
(1.6)
(0.8)
–
18.3
4.3
–
–
0.1
–
0.9
23.6

Retirement benefit
obligations
(17.0)
2.7
(4.1)
–
–
–
–
(18.4)
2.6
(4.7)
–
–
–
–
(20.5)

Intangible
assets
65.4
(20.1)
–
–
27.4
1.2
(0.4)
73.5
(19.1)
–
–
164.1
(0.7)
5.6
223.4

2014
(10.5)
157.8
147.3

Other
(32.4)
(2.2)
1.2
(2.1)
2.6
2.5
–
(30.4)
(24.8)
0.6
(0.9)
(20.3)
–
(3.4)
(79.2)

2013
(9.9)
52.9
43.0

Total
34.4
(17.3)
(2.9)
(2.1)
28.4
2.9
(0.4)
43.0
(37.0)
(4.1)
(0.9)
143.9
(0.7)
3.1
147.3

Other deferred tax assets and liabilities shown above include balances arising from temporary differences in relation to provisions, accruals, 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:

Within one year
After one year

Deferred tax assets are recoverable:

Within one year
After one year

Without taking into consideration the offsetting of balances, deferred tax balances are as follows:

£m
Deferred tax assets
Deferred tax liabilities
At 31 December 2014

Deferred tax assets
Deferred tax liabilities
At 31 December 2013

Accelerated tax
depreciation
(1.5)
25.1
23.6

Retirement benefit
obligations
(20.5)
–
(20.5)

–
18.3
18.3

(18.4)
–
(18.4)

Intangible
assets
–
223.4
223.4

–
73.5
73.5

2014

8.0
149.8
157.8

(7.1)
(3.4)
(10.5)

Other
(89.2)
10.0
(79.2)

(44.8)
14.4
(30.4)

2013

17.6
35.3
52.9

(5.7)
(4.2)
(9.9)

Total
(111.2)
258.5
147.3

(63.2)
106.2
43.0

103

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2014www.cobham.com At the balance sheet date, the Group has unused capital losses of £66.0m (2013: £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 £301.7m (2013: £369.2m).

22. 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 2014

Non-current assets
Current assets
Current liabilities
Non-current liabilities
Fair value at 31 December 2013

The movements in the fair values of derivative financial instruments during the year are as follows:

£m
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 1 January 2014
(Loss)/gain through income statement – not hedged
Loss through income statement – other
Gain reclassified to income statement
(Loss)/gain through OCI – hedged items
Foreign exchange adjustments
At 31 December 2014

Note

26
26

26
26
26

Interest
rate swaps
–
–
(0.7)
(2.6)
(3.3)

Foreign exchange
derivatives
7.6
8.7
(19.2)
(10.7)
(13.6)

–
–
(0.5)
(2.7)
(3.2)

5.1
6.6
(3.6)
(1.8)
6.3

Interest
rate swaps
(8.3)
–
–
4.5
0.6
(3.2)
–
–
1.3
(1.4)
–
(3.3)

Foreign exchange
derivatives
1.8
2.9
1.5
–
0.1
6.3
(22.1)
(0.5)
–
2.9
(0.2)
(13.6)

Inflation
swap
–
–
(0.8)
(2.2)
(3.0)

–
–
(0.5)
(2.9)
(3.4)

Inflation
swap
(3.3)
(0.7)
–
–
0.6
(3.4)
0.3
–
–
–
0.1
(3.0)

Total
7.6
8.7
(20.7)
(15.5)
(19.9)

5.1
6.6
(4.6)
(7.4)
(0.3)

Total
(9.8)
2.2
1.5
4.5
1.3
(0.3)
(21.8)
(0.5)
1.3
1.5
(0.1)
(19.9)

Interest rate swaps and a small number of specific foreign exchange derivatives with a fair value at 31 December 2014 of £2.7m (2013: £nil) 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.

The majority of 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. Where currency swaps offset movements in currency balances held, the movement in the fair value of these swaps is set against
the income statement exchange movements arising on those balances.

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 24, financial risk management.

104

Cobham plcAnnual Report and Accounts 2014www.cobham.com Notes to the Group Financial Statements continued23. 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 4 are as follows:

£m
Defined benefit schemes
Defined contribution schemes

2014
670.6
(772.6)
(102.0)

2014
5.5
25.5
31.0

2013
577.6
(664.9)
(87.3)

2013
5.2
24.4
29.6

The Group operates a number of funded defined benefit schemes (where benefits are based on employees’ length of service and average final salary), 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, where the Group’s contribution is fixed at a set percentage of employees’ pay.

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 2014. In the UK, within
15 months of each triennial valuation, the employer and the trustees are required to agree a schedule of contributions to ensure that the Plan is fully funded over
time on a suitably prudent basis. The Group expects to contribute £23.5m to its defined benefit pension schemes in 2015 and £23.1m in 2016. This includes
£18.4m (2016: £17.6m) related to deficit funding.

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. In 2014 the CPP has made liability driven investments
to provide further cover against interest and inflation volatility.

There were no significant contributions outstanding at the end of 2014 or 2013 for the defined benefit schemes. £1.3m (2013: £1.2m) was outstanding in respect
of defined contribution schemes but not due for payment at 31 December 2014.

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

UK
schemes
3.45%
3.20%
2.20%
3.50%
3.20%

2014
USA
scheme
3.45%
3.20%
3.20%
3.50%
3.20%

UK
schemes
3.80%
3.55%
2.55%
4.50%
3.55%

2013
USA
scheme
3.80%
3.55%
3.55%
4.50%
3.55%

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 13’. In practical terms, this is demonstrated in the table below:

Male
Female
Male
Female

Year of birth
1949
1949
1980
1980

Year age 65
2014
2014
2045
2045

Further life
expectancy
22.6 years
24.9 years
25.5 years
27.9 years

At 31 December 2014 it has been assumed that members will commute on average 20% (2013: 20%) of their pension for cash at retirement. This implies a full
take-up of the permitted 25% (2013: 25%) commutation by approximately 80% (2013: 80%) of eligible members on retirement.

