Cobalt Blue Holdings Limited Annual Report 2017

FY2017 Annual Report · Cobalt Blue Holdings Limited

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Cobham plc
Annual Report and Accounts 2017

Front cover image:
Cobham is investing in the development of a next generation life support
system, based on its revolutionary VigilOX™ breathing sensors, that will
directly respond to changing aircraft conditions and pilot physiology.
VigilOX™ monitors pilot health and cockpit conditions through a unique
combination of rapid response sensors. The sensors will interact with
the oxygen system to prevent the onset of physiologic events.

Inside cover image:
Cobham is developing the next generation of aircraft SATCOM products
called the Aviator ‘S’ Series. This provides cockpit connectivity and
enables SwiftBroadband safety services in a smaller and smarter package.
It is secured by over two million lines of code, protecting customers,
including Airbus, from the next two decades of aviation related
cyber threats.

Cobham is a leading global technology and
services innovator, respected for providing
solutions for the most challenging problems,
from deep space to the depths of the ocean.

We employ about 11,000 people primarily
in the US, UK, Europe and Australia.
We have customers and partners in more
than 100 countries.

Total revenue

Free cash flow*

£2,052.5m

(2016: £1,943.9m)

£140.6m

(2016: £50.7m)

Earnings per ordinary share –
underlying*

Earnings per ordinary
share – basic*

6.0p

(2016: 7.8p**)

3.5p

(2016: (45.9)p**)

Highlights of the Year
− Revenue 6% higher, benefiting from favourable currency

translation. Organic revenue growth of 1%

− Underlying operating profit of £210.3m, slightly ahead

of expectations

− Progressing delivery on the onerous contracts provided for in
2016, including KC-46, although risks and challenges remain

− Strong free cash flow generation as a result of management

focus, later phasing of 2016 onerous contract cash flows, lower
capital expenditure and £27m of advance customer receipts

− More resilient Balance Sheet with year-end gearing ratio at 1.3x

and US$545m revolving credit facilities refinanced for five
years or over

− Agreed divestment of AvComm and Wireless test and

measurement for US$455m in cash; transaction will increase
focus, reduce risk and further strengthen Balance Sheet

− Unchanged expectations for 2018 before divestment and

currency translation

* For details refer to pages 94 and 102.
** Restated for the bonus element of the June 2017 Rights Issue.

Contents

Strategic Report

Group at a Glance

Chairman’s Statement

Chief Executive Officer’s Statement

Our Markets

Our Business Model

Our Capabilities in Action

Our Turnaround Strategy

Future Strategic Direction

Our Key Performance Indicators

Communications and Connectivity Sector

Mission Systems Sector

Advanced Electronic Solutions Sector

Aviation Services Sector

Chief Financial Officer’s Statement

Principal Risks

Corporate Responsibility and Sustainability

Corporate Governance

Board of Directors

Corporate Governance Report

Compliance with the UK Corporate
Governance Code

Nomination Committee Report

Audit Committee Report

Directors’ Remuneration Report

Other Statutory Information

Statement of Directors’ Responsibility

Group Financial Statements

Independent Auditors’ Report

Group Financial Statements

Parent Company Financial Statements

Other Information

Group Financial Record

Shareholder Information

129

136

137

Visit us online at www.cobham.com

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

The Company is registered in England and Wales
under company number 00030470. The Company’s
registered office is Brook Road, Wimborne,
Dorset, BH21 2BJ, England.

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.

Group at a Glance

Cobham has four Sectors with
differentiated technology and
leading market positions

The Group in 2017
Cobham offers technologies and services across
its defence, aerospace and space markets. It has
leading market positions in: air-to-air refuelling;
aviation services; wireless; audio, video and
data communications, including satellite
communications; defence electronics;
life support and mission equipment.

Cobham has four Sectors, each with differentiated
technology and capabilities and leading market
positions. Three Sectors design and manufacture
intelligent hardware, primarily subsystems, also
supplying components particularly where
these can be integrated higher up the value chain.
Within the Aviation Services Sector we provide
often complex and customised services under
long term contracts.

Our revenue split by:

Sector (%)

Aviation Services
18%

Advanced
Electronic
Solutions
28%

£2,052.5m

(2016: £1,943.9m)

Market (%)

Communications &
Connectivity 34%

Commercial
40%

US defence/security
36%

Mission Systems
20%

UK, RoW defence
/security
24%

Communications and Connectivity
Provides high performance equipment and
solutions to enable reliable connectivity across a
range of demanding environments in aerospace,
avionics, satellite and radio, wireless and mobile
connectivity markets.

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. The primary focus is serving
niche areas of the defence and security market
globally, supplemented by an expanding presence
in commercial aviation markets.

Main operating locations
United States, United Kingdom, Denmark,
France, South Africa, Finland and Sweden

Main operating locations
United States and United Kingdom

Revenue

Underlying
operating profit

Revenue

Underlying
operating profit

£700.7m

£69.0m

£419.0m

£55.2m

(2016: £690.2m)

(2016: £58.2m)

(2016: £386.4m)

(2016: £60.0m)

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

See page 20 for more information

See page 22 for more information

www.cobham.com

Cobham plcAnnual Report and Accounts 2017
Geography (%)

Sector (%)

Geography (%)

Our underlying operating profit
split by:

Our employees worldwide:

RoW 4%
Asia10%

Australia 11%

Other EU 16%

UK 9%

USA 50%

Aviation Services
11%

Communications and
Connectivity 33%

RoW 5%
Australia 11%

USA 49%

Advanced
Electronic
Solutions
30%

£210.3m

(2016: £225.0m)

Other EU 13%

Mission Systems
26%

UK 22%

10,813 *

(2016: 10,692)

* Total permanent headcount at 31 December 2017.

Advanced Electronic Solutions
Provides critical solutions for communication on
land, sea, in the air and in space through off-the-
shelf and customised products including radio
frequency, microwave, and high reliability
microelectronics, antenna subsystems and motion
control solutions. This incorporates defence,
including missile, radar and electronic warfare,
X-ray imaging, medical and industrial markets.

Aviation Services
Delivers outsourced aviation services for customers
worldwide, including military training, special
mission flight operations, outsourced commercial
aviation, including fly-in, fly-out services to the
natural resources industry and aircraft engineering.

Our products and
capabilities have
relevance to a global
customer base

Main operating locations
United States and Mexico

Main operating locations
Australia and United Kingdom

Revenue

Underlying
operating profit

Revenue

Underlying
operating profit

£568.4m

£63.3m

£366.6m

£22.8m

(2016: £511.6m)

(2016: £66.2m)

(2016: 357.2m)

(2016: £40.6m)

See page 24 for more information

See page 26 for more information

www.cobham.com

STRATEGIC REPORTCobham plcAnnual Report and Accounts 2017
Chairman’s Statement

It has been a year of
rebuilding and renewal
and we have made
encouraging progress

Operational turnaround
2017 was extremely challenging for Cobham,
being the first full year of the turnaround. It was
a year of rebuilding and renewal, following a very
disappointing 2016. Cobham started the year with
a new Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), as well as myself taking
over as Chairman on 1 January 2017.

David Lockwood as CEO, and David Mellors as CFO
quickly recognised the attributes of the business,
including Cobham’s differentiated technology,
know-how and leading market positions. As I
reported last year, they diagnosed what needed to
be done to bring about an operational turnaround
at Cobham, which would reverse the Group’s
negative performance trajectory. They agreed
three operational priorities with our Board to
give this process both clear objectives and instil a
sense of momentum among employees. However,
it was also recognised that the turnaround would
take time as the underlying causes were in part
cultural, as well as being linked to operational and
execution weaknesses.

We have made encouraging progress against all
these operational priorities, in line with our prior
commitments, and I am pleased to say that the
overall financial performance of Cobham in 2017 is
slightly ahead of expectations. We have achieved a
more stable operational and financial performance
– including the important metric of on time
delivery to the Group’s customers. Having said this,
it is very important not to get ahead of ourselves,
as much remains to be done. While stability is a
goal, it is certainly not the final destination – or
anywhere near it. Our shareholders, customers and
our employees deserve much more than this and
the Board is absolutely clear that further significant
progress needs to be made during 2018.

We have prioritised cash flow as a key measure
of operational performance. This was not just
because the net debt/EBITDA* gearing ratio was
3.0x at the end of 2016, but also because focusing
on cash is just good business sense. As a result of
the 2016 gearing level, the Group completed a
Rights Issue in May 2017, raising 05£497m net
of expenses.

Our net debt/EBITDA ratio at 31 December 2017
was far lower at 1.3x with the improved position
due primarily to the Rights Issue. This was enhanced
by the focus on our cash position, enabling us to
deliver cash conversion of 103% in the year, and
we will continue the focus on cash.

We also have some significant contract exposures,
including on the KC-46 US tanker programme,
as well as contingent liabilities that remain to be
retired, and progressing these will also be a priority
for 2018.

Divestment of AvComm and Wireless
We have also made progress during the year
in simplifying the portfolio, re-focusing on our
traditional defence, aerospace and space markets.
As announced in February 2018, we have agreed
to divest the AvComm and Wireless test and
measurement businesses for US$455m in cash and,
with the completion of this transaction, we will have
reduced portfolio risk, with a more coherent
business and further resilience in the Balance Sheet.

FCA investigation
In June 2017 we announced that the Financial
Conduct Authority had appointed investigators to
ascertain whether the Company had breached the
Listing Rules and the Disclosure and Transparency
Rules between April 2016 and February 2017, and
the Market Abuse Regulations between July 2016
and February 2017. It is not possible currently to
predict what the outcome of this investigation
will be.

* For details on net debt/EBITDA gearing ratio and reconciliation to statutory numbers refer to note 16 to the Group Financial Statements.

www.cobham.com

Cobham plcAnnual Report and Accounts 20172018 is another
important year as we
position ourselves for
a strong performance
thereafter

Dividend policy
I said last year that the Board would not announce
a dividend in respect of the 2017 financial year.
The Board recognises the importance of dividend
payments to shareholders and will review the
dividend policy as the turnaround progresses
and the risk profile improves, seeking to resume
a dividend when it is appropriate to do so.

The Board and succession planning
Consistent with the rolling succession plan agreed
with the Board, as set out in last year’s Annual
Report and Accounts, the Board has undergone
a number of changes during the year. In
implementing the plan, I have been cognisant
that there is a need to balance the recruitment
of experienced Non-executives with a measure
of Board stability and continuity, and I have at
all times tried to maintain this balance.