105

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2014www.cobham.com The sensitivity of scheme liabilities to changes in certain key assumptions, after adjusting for liabilities covered by insurance contracts, is provided below:

Discount rate
Inflation rate
Life expectancy

Change in assumption
Increase by 0.5%
Increase by 0.5%
Increase by 1 year

Change in liabilities
-4%
+3%
+2%

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 OCI are as follows:

£m
Current service cost included
in administrative expenses
Scheme administration expenses
Amounts recognised in operating profit

Net interest
Amounts credited/(charged) to other finance
expense

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 recognised in OCI

Employer contributions
Member contributions
Benefits paid
Amounts included in Cash Flow Statement

Exchange differences

Net movement in the year
Net liability at start of year
Net liability at end of year

Scheme assets

Defined benefit
obligations

2014

Total

(5.5)
(0.6)
(6.1)

(3.6)

65.2
–
0.1

(96.3)

3.3
(27.7)

23.0
–
–
23.0

(0.3)

(5.5)
–
(5.5)

(29.6)

–
–
0.1

(96.3)

3.3
(92.9)

–
(2.6)
24.2
21.6

(1.3)

(107.7)
(664.9)
(772.6)

(14.7)
(87.3)
(102.0)

Scheme
assets

Defined benefit
obligations

–
(1.4)
(1.4)

25.2

22.8
(39.0)
–

–

–
(16.2)

21.1
2.7
(25.9)
(2.1)

(0.3)

5.2
572.4
577.6

(5.2)
–
(5.2)

(28.0)

–
–
–

(18.1)

8.7
(9.4)

–
(2.7)
25.9
23.2

0.3

(19.1)
(645.8)
(664.9)

2013

Total

(5.2)
(1.4)
(6.6)

(2.8)

22.8
(39.0)
–

(18.1)

8.7
(25.6)

21.1
–
–
21.1

–

(13.9)
(73.4)
(87.3)

–
(0.6)
(0.6)

26.0

65.2
–
–

–

–
65.2

23.0
2.6
(24.2)
1.4

1.0

93.0
577.6
670.6

Total employer contributions exceeded current service cost, past service cost and scheme administration expenses by £16.9m (2013: £14.5m).

The present value of funded obligations relating to the US scheme is US$42.7m (2013: US$35.5m) and the fair value of scheme assets relating to the US scheme
is US$27.0m (2013: US$26.2m).

The cumulative amount of actuarial losses recognised in the OCI since transition to IFRS is £235.8m (2013: £208.1m). 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.

The actual return on scheme assets was £91.1m (2013: £48.0m before accounting for the actuarial loss of £39.0m generated on the buy-in transaction).
The weighted average duration of the scheme liabilities is estimated to be 19 years.

106

Cobham plcAnnual Report and Accounts 2014www.cobham.com Notes to the Group Financial Statements continuedThe 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
Liability driven investments
Corporate bonds
Diversified growth funds
Insurance contracts
Other assets

£m
56.7
27.6
18.4
108.4
4.8
153.1
299.5
2.1
670.6

2014
%
8.5%
4.1%
2.7%
16.2%
0.7%
22.8%
44.7%
0.3%
100.0%

£m
74.7
43.0
20.0
–
28.8
127.4
280.7
3.0
577.6

2013
%
12.9%
7.4%
3.5%
–
5.0%
22.1%
48.6%
0.5%
100.0%

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.

Other retirement benefit schemes
The assets and liabilities of other immaterial retirement benefit schemes are as follows:

£m
French indemnity schemes
German based schemes
US based schemes

Assets
–
3.5
1.9
5.4

2014
Liabilities
(4.2)
(3.7)
(5.8)
(13.7)

Assets
–
2.6
–
2.6

2013
Liabilities
(3.6)
(2.6)
–
(6.2)

The actuarial loss for these schemes in the year to 31 December 2014, recognised in OCI, was £0.7m (2013: nil). The net liabilities are included in other liabilities
in note 19. The German based schemes are substantially covered by insurance policies.

24. 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 gains and losses included in the Income Statement
amounted to a gain of £5.8m (2013: £3.2m loss). 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 the Balance Sheet, translated into sterling at the
relevant year-end exchange rates:

US dollars
Euros
Australian dollars
Danish kroner
Other currencies

Sterling denominated monetary assets and liabilities

Monetary
assets
353.6
109.4
47.4
16.1
45.5
572.0
143.5
715.5

2014
Monetary
liabilities
(1,555.3)
(82.8)
(45.8)
(77.7)
(11.7)
(1,773.3)
(128.8)
(1,902.1)

Monetary
assets
188.8
86.8
56.2
18.1
24.5
374.4
166.2
540.6

2013
Monetary
liabilities
(584.9)
(109.3)
(54.2)
(90.7)
(8.3)
(847.4)
(117.9)
(965.3)

107

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2014www.cobham.com 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 £1,305.4m (2013: £482.4m) and Danish krone borrowings of £71.0m (2013: £75.9m) 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 OCI and in the translation reserve (note 26).

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.

During 2014 forward contracts have been placed to sell US dollars for Danish kroner to mitigate the impact of US dollar sales now being made by the Group’s
Danish subsidiaries.

The sterling/US dollar and Danish kroner/US dollar exchange rates are the most important for the Group. The Group has the following forward foreign currency
contracts outstanding for net sales of US dollars for sterling and Danish kroner:

Expiring within one year
Expiring within one to two years
Expiring after two years
US$/sterling contracts outstanding at 31 December

Expiring within one year
Expiring within one to two years
Expiring after two years
US$/DKK contracts outstanding at 31 December

2014
110.9
14.7
47.6
173.2

2014
138.1
125.1
28.3
291.5

US$m amount
2013
124.1
38.0
71.6
233.7

US$m amount
2013
9.6
–
–
9.6

Average US$: £
exchange rate
2013
1.59
1.58
1.56
1.58

Average US$: DKK
exchange rate
2013
5.55
–
–
5.55

2014
1.60
1.54
1.56
1.58

2014
5.53
5.47
5.34
5.49

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 commitments.

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 to sterling
US dollars to Danish kroner
Euros to sterling

Sensitivity
9%
12%
8%

Profit or loss
(8.0)
(18.4)
(4.2)

2014
Total equity
(8.0)
(18.4)
(4.2)

Sensitivity
11%
14%
9%

Profit or loss
(13.8)
(1.4)
(3.3)

2013
Total equity
(13.8)
(1.4)
(3.3)

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 to sterling
US dollars to Danish kroner
Euros to sterling

Sensitivity
10%
10%
10%

Profit or loss
(9.1)
(15.0)
(5.4)

2014
Total equity
(9.1)
(15.0)
(5.4)

Sensitivity
10%
10%
10%

Profit or loss
(12.4)
(0.9)
(3.7)

2013
Total equity
(12.4)
(0.9)
(3.7)

108

Cobham plcAnnual Report and Accounts 2014www.cobham.com Notes to the Group Financial Statements continued
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.

£m
Senior notes
Bank loans at fixed rate
Bank loans swapped to fixed rate
Fixed rate borrowings

Bank loans and overdrafts
Senior notes
Finance leases
Floating rate borrowings

Total borrowings

2014
777.6
48.1
30.8
856.5

492.2
99.4
0.2
591.8

1,448.3

2013
216.7
45.3
37.1
299.1

261.0
93.6
0.4
355.0

654.1

All floating rate borrowings have regular repricing dates.