During the year we appointed John McAdam as
Senior Independent Director, replacing Jonathan
Flint who retired from the Board at the same time.
René Médori and General Norton Schwartz (retired)
were also appointed as Non-executive Directors.
René Médori will take over as Chairman of the Audit
Committee in April 2018 when Alan Semple will
retire from the Board.

In addition, General Michael Hagee (retired) and
Birgit Nørgaard have indicated that they will retire
from the Board in April 2018. General Hagee will
remain on the Cobham Advanced Electronic
Solutions Sector Board, to which he was appointed
in the first half of 2017.

I said last year that we would start the
reinvigoration of our succession planning
below Board level, to strengthen the quality and
depth of management, although done diligently
this would not be a quick task. We expect to
continue progressing this through 2018.
David Lockwood has made a number of senior
management appointments in the year which
have strengthened the management team
and this has provided a foundation for our work
on succession planning.

I continue to be impressed as to how hard our
employees have worked to improve the Group’s
performance. The deep employee knowledge of
our technologies, together with their capabilities
and long experience, are key ingredients which
will help us on the road to success.

In David Lockwood and David Mellors we have
two executives who will take Cobham forward,
supported by a strengthening and capable
management team. I remain grateful for their
dedication and commitment.

Looking forward
2018 is another important year for Cobham as we
accelerate progress on our turnaround, complete
our senior recruitment goals and retire a number
of remaining challenges so as to position ourselves
for a strong performance thereafter.

The Board and I are extremely grateful for the
service, hard work and dedication of Jonathan
Flint, Alan Semple, General Hagee and Birgit
Nørgaard and I thank them for their contribution
to the turnaround.

Michael Wareing
Chairman
1 March 2018

www.cobham.com

STRATEGIC REPORTCobham plcAnnual Report and Accounts 2017Chief Executive Officer’s Statement

We have addressed the
various issues that faced
us and we are building
the foundations of
future success

Overview
We are reporting financial results for 2017 which
are slightly ahead of expectations, with Group
underlying trading profit of £210.3m and organic
revenue growth of 1%.

We delivered much improved cash generation in
2017, with operating cash conversion of 103%, and
net debt of £383.5m at the year end. The Balance
Sheet is now stronger than a year ago, reflecting the
May 2017 Rights Issue and the benefit of the cash
generation. The cash generation has been achieved
from a combination of management focus and a
benefit from some deferred cash phasing against
the 2016 onerous contract charges, and lower
capital expenditure. There was also some
favourable working capital timing, including £27m
of advance customer receipts.

During my first year, I have been impressed with the
Group’s technology and capabilities and its people
and I have also had regular contact with many of
our customers. This has reinforced my early
conviction that Cobham has a number of high
quality businesses with differentiated technology
and know-how, and leading positions in a number
of attractive markets. Taken together, this gives me
confidence in the Group’s medium term prospects.

Encouraging first year of our
turnaround plan
At our results announcement in March 2017, we
identified a number of significant opportunities
for improvement. These included improved
execution, better first-pass quality, a reduction in
organisational complexity and duplication, and
improved capital allocation decision making. We
continue to believe that these should enable
Cobham to deliver underlying operating margins
2-3% higher over the medium term, all else being
equal. We identified three operational priorities
comprising (1) customer focus, (2) leadership and
simplification and (3) control and execution. It
was clear that the improvement process would be
iterative and would take at least two years before

we saw the benefits, with business units likely to
respond at different speeds, and therefore potential
for an uneven recovery.

Operational environment
Driven by heightened security threats, we are
beginning to see an increase in global defence
budgets overall, although these are not without
political risk. In addition, the US National Defense
Strategy document, published in early 2018, makes
technology modernisation one of its themes, with
favourable implications for Cobham. Commercial
aerospace markets continue to see volume growth,
although there remain areas of commercial market
weakness, including maritime and flying services
in Australia. Across all markets, customers demand
value-for-money, driving the need to be
competitive on price; this alongside flawless
execution and enhanced capability. It is to prosper
in this environment that we are pursuing our
turnaround strategy.

Progress against operational priorities
We have made progress on the three operational
priorities which I originally set out. These will
continue to be a focus for 2018, with key
achievements below:

Customer Focus
To enable us to grow the business, we need to
understand our customers’ needs, invest in our
products and services, and deliver on time. We have
significantly increased the level of CEO and senior
management engagement with customers,
supplementing the business unit level engagement.
We are improving co-ordination to deliver greater
customer facing collaboration and we have
increased training during the year on root cause
problem solving and lean manufacturing.

Leadership and Simplification
We will only achieve optimal results if our employees
understand the Group’s objectives, are motivated
to achieve them and are made accountable. We are
simplifying processes and procedures, which will
provide more time for focus on customers, with
monthly operating reviews enabling us to have a
more constructive and forward looking dialogue
with our business unit leaders and we are rolling
out a new streamlined Group policy framework
to ensure clearer governance.

We have strengthened the management team with
focus on critical capability gaps. During the year,
I appointed Air Marshall Greg Bagwell as Strategic
Advisor and Chris Shaw as Chief Operations Officer.
We have also strengthened the team by appointing
Paul Kahn as President of the Communications
and Connectivity Sector and Gillian Duggan as
Executive Vice President Human Resources and
Communications. These individuals bring strong
operational track records, with considerable energy
and ideas. I will continue to selectively strengthen
the broader management team.

In addition, the Advanced Electronics Solutions
Sector (CAES) operates under a Special Security
Agreement (SSA), with the Sector Board critical to
Sector governance and performance. The Board
has been significantly strengthened during the year
with the appointments of Admiral Steve Abbot USN
(retired), General Mike Hagee USMC (retired), Cindy
Moran and Scott Webster.

Control and Execution
Underpinning what we do is a need to improve
the ability to forecast performance and enhance
control. This includes strengthening supply chain
management and quality management functions
and making investments to improve our
manufacturing performance. We have also
provided definition and clarity over minimum
standards of financial control for all our businesses.

www.cobham.com

Cobham plcAnnual Report and Accounts 2017It is my conviction
that Cobham has high
quality businesses with
differentiated technology
and know-how

In conclusion, we are beginning to see early signs
of progress across the business. I am proud of how
most of Cobham’s employees have responded to
the challenge and, in particular, their demonstration
of real commitment to customers. However, while
we have many improvement actions in-train and
we have started to build the foundations of future
success, there is much that is work-in-progress
with a lot left to do.

Update on 2016 onerous contracts
We are progressing delivery on our contracts
against which we took significant charges in 2016,
including on the largest of them, the KC-46
programme. KC-46 qualification is ongoing as part
of the overarching US Federal Aviation
Administration certification process. The work is
being carried out according to the terms of the
original development contract signed in 2011,
which contains some significant terms including
relating to delayed performance. The Centreline
Drogue System qualification is nearing completion
and the more complex Wing Aerial Refuelling Pod
qualification will be ongoing into the second half
of 2018.

We continue to support delivery of the first 18
KC-46 production aircraft to the US Air Force during
2018. A number of challenges remain, and the focus
continues to be on achieving improvements in the
supply chain and quality management.

On other programmes, we have taken some
additional charges at the 2017 year end within
Group underlying operating profit but overall our
estimates for the 2016 onerous contract provisions
are still appropriate. 2018 will be a critical year for
delivering against these contracts.

Balance Sheet
Our year end gearing ratio was 1.3x (31 December
2016: 3.0x). As I have previously stated, the
improved position is due primarily to the May 2017
Rights Issue, which raised £497m net of expenses.
This was enhanced by a greater level of focus on
our cash position, enabling us to deliver cash
conversion of 103% in the year. We will continue
the focus on cash.

One year ago the Board set a net debt/EBITDA
threshold of 1.5x in response to the immediate
need to strengthen the Balance Sheet. We will
review Cobham’s Balance Sheet structure as the
risk profile of the Group reduces, and we will set
out a capital allocation policy at the end of 2018.

Strategy
Our three operational priorities are only the first
step in delivering an improvement in Cobham’s
fortunes. Cobham is best placed to generate value
when it focuses on its defence, aerospace and
space markets. We can add value where we serve
markets we know with technology and capabilities,
where we have real depth in skill and understanding.

Accordingly we announced in February 2018 that
we had agreed to divest the AvComm and Wireless
test and measurement businesses for US$455m
cash consideration, following an auction, with the
businesses comprising approximately 8% of Group
revenue in 2017. On completion of the divestment,
we will have increased the coherency of the
portfolio, reducing risk by exiting businesses with
little commonality with the Group. Completion
is subject to US anti-trust clearance and other
customary conditions, and is anticipated in the
first half of 2018.

Our strategy is focused on organic growth and
aligned to our operational improvement priorities,
as it will succeed when we combine our high
value-add technology and capabilities with
improved execution and delivery. Future growth will
be driven by increasing the number of products and
services we supply to our customers, as well as
selling more of our technology and capabilities into
attractive geographies. We will avoid higher risk,
unrelated diversification.

Technology investment
A technology focused company like Cobham needs
to fund Private Venture (PV) investment. This keeps
our products and technology fresh, by delivering
the cost savings customers want and the capability
enhancements they need. We are moving Cobham
towards an appropriate methodology to ensure we
are consistently allocating this investment for
optimal returns.

Outlook
The Group is one year into its turnaround
programme. Whilst early progress is encouraging,
there remains much to do in order to improve
operational execution and efficiency and return
the Group to strength. Risks and challenges remain
in our business and the necessary actions to
complete the turnaround are expected to take time
and have associated costs. Overall for the Group,
the Board’s expectations for 2018 remain
unchanged with a range of potential outcomes.
Reported performance for 2018 will be affected
by the timing of completion of the AvComm and
Wireless test and measurement divestment, as
well as foreign exchange rates impacting the
translation of overseas business results. The Board
has confidence in the medium term outlook for
the Group.

David Lockwood
Chief Executive Officer
1 March 2018

www.cobham.com

STRATEGIC REPORTCobham plcAnnual Report and Accounts 2017
Our Markets

We have positions
in three broad
end-markets

Cobham’s focus is on its defence,
aerospace and space markets, each
with attractive characteristics.

Revenue by market (%)

Commercial 40%

US defence/security 36%

US defence/security
36% of Group revenue in 2017

Our technology and capabilities position
us to benefit from more favourable US
market conditions.

Cobham is significantly exposed to the US
Department of Defense (DoD) investment
accounts, comprising the Procurement and
Research, Development, Testing and Evaluation
budgets. It also has some limited exposure to other
DoD line items (e.g. operations) and to the Overseas
Contingency Operations accounts, from which
participation in regional conflicts are funded. In
addition, it also has limited exposure to other US
federal and state budgets including NASA, security
agencies and police.

US DoD budgets are influenced by macroeconomic
factors, including the state of the economy, but
are also impacted by changes in global security
tensions. Defence investment budgets increased
in 2016 and again in 2017, after a period of
year-on-year declines following the 2008-2009
financial crisis. In part, the change has been driven
by regional conflicts but also by increasing tensions
in the Middle East, North Eastern Asia, Eastern
Europe and elsewhere. While the budget has
started to increase, the actual disbursement of
funds from budgets will only follow after, with a
time lag between budget approval and the
performance of work.

US DoD budget (US$bn)

2017

2018

2019

2020

2021

120

125

150

160

170

Procurement

RDT&E

Source: BAML Analyst Research,
FY18 US President’s Green Book

One of the primary focuses of DoD investment has
been technology modernisation and this priority is
set out in the National Defense Strategy published
in early 2018. A priority has been high-end
technologies which will protect expensive assets
(e.g. ships and aircraft) and make them more
capable. Cobham specialises in high-end technology,
including sophisticated radar, electronic warfare,
communications and life support products. In
addition, there has been enhanced focus on missile
defence in the face of proliferating ballistic missile
strike capability, with Cobham having content on
land based systems, such as THAAD and Patriot,
and ship-borne systems, including Aegis and AMDR.

Our response
Cobham’s technologies and capabilities are relevant to
current US DoD priorities and it is therefore in a good
position to benefit from increasing budgets.

The Group’s operational priorities for 2017 and 2018
are aligned with increasing our share of markets with
considerable work having been put into customer
relationships and the improvement of our on time
delivery. We have been simplifying the business, in
part to increase accountability and focus, and we are
addressing our cost base, including the supply chain,
to enhance competitiveness.

UK, RoW defence/security
24% of Group revenue in 2017

We also seek to benefit from growing
government budgets outside of the
US market.

Cobham also supplies its products and services to a
number of other governments around the world, in
addition to the US.

In the same way that US defence spending has
begun to increase, global defence spending
generally has also reached an inflection point. While
Asian and Middle Eastern markets in particular have
continued to be strong, many European
governments have started to increase budgets,
after several years of decline. However, this situation

UK, RoW defence/security 24%

is not universal, with Eastern and Northern
European countries more likely to be increasing
budgets strongly. In addition, the UK defence
budget looks to be under budgetary pressure.
However, there is increasing recognition in parts of
Europe that heightened security tensions mean that
defence should be allocated a growing budget.

Indicative Growth Outlook in
RoW Defence Expenditure (US$bn)

2017

2018

2019

2020

2021

259

266

275

286

296

Selected countries comprising Japan, Saudi Arabia, India,
South Korea, Australia, United Arab Emirates and Kuwait.
Source: BAMLAnalyst Research, BMI Research Defence
Industry Data

The continued growth in defence spending in Asia
and the Middle East over recent years has been
driven by existing factors, notably the combined
impact of growing economies and regional security
concerns. The fall in oil revenue which has been
seen in recent years has typically not significantly
impacted the high level of defence spending in the
Middle East. For example, Saudi Arabia, which has
the largest defence budget in the region, has
announced a 6% increase to its budget in 2018.

Within the Aviation Services Sector in particular,
Cobham also performs non-military government
contracts including maritime surveillance and
participation in fixed and rotary wing training and
maintenance for military and non-military customers.
While competitive, the long term market trends are
expected to be favourable as Cobham is able to
supply customers with military-like services, at a
fraction of the estimated cost of a military asset,
giving a cost effective solution for customer needs.

www.cobham.com

Cobham plcAnnual Report and Accounts 2017
Our response
Cobham’s technologies and capabilities are relevant to
military customers and governments globally and it is
therefore well positioned to benefit from global
growth in spending.

Not only do the Group’s operational priorities for
2017 and 2018 align with increasing our share of our
markets (see US defence/security on page 8) but we
aim to increase our share of faster growing global
defence and government markets by supplying more
of our existing technology and capabilities into them.
We have laid this strategy out in more detail within the
Strategy section on pages 16 to 17.

Within our current exposure to platforms and
programmes we are on a number of non-US platforms
and programmes in development. These include the
Airbus A400M and Embraer KC-390 programmes, as
well as having won a significant position on the next
generation South Korean (KF-X) fighter programme.
These and other similar programmes should provide
significant production and aftermarket revenue.

Commercial
40% of Group revenue in 2017

We have positions in a number of attractive
markets, with the majority of revenue in
aerospace, which includes space.

The bulk of our commercial positions are focused
on products and services related to communications,
particularly for use on the move and in harsh
environments. Our markets are driven by long term
global growth, including an increasing propensity to
travel, leading to a requirement for access to voice,
data and video communications in remote or
challenging environments. In addition, our
commercial markets are also favourably impacted
by enhanced safety requirements, with examples of
high profile commercial aircraft disasters in recent
times underpinning a long term safety trend.

Commercial
Our revenue is in a number of different end markets
set out below.

Aerospace

9% Outsourced

Aviation Services 8%

Marine
SATCOM

Space

Other*

*Other markets include: land
SATCOM, medical, mining
and industrial slip rings.

www.cobham.com

Our biggest commercial markets are in commercial
aerospace where we have a number of products
that are standard fit on new build large transport
commercial aircraft. Within this market we expect
to benefit from increased production rates in the
longer term, as well as supplying products that can
be retrofitted on to existing aircraft or which are
linked to hours flown.

Airbus
No. of Aircraft

50,000

40,000

30,000

20,000

10,000

Growth

Replacement

Retained

21,000

Beginning 2017

43,000
22,000

13,000

8,000

2036

35,000
New
Deliveries

Source: Airbus global market forecast 2017-2036 “Growing
Horizons”. Includes passenger aircraft above 100 seats,
freighter aircraft above 10 tonnes.

Boeing
No. of Aircraft

50,000

40,000

30,000

20,000

10,000

Growth

Replacement

Retained

23,000

2016

47,000
23,000

18,000

6,000

2036

41,000
New
Deliveries

Source: Boeing current market outlook 2017-2036.
Includes all aircraft, including freight and regional jets.

We also have positions in commercial aviation
services and these include closed charter flying in
Australia for natural resources customers, a market
in which we face headwinds currently, as customers
cut costs and production capacity, although there
are some early signs of recovery. Within our other
commercial markets, we also face short term
headwinds from market conditions in commercial
marine, where we supply SATCOM products to
commercial shipping, oil and gas and leisure craft.
Both these markets have good medium term
prospects, once the down cycles end.

Our response
As with our other end markets, not only do the
Group’s operational priorities for 2017 and 2018 align
with increasing our share of our markets, but we are
making significant investment in PV as a means of
increasing our market share. Following on from recent
wins on the Airbus A320neo aircraft, including for
SATCOM products, we are continuing the
development of the Aviator ‘S’ light SATCOM product
for Airbus single aisle and long range aircraft families,
as well as the new digital Radio and Audio Integrated
Management System for the Airbus A320neo.

We have carried out a strategic review of our
AvComm and Wireless test and measurement
businesses during the year, and we announced
an agreement in February 2018 to divest them,
enhancing the focus on aerospace and space
markets. These businesses accounted in 2017 for
8% of Group revenue and this is excluded from the
end markets explanations opposite.

Our products and
capabilities have
relevance to
customers globally

The Theater High Altitude Area Defense
(THAAD) system incorporates antennas,
mission computers, microcircuits and
microprocessors supplied by Cobham. The
THAAD interceptor is guided to its target
by the TPY-2 radar, which uses waveguide,
switches, time delay units and other
modules also provided by Cobham.
Credit: Lockheed Martin

STRATEGIC REPORTCobham plcAnnual Report and Accounts 2017Our Business Model

Our core capability is specialist
intelligent hardware, with focus
on our defence, aerospace and
space markets

What we do
Cobham predominantly offers subsystems (tier 2
and tier 3) and products within its markets, while
also supplying components (tier 4) particularly
where these can be integrated higher up the
value chain.

The Group also offers tier 1 services, as not only
does this result in a recurring and sustainable
revenue stream through long term contracts,
but it can help cross-sell our products and
demonstrate their capabilities to potential
customers in a live environment so enabling a
‘product in a service’ wrapper.

Tier

1
1

2
2

3
3

4
4

Platforms/Fully Integrated Systems
– Aircraft
– Missiles
– Medical & Industrial Equipment
– Satellites (Commercial & Military)

Major Subsystems
– Complete Apertures
– Missile Subsystems
– Complete EW Subsystems

Integrated Assemblies
– AESA Modules
– Microelectronic Assemblies
– Power Distribution Modules
– Actuator/Gimbal Assemblies

Components
– Diodes
– MMIC Devices
– Semiconductors
– Rad Hard Components

What Cobham needs to do well to be a successful business and how this links to the
Group’s turnaround strategy

Identify

Design and Engineer

Deliver

Strong customer relationships
Cobham needs to be in frequent contact with
customers to understand their needs, be responsive to
their requirements and deliver to their time schedules.

Link to strategy
− We are increasing interaction with our major

customers

− We are appointing key account managers across

the Group

Knowledge and experience in our
specialist markets
The ability to deliver products and services in
specialist markets is dependent on deep
understanding and experience. This requires the
knowledge and know-how of technical specialists.

Link to strategy
− We invest in training and development for

our employees

Manage the supply chain
The supply chain is a critical factor in the ability to
manufacture and deliver products on time and to the
right quality.

Link to strategy
− Supply chain and quality management functions are
being consolidated under a single leader to drive
performance improvement and standardisation

− We have invested significantly in training and

− We are collecting and reviewing key customer data

− We are attracting emerging talent including

remediation activities

apprentices and graduates

− We have seconded staff to critical suppliers

For further details, please refer to Our Turnaround
Strategy on pages 14 and 15.

Leading market positions and reputation
Reputation and the proven ability to deliver is a key
consideration in many markets, giving customers’
confidence in delivery. Having a leading market
position should also increase the return from
technology investment.

Link to strategy
− We are providing greater oversight on major
development programmes to maintain our
market positions

− We are investing in our manufacturing facilities

to improve delivery

For further details on our manufacturing investment,
please refer to Mission Systems on page 22 and
Advanced Electronic Solutions on page 24.