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
Australian dollar loans

Period of swap contract

Fixed rate
6.30%
6.40%

from
May 2006
January 2007

to
January 2020
January 2020

Currency
value
AUS$49.7m
AUS$9.0m

2014

£m
26.1
4.7
30.8

Currency
value
AUS$58.0m
AUS$10.8m

2013

£m
31.3
5.8
37.1

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 18, at 31 December 2014 undrawn committed borrowing facilities of £102.7m (2013: £37.7m) were available to the Group 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.

£m
Non-derivative financial liabilities
Borrowings
Trade and other payables
At 31 December 2014

Derivative liabilities
Interest rate swaps
Foreign exchange derivatives
Gross cash outflows
Gross cash inflows

Inflation swap
At 31 December 2014

Within
one year

48.5
359.8
408.3

1-2 years

2-5 years

418.7
3.4
422.1

688.2
5.5
693.7

1.1

0.9

1.3

464.2
(446.1)
0.8
20.0

100.1
(90.8)
1.1
11.3

22.7
(20.2)
1.1
4.9

Over
5 years

529.3
4.6
533.9

–

–
–
–
–

Total

1,684.7
373.3
2,058.0

3.3

587.0
(557.1)
3.0
36.2

109

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2014www.cobham.com £m

Non-derivative financial liabilities
Borrowings
Trade and other payables
At 31 December 2013

Derivative liabilities
Interest rate swaps
Foreign exchange derivatives
Gross cash outflows
Gross cash inflows

Inflation swap
At 31 December 2013

Within
one year

1-2 years

2-5 years

63.1
271.4
334.5

1.3

120.9
(118.1)
0.5
4.6

14.5
14.2
28.7

0.8

16.8
(15.1)
0.9
3.4

512.3
3.5
515.8

1.2

0.2
(0.2)
2.0
3.2

Over
5 years

124.5
2.8
127.3

0.1

7.5
(8.0)
–
(0.4)

Total

714.4
291.9
1,006.3

3.4

145.4
(141.4)
3.4
10.8

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. 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 term 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 16.

Group management monitor the ageing of receivables which are more than one month overdue and debtor days on a regular basis. At 31 December 2014, 9.2%
(2013: 8.2%) of gross trade receivables were overdue by one month or more.

The maximum exposure to credit risk at 31 December 2014 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 £5.8m of receivables.

Bank term balances totalling £6.2m (2013: £6.4m) have been pledged against the residual value of leased assets as described in note 15.

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 15. 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 15.

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 22.

Capital risk management
Group policy is to maintain a strong capital base so as to maintain stakeholder confidence and to sustain future development of the business. Capital is defined as
total equity excluding non-controlling interests and amounted to £1,111.4m at 31 December 2014 (2013: £1,043.4m). 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 31. 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.

110

Cobham plcAnnual Report and Accounts 2014www.cobham.com Notes to the Group Financial Statements continued25. Share capital

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

2014
£m

Number
of shares

1,479,200,000
20,000

37.0
–

1,479,200,000
20,000

1,214,527,625

30.4

1,154,527,625

2013
£m

37.0
–

28.9

60,000,000 ordinary shares of 2.5 pence each, with an aggregate nominal value of £1.5m, were issued on 23 May 2014 following a stock exchange placing.
The gross proceeds realised were £180.0m, resulting in an increase in share premium of £175.3m after expenses as shown in the Statement of Changes in Equity.

As at 31 December 2014, 82,231,281 (2013: 85,680,533) ordinary shares were held in treasury including 6,279,557 (2013: 9,728,809) shares held in the Cobham
Employee Benefit Trust. At 31 December 2014, the market value of treasury shares was £266.3m (2013: £235.2m), including shares with a market value of £20.3m
(2013: £26.7m) held by the Cobham Employee Benefit Trust.

During the year ended 31 December 2014, treasury shares were used to satisfy awards and options under the Group’s share based payment 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 65.

26. Other reserves

£m
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 based payment reserve on exercise
Share based payments recognised in reserves
Tax effects
At 1 January 2014
Foreign exchange differences on translation of overseas operations
Reclassification of foreign exchange on divestment of overseas operation
Movements on cash flow hedges – interest rate swaps
Movements on cash flow hedges – foreign exchange contracts
Reclassification of fair value of cash flow hedges to income statement
Transfer of share based payment reserve on exercise
Share based payments recognised in reserves
Tax effects
Foreign exchange adjustments
At 31 December 2014

Note

Translation
reserve
41.7
(11.1)
0.6
–
–
1.5
–
–
(0.5)
32.2
(16.8)
(1.9)
0.1
–
–
–
–
–
–
13.6

Hedge
reserve
(6.3)
–
–
4.5
1.5
(1.5)
–
–
(0.7)
(2.5)
–
–
(1.4)
2.9
1.3
–
–
(0.9)
(0.1)
(0.7)

Share based
payment reserve
28.8
–
–
–
–
–
(4.2)
(1.7)
2.6
25.5
–
–
–
–
–
(3.3)
6.1
1.5
–
29.8

Total other
reserves
64.2
(11.1)
0.6
4.5
1.5
–
(4.2)
(1.7)
1.4
55.2
(16.8)
(1.9)
(1.3)
2.9
1.3
(3.3)
6.1
0.6
(0.1)
42.7

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.

The hedge reserve reflects movements in fair values on cash flow hedging derivatives as detailed in notes 22 and 24.

The share based payment reserve includes the cost of share awards as assessed under IFRS 2 and detailed in note 27, together with deferred tax provided under
IAS 12. The appropriate proportion of the share options reserve is transferred to retained earnings following vesting or exercise.

111

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2014www.cobham.com 27. 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

2014
6.8
1.4
(2.1)
6.1

2013
4.7
1.2
(7.6)
(1.7)

During the year ended 31 December 2014, £2.1m (2013: £7.6m) charged to the Income Statement in previous years has been released, reflecting actual
vesting experience and a reassessment of the expected future vesting of outstanding awards, based on non-market related performance conditions.

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 2013 and 2014 to the Group’s CEO and CFO.

The PSP scheme also includes retention awards granted during 2014 which mainly vest in equal amounts after two or three years, conditional only upon
continued employment within the Group.

Other schemes include ESOS, RSP, BCP and ShareSave elements. In previous years, share options were awarded to senior executives under the ESOS scheme,
with exercise conditional upon the Group’s underlying EPS growth over a three year period. This scheme included a ‘time-only’ section for US employees whereby
options were granted with 25% vesting on each annual anniversary, conditional only on continued employment within the Group. No new awards have been
made under this scheme since 2013. Restricted Share Plan awards (RSPs) have been granted for the first time during 2014. This scheme gives the rights to acquire
shares for nil consideration over a four year period, with 25% vesting on each annual anniversary, conditional only upon 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.