For further details, please refer to CRS section on
pages 40 to 43.

For further details, please refer to Our Turnaround
Strategy on pages 14 and 15.

Investment in PV
Cobham is a business that delivers intelligent technology
and it needs to continually invest in PV to maintain
technology differentiation and develop next generation
products and services. It can never afford to stand still.

Link to strategy
− We are managing our PV investment rigorously to

optimise the expected returns

− We are continuing to improve our technology

capabilities through innovation

For further details, please refer to Our Turnaround
Strategy on pages 14 and 15.

Programme management expertise
Cobham often works at the leading edge of
technology and needs to manage and monitor its
technology developments, to ensure they are
delivered on time and to budget.

Link to strategy
− We are providing greater oversight on major

development programmes

− We are investing in training and deploying our best

managers across our businesses

Operational Excellence
Notwithstanding the Group’s leading edge capabilities,
customers want solutions that are delivered on time,
to the required quality and which give value for
money. The Group has a Continuous Improvement
(CI) team, with a CI culture being embedded to enable
us to deliver consistently.

Link to strategy
− We are reviewing our manufacturing strategy
− We are investing in our facilities to improve

performance

For further detail, please refer to Our Turnaround
Strategy on pages 14 and 15.

Strong Balance Sheet
We operate in a number of long term markets, where
programmes and platforms can last decades. Our
customers must have confidence that we have the
financial strength to continue to invest and deliver
throughout the life of long term programmes.

Link to strategy
− We completed a Rights Issue in 2017 which reduced

our gearing ratio

− We appointed a new Chief Operations Officer to

integrate management of certain technical functions

− Cash generation is a continual focus
− We aim to reduce working capital over time

For more details, please refer to the CEO’s Statement
on pages 6 and 7.

For further details, please refer to the CFO statement
on pages 28 to 33.

www.cobham.com

Cobham plcAnnual Report and Accounts 2017What sets Cobham apart is its leading edge capabilities and know-how
Cobham’s true differentiation arises in its specialist capabilities and know-how which are often high value add, and sold to customers who have a requirement for
the most demanding environments – such as on aircraft, in space or in remote or inhospitable environments. It is this ability to design, develop and manufacture
high-end products, including for extremely demanding applications, that truly sets Cobham apart.

This differentiation means that the Group has often found itself at the forefront of engineering and technology and below are some examples of where its
technology has helped customers achieve special results:

Cobham Mission Systems: Our Cobham oxygen products have enabled every
US astronaut to breathe in space.
Credit: NASA

Cobham Aviation Services: Since 1996 Cobham has operated the largest
outsourced maritime surveillance contract in the world for the Australian
government. Today, aircraft converted by Cobham are used on this contract
that are equipped with a suite of sophisticated sensors and electronics.
Credit: Australian Border Force

Cobham Communications and Connectivity: Every Airbus aircraft uses
Cobham’s equipment, including the Group’s antennas and avionics, a position
that will continue with Airbus’ next generation of aircraft.
Credit: Airbus

Cobham Advanced Electronic Systems: Cobham provides critical actuators on a
number of space exploration vehicles, including the NASA Mars 2020
programme. These are used to drive the wheels, operate the steering and
deploy the sensing mast among other critical applications.
Credit: NASA

Key factors that underpin our business model

Culture
Developing a high performance and disciplined
operational and financial culture is key to Cobham’s
success as it is essential to deliver products on time
and to budget. The turnaround in performance
that is underway is dependent upon making
improvements to Cobham’s culture. One major
focus is Cobham’s ability to attract, retain and
develop talent: this is critical to execute on strategic
growth plans and deliver against key programmes.

Ethics
Cobham operates in a number of highly
regulated markets, often operating with sensitive
technologies and capabilities for government
customers. This requires Cobham’s employees to
be aware of their responsibilities and to always
conduct business in an ethical way, underpinned by

training and processes put in place to ensure
compliance with all relevant regulations. For
example, Cobham has a clearly stated Anti-Bribery
and Anti-Corruption Policy, and all employees are
required to receive training annually.

Health and Safety
Cobham has a robust attitude towards health
and safety, having a programme which promotes
continuous performance improvement, creating a
safe environment for employees. Health and safety
is of paramount importance and a prerequisite
for the Group’s success. A good health and safety
performance is also linked to operational excellence,
and therefore integral to our turnaround.

Environment
Cobham recognises the importance of developing
products that are smaller, lighter and which
consume less power than previous generations and
competitor products. In doing this, each new
product iteration results in increasing environmental
benefits, lowering both customer operating costs
and emissions.

For more details on these enablers, please refer to
CRS section on pages 40 to 43.

www.cobham.com

STRATEGIC REPORTCobham plcAnnual Report and Accounts 2017Our Capabilities in Action

Cobham’s products are
integral to the self-defence
and potency of US aircraft
carrier battle groups

Cobham content is present on every ship,
aircraft and missile that makes up a modern
US Navy aircraft carrier battle group.

Aircraft Carrier

SEWIP (Surface Electronic Warfare Improvement Program) –
protects the ship from airborne threats (aircraft and missiles)
by jamming radars and sensors.
− Cobham provides SEWIP with antenna array panel

assemblies and above deck electronics that focus the
system’s energy toward the target, and microelectronics to
route and convert signals.

Enterprise Air Surveillance Radar – a next generation radar
for future aircraft carriers which is currently in development.

Evolved Sea Sparrow Missile (RIM-162) – a guided missile
for use against cruise missiles, helicopters and surface threats.
− Cobham provides ESSM with microelectronics.

Missiles

− Cobham provides seeker microelectronics, fuzing and

datalinks on the Standard Missile family (a shipborne
guided missile used to defeat airborne threats including
aircraft, anti-ship cruise, and ballistic missiles).

− Cobham provides microelectronics used for guiding the
AMRAAM (AIM-120) airborne anti-aircraft missile and
the AIM-9X airborne anti-aircraft missile.

Credit: US Department of Defense

www.cobham.com

Cobham plcAnnual Report and Accounts 2017Guided Missile Destroyers and Cruisers

SEWIP (see opposite).
AMDR (Air and Missile Defense Radar or AN/SPY-6) – this new
3D radar will be an integral part of the AEGIS weapon/combat
system when it replaces the current radar. The AEGIS system
protects ships, aircraft and land based assets by detecting,
tracking and targeting airborne threats with missiles and
weapon systems.
− Cobham provides the AMDR digital receiver exciter and

other microelectronics on the AEGIS system.

− Cobham also provides waveguide assemblies that route

signals throughout the system.

UHF antennas – these enable communication via satellite.

Aircraft

US Navy aircrew use a variety of Cobham safety and survival
products, including oxygen and fuel inerting systems, restraints
and water activated release systems.

Cobham provides a range of microelectronics for electronic
warfare, radar, communication, navigation and identification
– these capabilities help keep F-18; E/A-18G and F-35 fighter
crew safe, aware and able to accomplish their roles.

Cobham provides a variety of equipment including on the
V-22 tiltrotor multirole aircraft, E-2 airborne early warning
aircraft and MH-60 anti-submarine helicopter including
antennas, aerial refuelling systems and microelectronics.

www.cobham.com

STRATEGIC REPORTCobham plcAnnual Report and Accounts 2017Our Turnaround Strategy

We have many
improvement actions
in train and we are
beginning to see early
signs of progress

The first objective of our strategy is to improve our
operational performance with the aim that this is a
relentless focus for every employee. Implementation
of the turnaround will take time and the rate of
progress across the businesses may not be uniform.
However, a successful outcome will help us realise
the great potential within Cobham.

We identified three operational priorities for 2017
and 2018 and success will enable us to deliver to our
customers’ and shareholders’ expectations. Central
to all of this is a laser focus on cash.

Turnaround strategy:

Leadership and
Simplification

Cash
Generation

Customer
Focus

Control and
Execution

Customer Focus

Leadership and Simplification

Control and Execution

Why this
is important

Cobham operates in attractive markets with good medium term opportunities.
Typically, it has high value add capabilities and leading market positions,
representing significant barriers to entry. There are many opportunities for the
Group’s businesses to increase market share, as there is a real need for its products.

In particular, customers will conduct more business with Cobham if the Group’s
delivery consistently meets the customers’ schedule and quality requirements.

Why this

is important

Having a motivated and accountable work force, working to clear and

Improved control and execution enhances the ability to consistently deliver

understandable rules, within a more cohesive portfolio of businesses,

to customers on time, so earning repeat orders and increasing content.

will improve the ability to respond quickly and effectively to market

developments and customer needs. This will help take advantage of

opportunities as they arise.

In addition, reduced development cost overruns, lower levels of late

deliveries and improvements to first pass quality performance will also

deliver significant cost and operating margin improvements over time.

The focus on the supply chain and manufacturing strategy should

also contribute to a lower cost base, enabling more competitive

market offerings.

Our focus
areas

− Improving customer intelligence and building relationships
− Monitoring and driving customer satisfaction
− Focusing on improving delivery

Our focus

− Instilling a common sense of purpose and motivation

areas

− Reducing and simplifying internal policies

− Increasing visibility and accountability

− Increasing scrutiny over key development programmes

− Focusing on the most critical performance metrics

− Operational improvements

Principal
risks

See principal risks 1, 5.

Principal

risks

See principal risks 4, 10.

See principal risks 3, 5, 6, 9, 11.

Where we
started
the year

Cobham had become too internally focused over time, with centrally driven
change programmes and large scale acquisition activity having consumed
significant financial resources and management attention. There was a need
to re-focus on customers, as the source of Cobham’s prosperity.

There has been investment over the years on PV, however this substantial
investment has not always yielded the expected return. This
could mean Cobham’s investment has not always been in the areas of greatest
customer need or that the investments made have not been timely or
efficiently undertaken.

Where we

The Group’s reporting structures, including its internal processes and the

There had been a succession of performance issues in a number of Cobham

started

the year

allocation of responsibilities had become overly complex and unclear and

businesses which stemmed from weaknesses in management and in

there was a broad portfolio of businesses. In a number of instances there

financial controls; contractual and commercial failures and, in a few

had been examples of duplication of responsibility, reduced accountability

businesses, from more challenging market conditions. However, in the main

and slow decision making, which contributed to some sustained operational

these have come from operational issues which include poorly worded

and financial challenges. In addition, the Group had not always integrated

contracts; late delivery against development programmes; poor financial

its acquisitions well, which caused an additional lack of clarity.

forecasting; inadequate on time delivery to customers; and a need to

improve quality levels.