Further details of all the schemes can be found in the Directors’ Remuneration Report on pages 56 to 64.

The number of awards outstanding at 31 December are as follows:

Number of awards (thousands of shares)
PSP
ESOS
RSP
BCP
ShareSave
At 31 December

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

2014
10,380
5,914
543
118
5,908
22,863

2014
8,544
5,171
(2,491)
(802)
(42)
10,380

2013
8,544
10,161
–
190
5,447
24,342

2013
7,794
3,531
(2,315)
(466)
–
8,544

Weighted average remaining contractual life of PSP awards outstanding
Number of PSP awards exercisable at 31 December (thousands)

1.46 years
40

1.38 years
669

Awards under the PSP schemes have been granted at various dates throughout the year, with main tranches in March, May and September 2014.
The average fair value of PSP awards granted during 2014 was £2.833 (2013 awards: £2.223), 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 weighted average inputs into the
models were as follows:

Weighted average share price
Expected life
Expected employee cancellation rate
Risk free rate

112

2014
£3.065
2.82 years
4.1%
0.9%

2013
£2.472
2.96 years
1.8%
0.3%

Cobham plcAnnual Report and Accounts 2014www.cobham.com Notes to the Group Financial Statements continuedThe expected lives used in the models have been adjusted, based on management’s best estimate, for the effects of non-transferability and behavioural
considerations. The expected employee cancellation rates are based on assessments of historic rates of voluntary cancellations of contracts by employees.
Most participants of the PSP schemes receive the benefit of dividend payments and therefore dividend yields are not taken into consideration in the
valuation models.

The fair values of ESOS and ShareSave awards are significantly lower than for PSP, RSP and BCP awards due to the effect of the exercise price which is set
based upon the market value of the Company’s ordinary shares around the date of grant.

28. Business combinations

Businesses acquired during the year
On 12 September 2014 Aeroflex Holding Corp. (Aeroflex) was acquired following a public offer and the purchase of 92% of the share capital. The remaining shares
have been purchased in 2015.

Approximately 70% of Aeroflex’s revenue is focused on commercial markets with exposure to wireless, space, microelectronics, industrial, energy and other
sectors, increasing the proportion of Cobham’s commercial revenue and building on Cobham’s focus on connectivity capabilities, customers and characteristics.
Aeroflex operations are being integrated into Cobham’s Advanced Electronic Solutions and Communications and Connectivity Sectors. The scale and complementary
nature of this acquisition is expected to enable Cobham to unlock significant synergy benefits, generating increased shareholder value, whilst supporting customers
more effectively. Further details can be found on pages 18 and 19.

Fair value information
The fair value of the business combination can be analysed as follows:

£m
Cash consideration paid
Cash consideration to be paid for remaining shares

A summary of the fair values of the net assets acquired is as follows:

£m
Intangible assets
Property, plant and equipment
Investment properties
Trade and other receivables
Non-current assets

Inventories
Trade and other receivables
Cash and cash equivalents
Current assets

Borrowings
Trade and other payables
Provisions
Current tax liabilities
Current liabilities

Trade and other payables
Provisions
Deferred tax
Non-current liabilities

Net assets acquired
Goodwill

The fair values of net assets acquired are provisional and subject to potential adjustment.

Total
523.5
49.3
572.8

Total
517.4
48.6
0.8
12.8
579.6

118.4
55.9
39.4
213.7

(362.3)
(70.5)
(7.8)
(13.1)
(453.7)

(6.4)
(2.6)
(144.3)
(153.3)

186.3
386.5
572.8

113

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2014www.cobham.com 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. Synergies are expected to arise from cross-selling
revenue benefits, site consolidation, supply chain efficiency, implementation of the Cobham Standard Operating Framework and elimination of duplicate
corporate overheads. Goodwill is not anticipated to be deductible for tax purposes.

The gross value of acquired trade and other receivables is £73.9m. These are included in the table above at their fair value of £68.7m. Contingent liabilities
recognised as provisions and included in the table above include amounts relating to outstanding legal settlements and environmental remediation provisions
in respect of a number of Aeroflex’s sites. The majority of these are expected to be settled within one year although some are longer term provisions.

Results of business combinations
Third party revenue of Aeroflex, since the date of acquisition, was £123.7m. The post-acquisition loss after tax was £5.7m including 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. Trading profit was £24.5m.

If this business combination had taken effect on 1 January 2014, it is estimated that Group total revenues would have been £2,110.0m and profit after
tax £31.5m. This information is not necessarily indicative of the results had the operations been acquired at the start of the year, nor of future results of
the combined operations.

The net cash flows resulting from business combinations are as follows:

£m
Cash consideration paid – Aeroflex and Axell
Net debt acquired

Total
523.2
322.9
846.1

Costs of £21.4m were incurred in relation to business combinations. These costs are recognised within administrative expenses in the Income Statement and
included within other acquisition related costs excluded from underlying profit as shown in note 2.

In the Group consolidated financial statements for the year to 31 December 2013, the fair values of assets and liabilities acquired for FBH were marked as provisional.
Following further review the opening balance sheet has been amended to reflect an increase in trade and other payables of £1.8m, a decrease in current tax liabilities
of £2.5m and an increase in deferred tax assets of £0.4m. Goodwill has therefore been adjusted accordingly.

29. 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

2014
41.8
24.0
23.3
20.1
16.2
53.6
179.0

2013
26.0
23.4
21.0
18.8
16.3
63.4
168.9

Operating lease payments during the year totalled £27.3m (2013: £30.4m) including rental costs of £6.9m (2013: £7.1m) relating to operational aircraft used in
the Group’s service businesses; the remainder primarily relates to the rental of office and operating facilities.

Operating lease commitments include £12.0m related to onerous leases which have been provided for at the balance sheet date.

114

Cobham plcAnnual Report and Accounts 2014www.cobham.com Notes to the Group Financial Statements continued30. Contingent liabilities
At 31 December 2014, 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 2014.

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 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, 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 final costs of technical solutions, the outcome of negotiations
with customers 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 incurred in excess of original baselines.

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.. This matter was satisfactorily concluded with the DoJ during the year with no material cost to the Group.

31. Related party transactions
Sales of goods to related parties were made on an arms length basis. No guarantees have been given to, or received from, related parties. No expense has been
recognised for bad or doubtful debts in respect of the amounts owed by related parties. Transactions between Group entities and joint ventures and associates
during the year were as follows:

£m
Sales of goods
Purchases of goods
Dividends received from joint ventures
Loan repayments and interest received from joint ventures

2014
–
1.0
–
–

2013
0.4
0.3
(3.7)
(3.0)

Compensation of key management personnel
Details of the compensation of key management personnel can be found in note 4.