Progress
during 2017

There is increasing interaction with major customers by senior management, and
this is supplementing and complementing business unit level engagement.

Progress

during 2017

The Group has been strengthened by adding a new Chief Operations Officer

The previous quarterly Sector level operational reviews are now monthly

role and by making other significant senior appointments including a new

reviews at the business unit level, giving greater clarity on performance and

Key customer related indicators are being collected and reviewed monthly
and Cobham is actively using and reviewing customer supplied score cards to
improve performance.

There is improved co-ordination between the businesses to deliver greater
customer facing collaboration through the pooling of information and
participation in joint presentations to customers.

There is focus on internal processes where this will result in an improved on time
delivery performance. This is being supplemented by training, coaching and
business-specific improvement programmes.

Greater rigour is being instilled into our PV investment processes by ensuring
investment is allocated for return and the sums invested are managed rigorously.
This will mean we are allocating investment to critical customer requirements and
we are delivering on a timely basis.

Plans for 2018
While we have many improvement actions in-train and done much to
build the foundations of future success, there is much that is work-in-
progress with a lot left to do. We have made progress against the three
operational priorities but they will continue to be a focus for 2018.
In addition, we will continue the focus on cash generation in 2018.

Key
Statistics
and link
to KPIs*

£1.9bn
Order intake
(2016: £2.1bn)**

1%
Organic revenue growth
(2016: (8)%)

Please refer to the CFO
Statement on pages 28 to 33.

* KPIs are identified using a numbered icon
** Includes AUS$719m related to the repriced multi-year Qantas contract.

. Please refer to pages 18 to 19 for KPI detail.

www.cobham.com

President of the Communications and Connectivity Sector and a new

improved accountability for delivery.

Executive Vice President of Human Resources and Communications, who

brings a track record of driving transformational change. The broader

There is an increased Group level oversight over key projects and material

management team will continue to be selectively strengthened.

development programmes so problems are identified earlier, when there is

There is increased senior management visibility through site visits and staff

meetings and increased engagement with the top 200 managers in the

There has been significant investment to remediate quality management,

greater scope to resolve them. See also Customer Focus on page 14.

Group, to instil a common sense of purpose and collaboration.

product quality and supply chain and infrastructure failings in larger sites.

There has been additional training and business unit specific remediation

Monthly business unit operational reports have been standardised with a

action taken.

comprehensive pack for reporting and forecasting.

Some 60 system reports and 80 data line items have been removed from

being consolidated to drive improved performance and standardisation

The supply chain management and quality management functions are

the Group reporting suite and the number of non-financial key performance

across the Group.

indicators has been cut by up to 70%.

The Group policy framework has been streamlined and there are revised

significant exceptional charges in 2016, including on the largest of them, the

delegated authorities in a single consolidated table, and this is used as an

KC-46 programme. A number of challenges remain with focus on achieving

active management tool reflecting business unit performance.

improvements in the supply chain and quality management.

We are progressing the onerous contracts on which Cobham took

Key

statistics

and link

to KPIs*

Number of system reports removed

Voluntary staff turnover

10%

(2016: 10%)

711

Continuous improvement

training courses undertaken

(2016: 504)

87%

Customer on time delivery

(2016: 86%)

Cobham plcAnnual Report and Accounts 2017Customer Focus

Leadership and Simplification

Control and Execution

Why this

is important

Cobham operates in attractive markets with good medium term opportunities.

Typically, it has high value add capabilities and leading market positions,

representing significant barriers to entry. There are many opportunities for the

Group’s businesses to increase market share, as there is a real need for its products.

In particular, customers will conduct more business with Cobham if the Group’s

delivery consistently meets the customers’ schedule and quality requirements.

Why this
is important

Having a motivated and accountable work force, working to clear and
understandable rules, within a more cohesive portfolio of businesses,
will improve the ability to respond quickly and effectively to market
developments and customer needs. This will help take advantage of
opportunities as they arise.

Improved control and execution enhances the ability to consistently deliver
to customers on time, so earning repeat orders and increasing content.

In addition, reduced development cost overruns, lower levels of late
deliveries and improvements to first pass quality performance will also
deliver significant cost and operating margin improvements over time.
The focus on the supply chain and manufacturing strategy should
also contribute to a lower cost base, enabling more competitive
market offerings.

Our focus

− Improving customer intelligence and building relationships

areas

− Monitoring and driving customer satisfaction

− Focusing on improving delivery

Our focus
areas

− Instilling a common sense of purpose and motivation
− Reducing and simplifying internal policies
− Focusing on the most critical performance metrics

− Increasing visibility and accountability
− Increasing scrutiny over key development programmes
− Operational improvements

Principal

risks

See principal risks 1, 5.

Principal
risks

See principal risks 4, 10.

See principal risks 3, 5, 6, 9, 11.

Where we

Cobham had become too internally focused over time, with centrally driven

started

the year

change programmes and large scale acquisition activity having consumed

significant financial resources and management attention. There was a need

to re-focus on customers, as the source of Cobham’s prosperity.

There has been investment over the years on PV, however this substantial

investment has not always yielded the expected return. This

could mean Cobham’s investment has not always been in the areas of greatest

customer need or that the investments made have not been timely or

efficiently undertaken.

Where we
started
the year

The Group’s reporting structures, including its internal processes and the
allocation of responsibilities had become overly complex and unclear and
there was a broad portfolio of businesses. In a number of instances there
had been examples of duplication of responsibility, reduced accountability
and slow decision making, which contributed to some sustained operational
and financial challenges. In addition, the Group had not always integrated
its acquisitions well, which caused an additional lack of clarity.

There had been a succession of performance issues in a number of Cobham
businesses which stemmed from weaknesses in management and in
financial controls; contractual and commercial failures and, in a few
businesses, from more challenging market conditions. However, in the main
these have come from operational issues which include poorly worded
contracts; late delivery against development programmes; poor financial
forecasting; inadequate on time delivery to customers; and a need to
improve quality levels.

Progress

during 2017

There is increasing interaction with major customers by senior management, and

this is supplementing and complementing business unit level engagement.

Progress
during 2017

The Group has been strengthened by adding a new Chief Operations Officer
role and by making other significant senior appointments including a new
President of the Communications and Connectivity Sector and a new
Executive Vice President of Human Resources and Communications, who
brings a track record of driving transformational change. The broader
management team will continue to be selectively strengthened.

There is increased senior management visibility through site visits and staff
meetings and increased engagement with the top 200 managers in the
Group, to instil a common sense of purpose and collaboration.

Monthly business unit operational reports have been standardised with a
comprehensive pack for reporting and forecasting.

Some 60 system reports and 80 data line items have been removed from
the Group reporting suite and the number of non-financial key performance
indicators has been cut by up to 70%.

The Group policy framework has been streamlined and there are revised
delegated authorities in a single consolidated table, and this is used as an
active management tool reflecting business unit performance.

The previous quarterly Sector level operational reviews are now monthly
reviews at the business unit level, giving greater clarity on performance and
improved accountability for delivery.

There is an increased Group level oversight over key projects and material
development programmes so problems are identified earlier, when there is
greater scope to resolve them. See also Customer Focus on page 14.

There has been significant investment to remediate quality management,
product quality and supply chain and infrastructure failings in larger sites.
There has been additional training and business unit specific remediation
action taken.

The supply chain management and quality management functions are
being consolidated to drive improved performance and standardisation
across the Group.

We are progressing the onerous contracts on which Cobham took
significant exceptional charges in 2016, including on the largest of them, the
KC-46 programme. A number of challenges remain with focus on achieving
improvements in the supply chain and quality management.

Key
statistics
and link
to KPIs*

60
Number of system reports removed

10%
Voluntary staff turnover
(2016: 10%)

711
Continuous improvement
training courses undertaken
(2016: 504)

87%
Customer on time delivery
(2016: 86%)

www.cobham.com

Key customer related indicators are being collected and reviewed monthly

and Cobham is actively using and reviewing customer supplied score cards to

improve performance.

There is improved co-ordination between the businesses to deliver greater

customer facing collaboration through the pooling of information and

participation in joint presentations to customers.

There is focus on internal processes where this will result in an improved on time

delivery performance. This is being supplemented by training, coaching and

business-specific improvement programmes.

Greater rigour is being instilled into our PV investment processes by ensuring

investment is allocated for return and the sums invested are managed rigorously.

This will mean we are allocating investment to critical customer requirements and

we are delivering on a timely basis.

Key

Statistics

and link

to KPIs*

£1.9bn

Order intake

(2016: £2.1bn)**

Organic revenue growth

(2016: (8)%)

Please refer to the CFO

Statement on pages 28 to 33.

Please refer to the CFO

Statement on pages 28 to 33.

* KPIs are identified using a numbered icon

. Please refer to pages 18 to 19 for KPI detail.

** Includes AUS$719m related to the repriced multi-year Qantas contract.

STRATEGIC REPORTCobham plcAnnual Report and Accounts 2017Future Strategic Direction

We are looking to implement a
growth strategy which is aligned
to our improvement initiatives…

Strategy
The Board has considered the Group’s strategy
evolution and has concluded that Cobham is best
placed to generate value when it focuses on its
defence, aerospace and space markets – in which it
designs and delivers services, systems and products.
Cobham can add value where it serves the markets
it knows with technology and capabilities where
there is real depth in our skill and understanding.

This strategy, which focuses the portfolio within
these markets, also recognises that Cobham’s
positions may mitigate the risk from economic
cycles. For example, within its defence/security
markets, Cobham has significant positions funded
out of government budgets around the world
including in the US, Europe, the Middle East, Asia
and Australasia. These budgets often do not move
in synchronicity, which may reduce the impact from
a decline in any one of them.

2017 Portfolio review
A review of the portfolio was undertaken during
the year. The AvComm and Wireless businesses
were placed under strategic review to investigate
how best to optimise shareholder value, given their
strong technology and/or market positions.
The review considered a range of strategic options
from better aligning the Group’s operations and
management to these businesses, to divesting
them to an owner who is better able to add value
to them.

In February 2018, the agreed divestment of the
AvComm and Wireless test and measurement
businesses was announced for US$455m in cash

on completion, with completion expected in the
first half of 2018. The businesses recorded
approximately £170m of revenue during 2017,
or approximately 8% of the Group. The divestment
of these businesses will result in Cobham having a
simplified portfolio of technologies and capabilities,
with a focus on defence, aerospace and space, and
a reduced risk profile, as it has exited businesses
with little technology, customer or market overlap.
Completion of the divestment will also further
strengthen the Balance Sheet.

The portfolio review set out below showed that
AvComm and Wireless were outliers within
Cobham’s portfolio:

The strategy
is built around
Cobham’s organic
growth potential

The Cobham portfolio

Components

MES

Products

Subsystems

IES

Orchard
Park

Davenport

Antennas

Wimborne

Helicopter
Services

Special
Mission

Services/
Systems

Defence

Bubble size is approximately proportional to revenue.

SCS

Aero Comms.

SATCOM

AvComm
and Wireless

Communications and Connectivity
Avanced Electronic Solutions
Mission Systems
Aviation Services

Commercial

Commercial
Aerospace

Commercial
Connectivity

www.cobham.com

Cobham plcAnnual Report and Accounts 2017…and takes into account
our risk appetite

Given the overriding necessity to turn the
performance of the businesses around, the Group’s
strategy is aligned to its operational improvement
priorities (set out on pages 14 and 15) as it is
focused on organic growth. As previously set out,
Cobham’s turnaround in performance and its
opportunities to generate growth will be largely
achieved through “self-help” measures, driven by its
operational performance improvements. In
particular, customers will conduct more business
with Cobham, if the Group’s delivery consistently
meets the customers’ schedule and quality
requirements. This must be combined with customer
desire for competitive prices and the requirement for
technology and know-how to provide enhanced
capabilities and operational advantage.

Future growth will be driven by increasing the
number of the Group’s products and capabilities
sold to existing customers, as well as expanding
Cobham’s reach to sell more of Cobham’s
technology and capabilities into attractive
geographies. The Group will avoid higher risk,
unrelated diversification.

In summary, the approach will only succeed when
high value add technologies and capabilities are
combined with improved delivery to customers, in
line with their needs. Successful implementation will
make Cobham a trusted and valued supplier of key
technologies to its customers.

Existing markets and products
Currently Cobham primarily sells to customers
that are concentrated in a limited number of
geographic markets.

Product/service development
Sell more leading-edge technologies and
capabilities to existing customers by offering
similar capabilities that are complementary to
what Cobham already supplies. The anticipated
improvement in operational performance,
leading to increased on time and on budget
delivery, will enable the Group to expand its
footprint with its existing customers, increasing
our share of their spend.

The strategy for growth therefore has
complementary but different directions of
travel, which will underpin the delivery of the
Group’s revenue growth:

Geographic market development
Market and sell increasing amounts of existing
products and services to customers across a wider
range of attractive geographic markets, enabling
Cobham to expand its customer base and
geographic footprint.

However, Cobham will avoid:

Unrelated diversification
Diversification into new and unfamiliar markets –
selling new products and capabilities to new and
unfamiliar customers. Diversification is a higher risk
strategy from which Cobham is less likely to deliver
sustainable shareholder value.

w
e
N

s
r
e
m
o
t
s
u
C

g
n
i
t
s
i
x
E

H
T
W
O
R
G

Market
Development
Selling existing capabilities
to customers across a range
of attractive markets

Unrelated
Diversification
Selling new solutions
to new customers in
new markets

Existing
Markets and
Products

Product/Service
Development
Selling more solutions
to our existing customers

GROWTH

Existing

Product/Services

New

www.cobham.com

STRATEGIC REPORTCobham plcAnnual Report and Accounts 2017Our Key Performance Indicators

We are undergoing a period
of change, but the way we
measure our success has
not fundamentally changed

In 2017, we have performed a review of our KPIs to
ensure that they are still relevant to our business
and aligned with our strategic objectives. Changes
to the measures have been explained below.

KPI, description
and rationale

1. Organic revenue (%)

Organic revenue is stated at constant
translation exchange rates, excluding
the incremental effect of acquisitions
and divestments.

Sustainable organic growth is an important
means by which value can be created.

(4%)

(2%)

(1%)

2013

2014

2015

2016

(8%)

2017

Change
to KPI and/
or target

In today’s market
environment, the
Group has reviewed
its sustainable rate
of revenue growth.

2017 progress
and medium-
term target

Group organic
revenue growth
was 1.2%, the first year
of growth achieved
since 2011.*

Target: Low to mid-
single digit percentage
organic growth.

2013

2014

2015

2016

2017

2013

2014

2015

2016

2017

2. Underlying operating margin (%)

The Group’s underlying operating profit divided
by its revenue in a reported period.

A sustainable increase in the trading margin is
a key value creator for the Group.

3. Underlying EPS (pence)

Underlying profit after taxation less amount
attributable to non-controlling interests,
divided by the weighted average number
of ordinary shares.

Earnings per Share (EPS) is an important metric
used by shareholders. It is used to encapsulate
the financial performance of the Group including
revenue growth, operating margin progression,
the cost of debt finance and the rate of
underlying taxation.

17.7

15.5

16.0

15.9

13.6

14.4

This is a newly
included KPI as
management
considers an
increase in the
underlying
operating margin
to be a major
contributor to
future value
creation.

The medium term
EPS target is
primarily driven by
organic revenue
growth potential
and the medium
term operating
margin opportunity.

11.6

10.2

7.8

6.0

The underlying
operating margin
was 10.2%, in the first
year of the Group’s
turnaround.

Target: 12-14%

Underlying EPS was
lower than the prior
year. This reflected
primarily the higher
share count following
the Rights Issue and
lower underlying
operating profit.

Target: Mid-single
digit percentage
growth.

Core business organic revenue growth in 2011.

** On time to promise (OTTP).

*** Targets are reassessed annually to ensure they drive continuous improvement.

Used as a measure for determining executive remuneration.

Alternative Performance Measure.

www.cobham.com

Cobham plcAnnual Report and Accounts 2017

KPI, description
and rationale

4. Operating cash conversion (%)

Operating cash flow as a percentage of underlying
operating profit, excluding the share of profit
from joint ventures and associates.

Cash generation is a particular focus for Cobham
and will aid the strengthening of the Balance
Sheet and investment in the business, enabling
the Group to provide returns to shareholders.

5. On time delivery** (%)

Number of complete orders delivered on time as
a percentage of the total number of orders
promised for delivery in the same period.

Delivering products and services in line with
customer schedules, to budget and to our agreed
performance and quality is essential to growing
market share.

6. Voluntary staff turnover (%)

The number of voluntary leavers divided by the
number of employees at the start of the period,
excluding employees who became redundant,
were dismissed or retired.

Retention of key staff is critical to business
stability and is particularly important for a
technology business needing specialist skills
and capabilities.

7. Lost work case incident rate

The number of lost workday injury/occupational
illness cases multiplied by 200,000, divided by
hours worked.

Ensuring a safe working environment for
employees is an absolutely essential underpinning
to our progress and fundamental to attracting
and retaining talented employees. Improving
health and safety is linked to the Group’s
operational improvement plans.

2013

2014

2015

2016

2017

2013

2014

2015

2016

2017

2013

2014

2015

2016

2017

2013

2014

2015

2016

2017

103

Change
to KPI and/
or target

2017 progress
and medium-
term target

Operating cash
conversion was driven
by later phasing of
2016 onerous
contract cash flow,
lower capital
expenditure and
£27m of advance
customer receipts.

Target: Around 90%

The medium term
conversion target is
an increase on the
previous target of
>80%, demonstrating
the enduring cash
generation of the
business. It will be
on a sustainable
basis primarily
once Cobham has
completed its
onerous contracts
and utilised the
other provisions
that it took as
exceptional in 2016.

KPI unchanged.

On time to
performance
stabilised following
a decline in 2016, as
business units respond
to actions taken at
different speeds.

Target: >90%

KPI unchanged.

0.51

0.50

0.78

0.60

0.72

Health and safety
performance is
linked to Cobham
and it has used a
standard metric for
aerospace and
defence companies,
enabling it to
benchmark its
performance.

Voluntary staff
turnover stabilised,
reflecting the first year
of the turnaround
with the Group’s
structures, ways of
working and culture
undergoing a period
of evolution.

Target: <10%

The lost work
case incident rate
improved on the
previous year as a
result of the ongoing
measures taken to
improve performance.
These are set out in
the CRS section on
pages 40 to 43.

Target:
<0.640 in 2017 ***

2016 KPIs not included
The Group is no longer using total PV investment and Return on Invested Capital (ROIC) as KPIs. This is because the Group is not focusing on absolute
PV investment as a measure, preferring PV as an input with focus on its organic revenue and underlying operating margin performance. The 2017 KPIs
are focused on achieving operational improvement, whereas the Group’s ROIC measure is significantly reflective of previous M&A, most notably the 2014
acquisition of Aeroflex.

www.cobham.com

STRATEGIC REPORTCobham plcAnnual Report and Accounts 2017
Communications and Connectivity

Enabling reliable
connectivity
anywhere, anytime

Provides high performance equipment and
solutions to enable reliable connectivity
across a range of demanding environments
in aerospace, avionics, satellite and radio and
mobile connectivity markets.

Organic revenue was 3% lower, principally impacted
by lower volumes in the AvComm and SATCOM
business units. This was partially offset by higher
organic revenue in the Antenna Systems and
Wireless business units.

Within AvComm revenue was impacted by the
previously announced transition between master
distributors in the first half, albeit with a half-on-half
improvement. The SATCOM business had lower
revenue in its maritime markets, with the
environment continuing to be challenging. Revenue
in Antenna Systems was driven by increased antenna
shipments on US defence/security programmes
and, in Wireless, revenue reflected increased
shipments of 5G related test and measurement
products, including the TM/E-500 family.

In February 2018 the agreed divestment of
the Sector’s AvComm and Wireless test and
measurement businesses to Viavi Solutions Inc.
was announced for US$455m in cash, payable
on completion. In 2017, the businesses recorded
aggregate revenue of £169.6m and underlying
operating profit of £13.6m (a £24.8m contribution
before the allocation of central charges and £2.4m
of restructuring costs). The transaction is expected
to complete within the first half of 2018.

Underlying operating profit increased by £4.7m
after the impact from exchange rates, reflecting
improved sales volumes and a restructured cost
base in the Wireless business, as well as higher sales
volumes in Antenna Systems. In 2016, Wireless
profit was also reduced by £9m due to accounting
adjustments related to operational issues. These
movements were partially offset by lower trading
in the AvComm and SATCOM businesses, as well
as increased PV investment in next generation
aerospace SATCOM products.