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 56 to 64.

115

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2014www.cobham.com 32. Subsidiaries
All subsidiary undertakings have been included in the Group consolidation. The undertakings held at 31 December 2014 which, in the opinion of the Directors,
principally affected the results for the year or the net assets of the Group were:

Business Unit and principal activities
Cobham Communications and Connectivity

Name of undertaking

Aerospace Communications
Design and manufacture of high technology avionics, connectivity, motion control
and microwave solutions for commercial, security and defence platforms, with
world leading positions for aircraft audio management systems and slip rings.

Air Précision SAS
Chelton Avionics, Inc
Chelton Telecom and Microwave SAS
TEAM SA

Antenna Systems
Advanced antenna technology for satellite communications, avionics, radar and
surveillance applications which connects military and commercial aircraft, naval
vessels, vehicles and mobile teams with the world through high-speed data,
voice and video.

Chelton Limited
Chelton, Inc
Cobham CTS Limited
Trivec-Avant Corporation

SATCOM
Development, manufacture, sales and support of satellite and radio communication
terminals and earth stations for land, maritime and airborne applications.

Sea Tel, Inc

Thrane & Thrane A/S

Tactical Communications and Surveillance
Leading edge surveillance and communication technologies for successful
operations in demanding environments.

Cobham Defence Communications Limited
Cobham TCS Limited
DTC Communications, Inc

Composites

Design, development, manufacture, test and repair of high performance
composite components for both civil and military aerospace applications.

Cobham Advanced Composites Limited
Cobham Composite Products, Inc

AvComm

Development, manufacture, sales and support of high performance
development, test, monitoring and control solutions for commercial,
government and military applications.

Aeroflex Wichita, Inc

Wireless

Advanced network solutions and applications, delivering class leading, cost
effective solutions that address the increasing demand for data connectivity,
capacity and quality.

Aeroflex Limited
Axell Wireless Limited

Cobham Mission Systems

Aerial refuelling, actuation and control, and advanced restraint systems for space,
aerospace and land including remote controlled unmanned systems and bomb
disposal vehicles for homeland security and military applications.

Carleton Life Support Systems, Inc
Carleton Technologies, Inc
Flight Refuelling Limited **

Telerob Gesellschaft für Fernhantierungstechnik mbH

Place of incorporation
(or registration) and
operation

France
USA
France
France

England
USA
England
USA

USA

Denmark

England
England
USA

England
USA

USA

England
England

USA
USA
England

Germany

116

Cobham plcAnnual Report and Accounts 2014www.cobham.com Notes to the Group Financial Statements continuedBusiness Unit and principal activities

Cobham Advanced Electronic Solutions

Microelectronic Solutions

RF microelectronic technologies that enable mission critical performance
for electronic warfare, missiles, communications, and radar applications.
Monolithic Microwave Integrated Circuit (MMIC) technology, industry leading
phase noise performance, and high packaging density which enable innovative
solutions to challenging mission requirements.

Name of undertaking

Place of incorporation
(or registration) and
operation

Cobham Advanced Electronic Solutions, Inc *

USA

Integrated Electronic Solutions

Mission critical RF technology solutions serving defence, commercial aerospace
and space customers.

Cobham Advanced Electronic Solutions, Inc *

Continental Microwave and Tool Co, Inc

Semiconductor Solutions

Standard HiRel ICs including memory, microprocessor, interconnect and power,
and ASICs (application specific integrated circuits) for space, commercial, medical
and industrial markets along with electronic manufacturing services including
circuit card assembly, radiation testing, component upscreening and packaging.

Aeroflex Plainview, Inc *

Aeroflex Colorado Springs, Inc

RFMW Solutions

Microwave and RF devices, components, modules and subsystems including
signal attenuation products, microwave diodes, integrated microwave assemblies,
military discretes, synthesizers and interconnect subsystems.

Aeroflex Control Components, Inc

Aeroflex Plainview, Inc *

Motion Control Solutions

High reliability motion control products including slip rings, twist capsules,
actuators, DC motors and controllers for space, military, avionics and strategic
industrial customers.

Aeroflex Plainview, Inc *

Cobham Aviation Services

Special Mission

Aerial surveillance services, operational readiness training, mission rehearsal
and flight inspection services.

FR Aviation Limited

Surveillance Australia Pty Limited

Helicopter Services

Helicopter pilot training, search and rescue, logistics and emergency medical
services for government clients globally.

FB Heliservices Limited

USA

England

Australia

England

Airline Services

Operation of a fleet of 18 Boeing 717 aircraft for QantasLink, the regional airline
of Qantas. Providers of flight crew and management of high capacity airline services
to regional ports and state capitals across Australia.

National Jet Systems Pty Limited

Australia

Regional Services
Customised passenger and freight flights in support of the resource industry
in remote areas of Australia and Papua New Guinea.

National Jet Express Pty Limited

Australia

* Cobham Advanced Electronic Solutions, Inc and Aeroflex Plainview, Inc operate across a number of sites within more than one Business Unit.
** 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.

117

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2014www.cobham.com Independent Auditors’ Report to the Members of Cobham plc

Report on the Parent Company Financial Statements

Our opinion
In our opinion, Cobham plc’s Parent Company Financial Statements
(the financial statements):
– Give a true and fair view of the state of the Parent Company’s affairs

Other Companies Act 2006 reporting
Under the Companies Act 2006 we are required to report to you if, in our
opinion, certain disclosures of Directors’ remuneration specified by law are
not made. We have no exceptions to report arising from this responsibility.

as at 31 December 2014;

– Have been properly prepared in accordance with United Kingdom

Responsibilities for the financial statements and the audit

Generally Accepted Accounting Practice; and

– Have been prepared in accordance with the requirements of the

Companies Act 2006.

What we have audited
Cobham plc’s financial statements comprise:
– The Parent Company Balance Sheet as at 31 December 2014;
– The Reconciliation of Movements in Shareholders’ Funds for the year

then ended; and

– The notes to the financial statements, which include a summary

of significant accounting policies and other explanatory information.

The financial reporting framework that has been applied in the preparation
of the financial statements is applicable law and United Kingdom Accounting
Standards (United Kingdom Generally Accepted Accounting Practice).

Other required reporting

Consistency of other information
Companies Act 2006 opinion
In our opinion, the information given in the Strategic Report and the Directors’
Report for the financial year for which the financial statements are prepared
is consistent with the financial statements.

ISAs (UK and Ireland) reporting
Under International Standards on Auditing (UK and Ireland)
(ISAs (UK and 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 financial

statements; or

– Apparently materially incorrect based on, or materially inconsistent with,
our knowledge of the Company acquired in the course of performing
our audit; or

– Otherwise misleading.