Sector revenue (£m)

Sector underlying operating profit (£m)

900

800

700

600

500

400

300

200

100

690.2

33.2

(22.7)

700.7

2016

Currency
translation

Organic
growth

2017

150

100

58.2

6.1

4.7

69.0

2016

Currency
translation

Organic
growth

2017

Revenue by market (%)

Revenue by geography (%)

Maritime/other
54%

Commercial
aerospace/
general aerospace
23%

US defence/
security 7%

RoW 8%

Asia 19%

UK, RoW
defence/security
16%

Australia 1%

USA 28%

UK 6%

Other EU 38%

Order
intake

Organic
revenue

Underlying
operating margin

Number of
employees

£715.2m

(2016: £647.3m)

(3.1)%

(2016: (5.1)%)

9.8%

(2016: 8.4%)

3,197*

(2016: 3,430)

* Total permanent headcount at 31 December 2017.

The Sector has won some significant awards during
the year, including the conformal antenna suite and
an initial order for the anti-jam GPS system on the
next generation South Korean K-FX fighter aircraft
programme. In addition, the Sector has received
initial orders for its Flightline radio for an upgrade
of the Boeing T-38 trainer aircraft in the US, with
further orders expected. Having also completed
the development of its next generation panel
mounted RT-7000 radio, the Sector made
initial shipments in the first half, with a
strong pipeline of orders for the product
from government and commercial
aviation customers.

www.cobham.com
www.cobham.com

Cobham plcAnnual Report and Accounts 2017Main image
Cobham’s RT-7000 radio sets a new standard for airborne
tactical radios. Being software defined, it has modules that
can be upgraded to reflect changing operator requirements.

Small image
Cobham has a portfolio of land based SATCOM products,
including the 935 series Tactical Direction Finder.

www.cobham.com

Cobham plc
Annual Report and Accounts 2017

21
21

STRATEGIC REPORTMission Systems

Leading capabilities including aerial
refuelling and survival systems for
extreme environments

Provides safety and survival systems for extreme
environments, nose-to-tail aerial refuelling systems
and wing-tip to wing-tip mission systems for fast
jets, transport aircraft and rotorcraft. The Sector’s
primary focus is serving niche areas of the defence
and security market globally, which is supplemented
with an expanding presence in commercial aviation
markets by applying its differentiated technology,
particularly in pneumatic and actuation systems.

The 6% increase in organic revenue reflected
continuing growth in actuation control subsystems
for air-to-ground munitions, with a significant
production increase during the year. Aerial refuelling
revenue increased on the KC-46 and V-22 Aerial
Refuelling System development programmes,
partially offset by lower Airbus A400M revenue.
There were also increased shipments of the Sector’s
long life Air Separation Module for the Boeing 737
NG, which reduces the flammability of its fuel tanks,
with a further airline customer signed in the year.

Underlying operating profit decreased by £8.8m
after the impact from exchange rates and the 2016

divestment. Underlying operating profit was
adversely impacted by costs incurred on additional
resource to improve quality and supply chain
management, as well as some additional charges
taken against development programmes. However,
there was a benefit from increased volumes,
including from actuation control subsystems.

A comprehensive business change programme is
underway in the Sector’s Wimborne, UK facility,
where a number of development programmes are
moving into production. The programme, which
commenced in 2017, comprises all areas of the
business, including a reorganisation of the shop
floor to accommodate a ramp up in production
rate, a streamlining of business processes, and an
investment in continuous improvement activities.

Order intake increased on the prior year in part
through strong demand for actuation control
subsystems for air-to-ground and laser guided
munitions, with multi-year contracts secured
from two major US primes for domestic and
export markets.

In addition, 808E Hose Drum Unit (HDU) certification
flight tests were completed in December for the
A400M programme. This latest series of flight tests
were conducted by day and night with F/A-18 and
A400M receiver aircraft. Final type approval for the
HDU is continuing. The Sector has also secured
customer funding to develop a Helicopter
Refuelling capability for the A400M, a significant
enhancement for this aircraft.

Cobham has accumulated over 15,000
CRU-123 (oxygen sensor) flight hours on
the Boeing T-45 aircraft. The CRU123 records
oxygen concentration and pressure and
has been instrumental in supporting the US
Navy’s Physiologic Events (hypoxia)
investigation. Furthermore, the Sector’s
new VigilOX (breathing sensor suite) is
currently undergoing US Navy flight
testing, to demonstrate its ability to
enhance diagnostic capability.

Sector revenue (£m)

Sector underlying operating profit (£m)

900

800

700

600

500

400

300

200

100

150

100

386.4

7.1

25.5

419.0

2016

Divestment
and currency
translation

Organic
growth

2017

60.0

4.0

(8.8)

55.2

2016 Divestment
and currency
translation

Organic
growth

2017

Revenue by market (%)

Revenue by geography (%)

Commercial
aerospace/
general aerospace
8%

UK, RoW defence/
security
33%

Maritime/other
1%

US defence/
security 58%

Asia 3%
Australia 1%
Other EU 12%
UK 5%

RoW 2%

USA 77%

Order
intake

Organic
revenue

Underlying
operating margin

Number of
employees

£518.2m

(2016: £381.6m)

6.5%

(2016: (6.6)%)

13.2%

(2016: 15.5%)

1,774*

(2016: 1,618)

* Total permanent headcount at 31 December 2017.

www.cobham.com
www.cobham.com

Cobham plcAnnual Report and Accounts 2017

Main image
Cobham designs and builds aerial refuelling systems
including for the Lockheed Martin C-130 aircraft as well
as a variety of external fuel tanks and special pods.

Small image
Cobham designs and manufactures actuation products
including emergency release, inflation rocket propulsion
and weapons control and ejection.

www.cobham.com

Cobham plc
Annual Report and Accounts 2017

23
23

STRATEGIC REPORTAdvanced Electronic Solutions

Providing critical communication
solutions on land, at sea, in the
air and in space

Provides critical solutions for communication
on land, at sea, in the air and in space through
off-the-shelf and customised products including
radio frequency, microwave and high reliability
microelectronics, antenna subsystems and motion
control solutions. This addresses defence and
commercial markets, including missiles, radars,
electronic warfare, satellite electronics and select
industrial applications.

The Sector’s 6% organic revenue performance
reflected increases across a number of product
areas including space related actuation, power
distribution modules for satellite programmes
and the Low Band Consolidation (LBC) electronic
warfare programme, which passed its preliminary
design review. Additionally there were increased
volumes on the F-35 Joint Strike Fighter programme,
with the Sector having significant electronic
warfare and radar subsystem content, with
further content won.

Underlying operating profit decreased by £5.9m
after the impact from exchange rates. As previously
reported, there was an adverse impact from
investments made to strengthen the Sector’s
functional infrastructure and this included the
build out and deployment of various IT and
compliance systems.

During 2017 and 2018 a significant investment is
also being made in the San Diego facility, which is
currently increasing production, to improve on time
delivery and quality management.

The Sector has received Low Rate Initial Production
awards for air and missile defence programmes.
The Advanced Off-board Electronic Warfare
(AOEW) pod programme also successfully passed its
preliminary design review. This is a major milestone
for this long-term programme, which will provide US
Navy MH-60 helicopters with enhanced electronic
warfare surveillance and countermeasure

capabilities against anti-ship missile threats,
extending the detection range of existing
ship-based electronic warfare systems. The Sector
also worked with partners on the European Space
Agency (ESA)’s Next Generation Microprocessor
(NGMP) development to bring to market a
space-qualified quad-core processor, providing
faster processing power.

The Sector continues to operate under
an SSA, with the Sector Board critical to
Sector governance and performance.
Admiral Steve Abbot USN (retired),
General Mike Hagee USMC (retired),
Cindy Moran and Scott Webster were
appointed to the Board in the year.

Sector revenue (£m)

Sector underlying operating profit (£m)

900

800

700

600

500

400

300

200

100

150

511.6

25.8

31.0

568.4

100

66.2

3.0

(5.9)

63.3

2016

Currency
translation

Organic
growth

2017

2016

Currency
translation

Organic
growth

2017

Revenue by market (%)

Revenue by geography (%)

Commercial
aerospace/
general
aerospace 3%

UK, RoW
defence/security
4%

Maritime/other 14%

Asia 4%
Other EU 3%
UK 1%

US defence/
security 79%

RoW 1%

USA 91%

Order
intake

Organic
revenue

Underlying
operating margin

Number of
employees

£563.0m

(2016: £542.1m)

5.8%

(2016: (8.3)%)

11.1%

(2016: 12.9%)

3,393*

(2016: 3,068)

* Total permanent headcount at 31 December 2017.

www.cobham.com

Cobham plcAnnual Report and Accounts 2017

Main image
Cobham is investing significantly in its site in San Diego, US
to deliver its strong order book while improving on time
delivery and enhancing the efficiency of our operations.

Small image
Cobham’s Application Specific Integrated Circuit (ASIC) space
solutions have earned the US Government’s highest ratings.
They offer higher size, weight, and processing benefits.

www.cobham.com

Cobham plc
Annual Report and Accounts 2017

25
25

STRATEGIC REPORTAviation Services

Delivering outsourced aviation
services for military and
commercial customers

Delivers outsourced aviation services for
customers worldwide, including military training,
special mission flight operations, outsourced
commercial aviation, including fly-in fly-out
services to the natural resources industry and
aircraft engineering.

Organic revenue was 2% lower, reflecting a
reduction in revenue from commercial markets,
attributable to lower flying activity for Australian
natural resources customers and the adverse
impact from the first full year of the repriced
contract with Qantas. In addition, Helicopter
Services revenue was lower, being impacted by the
completion of certain overseas contracts, including
search and rescue operations in Trinidad and
Tobago and maintenance activity in Qatar. However,
there was a benefit from an increase in fixed wing
special mission revenue, primarily relating to the
commencement of the Australian Maritime Safety
Authority (AMSA) contract.

Operating profit was £19.1m lower after the impact
of exchange rates. This primarily reflected the Qantas
contract and also the wind-down and demobilisation
of helicopter operations in Trinidad and Tobago and
Qatar. The results also reflected £3.2m of non-recurring
charges, relating to the settlement of legacy issues
largely provided for in the first half.