We have no exceptions to report arising from this responsibility.

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 require for

our audit; or

Our responsibility is to audit and express an opinion on the financial statements
in accordance with applicable law and ISAs (UK and 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
Parent 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.

What an audit of financial statements involves
We conducted our audit in accordance with ISAs (UK and 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.

We primarily focus 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.

We test and examine information, using sampling and other auditing
techniques, to the extent we consider necessary to provide a reasonable basis
for us to draw conclusions. We obtain audit evidence through testing the
effectiveness of controls, substantive procedures or a combination of both.

– 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

Other matter
We have reported separately on the Group Financial Statements of Cobham plc
for the year ended 31 December 2014.

– The 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
Directors’ remuneration report – Companies Act 2006 opinion
In our opinion, the part of the Directors’ Remuneration Report to be audited
has been properly prepared in accordance with the Companies Act 2006.

Pauline Campbell
(Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
4 March 2015

118

Cobham plcAnnual Report and Accounts 2014www.cobham.com Parent Company Balance Sheet (under UK GAAP)
As at 31 December 2014

£m
Fixed 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

2014

2013

5
5
10

10
6

8
9

11
12
12
12
12

–
776.4
6.1
14.3
796.8

15.7
1,988.4
420.2
2,424.3

0.1
776.8
6.1
18.1
801.1

8.3
1,118.9
74.1
1,201.3

(155.5)
2,268.8

(355.3)
846.0

3,065.6

1,647.1

(1,855.4)
(6.6)
1,203.6

(1,020.1)
(6.6)
620.4

30.4
301.9
43.6
17.5
810.2
1,203.6

28.9
126.6
43.6
14.8
406.5
620.4

The financial statements on pages 119 to 123 were approved by a duly appointed and authorised committee of the Board on 4 March 2015 and signed
on its behalf by:

Bob Murphy
Directors

Simon Nicholls

Reconciliation of Movements in Shareholders’ Funds
For the year ended 31 December 2014

£m
Profit for the financial year
Dividends
Retained profit for the financial year
Issue of shares
Treasury shares
Movements in hedge reserve
Share based payments
Net addition to shareholders’ funds
Shareholders’ funds at 1 January
Shareholders’ funds at 31 December

Note

11, 12
12
12
12

2014
505.4
(108.3)
397.1
176.8
3.3
(0.1)
6.1
583.2
620.4
1,203.6

2013
108.1
(96.6)
11.5
–
(1.8)
3.8
(1.7)
11.8
608.6
620.4

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.

119

PARENT COMPANY FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2014www.cobham.com

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.

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.

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 sterling 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.

Contributions to defined contribution schemes are charged to the profit and
loss account in the period the contributions are payable.

All exchange differences arising are taken to the profit and loss account.

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.

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
based payment awards for employees of subsidiary undertakings, net of
amounts recovered as management charges.

Other investments are stated at cost less any provision for impairment in value.

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.

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 re-measured
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.

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.

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

120

Cobham plcAnnual Report and Accounts 2014www.cobham.com

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.

3. Directors’ emoluments and pension costs
Disclosures in respect of Directors’ emoluments can be found in the Directors’
Remuneration Report on pages 56 to 64 of the Annual Report and Accounts.

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 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.

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 assessments of
the CPP and CEPP were 1 April 2012 and 1 April 2013 respectively. The
assessments were updated to 31 December 2014, at which date the total
net liabilities of the schemes were assessed to be £92.3m. 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.

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.

Contributions to the Group schemes for 2014 were £0.2m (2013: £0.3m) of
normal funding and £9.1m (2013: £9.4m) of deficit funding. No contributions
were outstanding at the end of 2014 or 2013.

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.

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 £0.9m (2013: £1.0m). No contributions were outstanding
at the end of 2014 or 2013.

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 awards 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 share based payments awarded to employees of subsidiary
undertakings, net of amounts recovered as management charges, is recognised
as a capital contribution and recorded in investments.

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 Restricted Share Plan (RSP);
– the Cobham Executive Share Option Scheme (ESOS); and
– the Cobham Bonus Co-investment Plan (BCP).

The valuation of the awards 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.

Employees also participate in the Cobham Savings Related Share Option
Scheme (ShareSave) operated by the Group, which is open to all UK employees.

2. Dividends

£m
Final dividend of 7.04 pence per share
for 2013 (2012: 6.4 pence)
Interim dividend of 2.904 pence per share
for 2014 (2013: 2.64 pence)
Total dividend authorised and paid during the year

2014

2013

75.5

68.5

32.8
108.3

28.1
96.6

Further details of the proposed final dividend of 7.746 pence per share are
shown in respect of the financial year ended 31 December 2014 in note 7 to
the Group Financial Statements.

The Company recognised a total charge of £1.5m (2013: £2.2m credit) related
to equity settled share based payment transactions during the year (excluding
national insurance). This includes charges of £2.4m less a reversal of £0.9m
of amounts charged in previous years due to the reassessment of assumptions
during the year (2013: £2.3m less £4.5m reversal). As shown in note 5,
investments in Group and other undertakings have been adjusted by £0.4m,
comprising £4.6m for awards granted to employees of the Company’s
subsidiaries less £5.0m recharged during the year.

At 31 December, the following awards were outstanding under each
of the schemes:

Number of awards (thousands of shares)
PSP
RSP
ESOS
BCP
ShareSave

2014
3,695
23
519
114
283
4,634

2013
3,821
–
817
111
269
5,018

Further details of these schemes can be found in the Directors’ Remuneration
Report on pages 56 to 64 and in note 27 to the Group Financial Statements
on pages 112 and 113.

121

PARENT COMPANY FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2014www.cobham.com 5. Investments in Group and other undertakings

7. Creditors: amounts falling due within one year

£m
Cost and net book amount
At 1 January 2014
Share based payment awards granted
to employees of Group undertakings
net of recoveries
At 31 December 2014

Share based
payments

Total

764.7

12.1

776.8

£m
Bank overdrafts
Senior notes
Total borrowings

Note

–
764.7

(0.4)
11.7

(0.4)
776.4

2014
26.3
–
26.3

3.7
75.3
23.3
6.8
2.2
17.9
155.5

2013
(as re-presented)
143.2
46.2
189.4

1.9
125.8
8.8
7.4
1.9
20.1
355.3

Trade creditors
Amounts owed to Group undertakings
Derivative financial instruments
Corporation tax payable
Other tax and social security
Accruals and deferred income

Bank loans reported as current liabilities as at 31 December 2013 have been
re-presented as non-current liabilities in accordance with the maturity dates
of the relevant agreements. Further details of the Company’s principal
borrowing facilities are disclosed in note 18 to the Group Financial Statements.

Interest is charged on amounts owed to Group undertakings at rates varying
between 0.25% and 9.0%. These amounts are unsecured and are repayable
on demand.

8. Creditors: amounts falling due after more than one year

£m
Bank loans
Senior notes
Amounts owed to Group undertakings
Derivative financial instruments

Note

2014
569.8
877.0
390.6
18.0
1,855.4

2013
(as re-presented)
341.7
264.1
403.5
10.8
1,020.1

The loans falling due after more than one year are due for repayment
as follows:

£m
Between one and two years
Between two and three years
Between three and four years
Between four and five years

2014
331.1
52.2
186.5
–
569.8

2013
(as re-presented)
–
97.0
89.5
155.2
341.7

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 between
2020 and 2024

2014
51.9
363.9

461.2
877.0

2013
–
142.5

121.6
264.1

Amounts owed to Group undertakings consist of frozen loans which are
unsecured, interest free and not repayable within one year.

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 32 to the Group Financial
Statements. The market capitalisation of the Group as a whole is given in the
Group Financial Record on page 124.

The Company has minority shareholdings in two companies in connection
with the Voyager (FSTA) programme. The total amount invested is £6.1m
(2013: £6.1m) and this is held as a trade investment.

6. Debtors

£m
Amounts owed by Group undertakings
Deferred tax
Loan notes
Prepayments and accrued income

2014
1,959.9
2.8
18.3
7.4
1,988.4

2013
1,093.5
2.8
18.3
4.3
1,118.9

Amounts owed by Group undertakings are unsecured and repayable on
demand. All such balances, excluding trading balances, are interest bearing.
Loan notes relate to the FSTA programme, these are interest bearing and
due for repayment in 2035.

The net deferred tax asset can be analysed as follows:

£m
Derivative financial instruments
Share based payments
Accelerated capital allowances
and other timing differences

2014
2.0
0.7

0.1
2.8

2013
1.3
1.0

0.5
2.8

There were no movements in the net deferred tax asset during the year.
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.

122

Cobham plcAnnual Report and Accounts 2014www.cobham.com Notes to the Parent Company Financial Statements continued9. Provisions for liabilities
Other provisions of £6.6m (2013: £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. Reserves

10. 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 2014

Interest
rate swaps
–
–

Foreign
exchange
derivatives
12.1
14.9

Inflation
swap
2.2
0.8

Total
14.3
15.7

(0.7)

(21.8)

(0.8)

(23.3)

(2.6)
(3.3)

(13.2)
(8.0)

(2.2)
–

(18.0)
(11.3)

Fixed assets
Current assets
Creditors: amounts falling due
within one year
Creditors: amounts
falling due after more than one year
At 31 December 2013

–
–

15.2
7.8

2.9
0.5

18.1
8.3

(0.5)

(7.8)

(0.5)

(8.8)

(2.7)
(3.2)

(5.2)
10.0

(2.9)
–

(10.8)
6.8

11. Called up share capital

£m
Allotted, issued and fully paid
Equity
1,214,527,625 (2013: 1,154,527,625) 2.5 pence
ordinary shares
Non-equity
19,700 (2013: 19,700) 6% second cumulative
preference shares of £1

2014

2013

30.4

28.9

–

Preference shares with a value of £19,700 are classified as borrowings.

Further details of the share capital of Cobham plc, including shares issued
during the year and changes resulting from treasury shares, can be found in the
Directors’ Report on page 65 and in note 25 to the Group Financial Statements.

Share
premium
account
126.6
–
–

–

175.3

–

£m
At 1 January 2014
Profit for the financial year
Dividends
Purchase of
treasury shares
Premium on issue
of shares
Movement in fair value
of hedge accounted
derivatives
Reclassifications to profit
and loss account
Share based payments
recognised in reserves
Transfer of share based
payment reserve
At 31 December 2014

Other reserves
Share
based
payment
reserve
17.3
–
–

Hedge
reserve
(2.5)
–
–

Special
reserve
43.6
–
–

–

(1.4)

1.3

–

–
(2.6)

Profit and
loss
account
406.5
505.4
(108.3)

3.3

–

6.1

–
301.9

–
43.6

(3.3)
20.1

3.3
810.2

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 based payment reserve relates to provisions made in accordance
with FRS 20 for awards made to the Company’s employees under the Group’s
share based payment schemes. Where awards which gave rise to charges
under FRS 20 have vested or been exercised, the appropriate proportion
of the reserve is transferred to the profit and loss account in equity.

The audit fee in respect of the Parent Company Financial Statements was
£46,000 (2013: £45,000).

13. 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 2014 (2013: £nil).

14. 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 56 to 64.

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 £1.2m (2013: £1.1m) from TEAM SA which is 98.7% owned.
No amounts were outstanding at the current or prior year end.

123

PARENT COMPANY FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2014www.cobham.com Group Financial Record

£m
Revenue

2010
1,902.6

2011
1,854.4

2012
1,749.4

2013
1,789.7

2014
1,851.7

Underlying profit before taxation

306.1

327.9

300.2

288.0

257.0

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
Market capitalisation as at 31 December

189.3
(36.5)
152.8

234.3
(46.3)
188.0

204.0
(32.2)
171.8

126.6
(12.1)
114.5

24.3
4.7
29.0

1,048.4
350.9
17.2
31.2
1,123.2
2,570.9
(520.5)
(892.2)
1,158.2
(82.0)
1,076.2

28.9
1,046.9
1,075.8
0.4
1,076.2

917.6
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

1,102.1
315.5
15.8
60.3
877.9
2,371.6
(576.4)
(667.4)
1,127.8
(73.4)
1,054.4

28.9
1,024.9
1,053.8
0.6
1,054.4

1,162.2
360.7
3.1
43.3
849.9
2,419.2
(574.8)
(712.9)
1,131.5
(87.3)
1,044.2

28.9
1,014.5
1,043.4
0.8
1,044.2

1,997.2
400.4
3.1
77.5
1,104.8
3,583.0
(699.1)
(1,669.6)
1,214.3
(102.0)
1,112.3

30.4
1,081.0
1,111.4
0.9
1,112.3

(326.1)

(232.5)

(359.9)

(453.4)

(1,222.7)

271.4
79%

5.60
19.68
13.27
13.20
93.2

337.1
95%

6.17
22.05
16.80
16.76
88.3

339.3
104%

8.60
22.48
15.98
15.93
91.3

268.5
85%

207.9
73%

9.04
21.60
10.70
10.65
90.4

9.94
18.48
2.60
2.58
91.6

2,349

2,117

2,549

3,169

3,934

Current and non-current liabilities for 2010-2013 shown above have been reclassified in accordance with the maturity dates of borrowings as detailed in note 18.

124

Cobham plcAnnual Report and Accounts 2014www.cobham.com
Shareholder Information

Analysis of shareholders
Analysis of ordinary shareholders on the register at 31 December 2014:

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
1,592
2,529
626
233
119
143
5,242

Percentage of
registered holders
30.37
48.25
11.94
4.44
2.27
2.73
100.00

Number of
ordinary shares
held
783,930
9,115,633
13,100,164
25,741,314
62,256,496
1,027,578,364
1,138,575,901

Percentage of
ordinary shares
0.07
0.80
1.15
2.26
5.47
90.25
100.00

At 31 December 2014, there were 5,242 ordinary shareholders on the register, compared with 5,262 at 31 December 2013.

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

23 April 2015
30 April 2015
1 May 2015
29 May 2015
5 August 2015
8 October 2015
9 October 2015
6 November 2015

Registered Office
Brook Road, Wimborne, Dorset, BH21 2BJ, UK
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.

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 8:00am 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.

125

PARENT COMPANY FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2014www.cobham.com

Glossary

Acronym

A330MRTT

A350

A400M

AMDR

Full name

Airbus A330 MRTT

Airbus A350 XWB

Airbus A400M

Air and Missile Defense Radar

AMRAAM

Advanced Medium Range Air-to-Air Missile

B787

Boeing 787 Dreamliner

COSO ERM

Committee of Sponsoring Organizations of the
Treadway Commission, Enterprise Risk Management

Distributed Antenna Systems

Digital Receiver/Exciter

Enterprise Resource Planning

DAS

DREX

ERP

E190

Description

A military derivative of the A330, designed as a multi role
air-to-air refuelling and transport aircraft.

A twin engine extra wide body jet aircraft for commercial
use. The aircraft entered service in 2014.

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.

An advanced radar suite for US Navy destroyers currently
in development. 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.

A family of efficient airplanes with new passenger pleasing
features that bring the economics of large jet transports to
the mid-size aircraft market.

An integrated framework which helps businesses assess
and enhance their internal control systems. The framework
is used to control activities and to better achieve
established objectives.

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 wireless coverage for network operators,
transportation and public safety authorities.

An electronic subsystem which enables military platforms
to simultaneously operate its own radar systems, while
also jamming hostile radar systems.

An IT system which integrates all business processes,
including manufacturing, finance and accounting, human
resources, sales and marketing, purchasing, distribution,
and inventory into one central cohesive repository. It
allows businesses to run more efficiently, with real time
access to data across many business functions.

Embraer 190

A next generation narrow body, twin engine jet airliner.

Eurofighter

Eurofighter Typhoon

Explorer 5075 GX

Explorer 5075 Global Xpress

F-#

USAF designated fighter aircraft

A multi-role combat aircraft covering a full spectrum of air
operations, from air policing, to peace support, through to
high intensity conflict.

An auto-deploy flyaway SATCOM system that is
lightweight, rugged and highly portable. It is a land
based system that is configured specifically for
operation on the GX network.

Designation given by the US Air Force to aircraft designed
for air-to-air combat or for multiple roles, including ground
support missions.

126

Cobham plcAnnual Report and Accounts 2014www.cobham.com Acronym

FSTA

IED

Jaguar

KC-46

KC-390

MRJ

NASA

Full name

Description

Future Strategic Tanker Aircraft

Inmarsat Global Xpress

Improvised Explosive Device

SEPECAT Jaguar

Boeing KC-46

Embraer KC-390

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. FSTA uses the A330 MRTT.

A satellite service, with global coverage expected at
the start of the second half of 2015, 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.

Homemade bombs which have been the weapons
of choice for terrorists due to their availability and
destructiveness.

A supersonic low-level strike fighter created by a
joint venture between Britain and France.

An aerial refuelling tanker, currently being developed
for the US Air Force to replace its ageing fleet of KC-135
Stratotankers. The KC-46, which had its first flight at
the end of 2014, offers improved cargo and passenger
capability.

A medium-lift military transport and aerial refuelling
tanker aircraft currently being developed by Embraer.
Production is scheduled to commence in 2016.

Mitsubishi Regional Jet

A next generation regional jet which will give class leading
operational economy and outstanding cabin comfort.

The National Aeronautics and
Space Administration

A US government agency responsible for a civilian space
programme as well as aeronautics and aerospace research.

Sailor 100 GX

Sailor 100 Global Xpress

An advanced 3-axis stabilized Ka-band antenna system
designed for the Inmarsat GX satellite network.

SATCOM

Satellite Communication

Enables voice and data communications such as telephone
calls, television or internet connections, using an orbiting
satellite to transfer data around the earth.

SEWIP

TeraVM

TM500

Surface Electronic Warfare Improvement Program An evolutionary series of enhancements to the US Navy’s

AN/ SLQ-32 electronic warfare system for surface ships.

TeraVM

TM500

A comprehensive internal protocol network and
application performance test and measurement solution.

A family of offload test platforms that enable networks
including 4G and LTE to offload to Wifi connectivity.

127

OTHER INFORMATIONCobham plcAnnual Report and Accounts 2014www.cobham.com Definitions

KPI definitions

Group organic revenue growth
Revenue growth stated at constant translation exchange rates, excluding
the incremental effect of acquisitions and divestments.

Underlying EPS growth at constant translation exchange rates
The year-on-year increase in 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.

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, non-GAAP measures
including trading profit and underlying earnings results. Trading profit 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, revaluation gains and losses arising on the original
equity interests on stepped acquisitions, 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 to the integration of the Aeroflex businesses acquired
in 2014 and the EiD programme.

PV investment
Private Venture (PV) or company funded Research and Development (R&D)
measures exclude Aviation Services, where there is no R&D activity.

Underlying earnings are defined as trading profit less net underlying finance
costs, which excludes acquisition related items, and after deducting associated
taxation and non-controlling interests.

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.

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. Operating cash conversion is defined as operating cash flow
as a percentage of trading profit, excluding profit from joint ventures.

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 sectoral 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.

128

Cobham plcAnnual Report and Accounts 2014www.cobham.com COBHAM PROTECTS LIVES
AND LIVELIHOODS WITH ITS
DIFFERENTIATED TECHNOLOGY
AND KNOW-HOW. IT OFFERS
AN INNOVATIVE RANGE
OF TECHNOLOGIES AND
SERVICES TO SOLVE
CHALLENGING PROBLEMS
IN HARSH ENVIRONMENTS

Front cover: Image courtesy of Lockheed Martin Corporation.
Inside front cover: Image courtesy of Boeing.

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products and services, corporate responsibility and
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www.cobhamsustainability.com

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www.cobhaminvestors.com

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www.cobham.com/products-and-services

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Cobham plc

Annual Report and Accounts 2014

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