In order to enhance customer focus as well as
reduce overheads, the Sector is being restructured
into two regionally based businesses, one based in
Australia and one focused on the UK and EMEA.

The Sector’s order intake was lower than the prior
year, which included receipt of the net initial order
for AUS$719m relating to the multi-year Qantas
contract extension.

The Australian natural resources market is showing
some early signs of recovery. Significantly, the
Sector also secured a five year contract extension
to continue its operations for Chevron, albeit at a
lower rate of flying activity.

In addition, all four specially modified Bombardier
Challenger CL-604 aircraft for the AMSA contract
are now fully operational and after the recent
establishment of the Cobham Helicopter Academy,
based in Newquay, UK, a launch customer has
been secured. The Academy will allow the Sector
to continue helicopter training services when
the UK Defence Helicopter Flying School
contract finishes at the end of March 2018.

The Sector signed a teaming agreement with
Draken International in the year, for jointly
developing solutions for the delivery of
operational readiness training under the UK
Ministry of Defence (MoD) Air Support to
Defence Operational Training (ASDOT)
programme. ASDOT will meet the training
component of UK air support from 2020,
progressively replacing contracted and
military service provision as these expire,
including Cobham’s existing operational
readiness training for the UK MoD.

Sector revenue (£m)

Sector underlying operating profit (£m)

900

800

700

600

500

400

300

200

100

150

100

357.2

18.4

(9.0)

366.6

2016

Currency
translation

Organic
growth

2017

40.6

1.3

(19.1)

2016

Currency
translation

Organic
growth

Revenue by market (%)

Revenue by geography (%)

Commercial
aerospace/
general aerospace
43%

UK, RoW defence/
security 57%

RoW 2%
Asia 6%

Australia 59%

22.8

2017

UK 31%

Other EU 2%

Order
intake

Organic
revenue

Underlying
operating margin

Number of
employees

£122.4m

(2016: £513.4m)

(2.4)%

(2016: (13.9)%)

6.2%

(2016: 11.4%)

2,072*

(2016: 2,240)

* Total permanent headcount at 31 December 2017.

www.cobham.com

Cobham plcAnnual Report and Accounts 2017

Main image
Cobham operates the world’s most advanced civil search-and-
rescue aircraft – specially modified Challenger jets – to conduct
operations for the Australian Maritime Safety Authority.

Small image
Cobham’s Helicopter Academy delivers specialised search and
rescue training with over 20 years of experience in the market.

www.cobham.com

Cobham plc
Annual Report and Accounts 2017

STRATEGIC REPORTChief Financial Officer’s Statement

This first year of the
turnaround has delivered
a significantly more
resilient Balance Sheet
with a focus on cash
generation

Summary of underlying results
To assist with the understanding of earnings trends,
the Group has included within its published financial
statements non-GAAP alternative performance
measures including underlying operating profit and
underlying profit. The non-GAAP measures used
are not defined terms under IFRS and therefore
may not be comparable to similar measures used by
other companies. They are not intended to be a
substitute for, or superior to, GAAP measures.

Management uses underlying measures to assess
the operating performance of the Group, having
adjusted for specific items as detailed in note 2 to
the Group Financial Statements on page 94. They
form the basis of internal management accounts
and are used for decision making including capital
allocation and a subset also forms the basis of
internal incentive arrangements. By using underlying
measures in segmental reporting, this further
ensures readers of the financial statements can
recognise how incentive performance is targeted.
Underlying measures are also presented in this
statement because the Directors believe they
provide additional useful information to
shareholders on comparative trends over time.
Finally, this presentation allows for separate
disclosure and specific narrative to be included
concerning the adjusting items; this helps to ensure
performance in any one year can be more clearly
understood by the user of the financial statements.

A reconciliation of statutory to underlying profit
numbers is set out on page 29.

A summary of the Group’s underlying results is set
out below:

£m
Revenue
Underlying operating profit

2017
2,052.5
210.3

2016
1,943.9
225.0

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

£m

2016
1,943.9

translation Divestments
(7.7)

92.3

Organic
growth
2017
24.0 2,052.5

Underlying operating 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)*

10.2%

11.6%

(37.2)
173.1
(39.8)
23.0%
133.3

(49.8)
175.2
(39.6)
22.6%
135.6

2,231.8
6.0

1,732.2
7.8

* Comparatives have been restated to reflect the bonus
element of the Rights Issue completed during 2017.

Definitions of the underlying measures can be
found on page 94.

Orders
Group order intake was £1,916.6m (2016: £2,084.0m).
Order intake in 2016 benefited from an initial net
AUS$719m order booked relating to the significant
repriced and multi-year Qantas contract in the
Aviation Services Sector. Excluding this, and at
constant currency, 2017 order intake was 8% higher.
The Group’s book-to-bill was 0.93x (2016: 1.07x);
excluding Aviation Services book-to-bill was
1.06x (2016: 0.99x).

At 31 December 2017, the Group’s order book was
£2,700.8m (2016: £2,946.4m), a decrease of 8%.
Within this, orders due for delivery in the current
year are £1,370.1m (2016: £1,301.7m), an increase
on the prior year of 5%, or 11% after adjusting for
divestments and currency.

Total Group revenue increased to £2,052.5m (2016:
£1,943.9m) driven by favourable currency translation
and organic revenue growth of 1%.

Organic revenue was driven by growth of 6%
(£25.5m) in the Mission Systems Sector and 6%
(£31.0m) in the Advanced Electronic Solutions
Sector, partly offset by a 3% (£22.7m) organic
decline in the Communications and Connectivity
Sector and a 2% (£9.0m) decline in the Aviation
Services Sector.

Analysing this revenue performance by end market,
organic revenue in the Group’s US defence/security
market, which was 36% (2016: 34%) of Group
revenue, was £37.6m or 5% higher. UK, RoW
defence/security organic revenue, which was 24%
(2016: 25%) of Group revenue, was £1.1m or 0.2%
higher. Organic revenue in the Group’s commercial
markets, which amounted to 40% (2016: 41%)
of Group revenue, was £14.7m or 2% lower in
the year.

Statutory operating profit
The Group made a statutory operating profit of
£104.1m (2016: £779.1m loss). In addition to the
underlying operating profit result, statutory profit
includes items which have been accounted for as
specific adjusting items, consistent with prior years.
The net charge arising from these specific adjusting
items is lower than the prior year, principally due to
the following:

www.cobham.com

Cobham plcAnnual Report and Accounts 2017
2017
104.1

138.9
(28.9)
33.5
(31.8)
(1.4)
(8.0)
–
4.7
(0.8)
106.2
210.3

2017
66.9

106.2
–
173.1
(39.8)
133.3

6.0

2016
(779.1)

161.2
39.3
573.8
–
33.3
24.4
179.1
(8.7)
1.7
1,004.1
225.0

2016
(847.9)

1,004.1
19.0
175.2
(39.6)
135.6

7.8

Reconciliation of underlying measures

£m
Operating profit/(loss)
Adjusted to exclude:
Amortisation of intangible assets arising on business combinations
Derivative financial instruments
Impairment of goodwill and other intangible assets
Reversal of impairment of intangible assets
Carrying values of other assets provided at 31 December 2016
Legal and other provisions provided at 31 December 2016
Estimates of fixed price contract profitability provided at 31 December 2016
Amounts related to prior periods restructuring programmes
Other business acquisition and divestment related items
Total operating reconciling items
Underlying operating profit

£m
Profit/(loss) before taxation
Adjusted to exclude:
Total operating reconciling items above
Non underlying finance costs
Underlying profit before taxation
Taxation charge on underlying profit
Underlying profit after taxation

Underlying EPS (pence)

− Amortisation of intangible assets arising on
business combinations of £138.9m (2016:
£161.2m);

Goodwill and other intangible assets arising on
business combinations are recognised as a result
of the purchase price allocation on acquisition
of subsidiaries.

− Favourable movements in non-hedge

accounted derivative financial instruments
of £28.9m (2016: £39.3m adverse);

The impact of derivative financial instruments
excluded from underlying results includes changes
in the marking to market of non-hedge accounted
derivative financial instruments. These amounts
relate to foreign currency exchange contracts
and would not have impacted the results had
the Group chosen to comply with IAS 39 hedge
accounting requirements.

− Net impairment of goodwill and other intangible

assets of £1.7m (2016: £573.8m);

The Group reviews its valuation of goodwill for
potential impairment at least annually. In 2017 the
Group impaired its Helicopter Services Business Unit
by £33.5m. In addition, following announcement of
the divestment in February 2018 there was a partial
reversal of £31.8m against a previous impairment of
other intangible assets of the Wireless business. The
reversal related to the 2016 impairment of £573.8m
against goodwill and other intangible assets of the
Wireless, Integrated Electronic Solutions and
Semiconductor Solutions Business Units.

www.cobham.com

− Adjustments to revisions of the carrying values
of other assets provided at 31 December
2016 was a credit adjustment of £1.4m (2016:
£33.3m charge);

The credit adjustment, previously announced within
the 2017 interims, related to a provision against
receivables which was considered doubtful at
31 December 2016, but which has now been
recovered. The 2016 charge relates in aggregate
to inventory balances, reflecting ageing stock and
lower demand forecasts; provisions against aged
receivables and tangible and intangible assets no
longer expected to be used.

− Adjustments to the assessment of legal and
other provisions was a credit adjustment of
£8.0m (2016: £24.4m charge);

In addition, in 2016 the Group also took aggregate
charges of £179.1m against contract loss provisions,
including £150.0m against the KC-46 programme.

Partially offsetting these was the following specific
adjusting item:

− Amounts relating to prior periods’ restructuring
programmes of £4.7m (2016: £8.7m credit);

The costs relate to prior periods’ restructuring
programmes which have been accounted for
as incremental to normal operations. The 2016
credit included a reassessment of the level
of provisions required in respect of IT
integration and remediation costs. There will
be no further charges relating to prior periods’
restructuring programmes.

The credit adjustments relate to legal,
environmental, warranty and other regulatory
matters that were provided for in 2016 and
which have been resolved within their original
cost estimates.

Technology investment
Included within underlying operating profit
was £121.9m (2016: £123.9m) of PV investment,
excluding bid costs. PV investment in the year
represented 7.2% (2016: 7.8%) of revenue.

− Other business acquisition and divestment

related items was a credit of £0.8m
(2016: £1.7m charge);

The credit adjustment predominately relates to
previous divestment activity being concluded
within the original cost estimates.

Net finance expense and profit before tax
The Group’s net finance charge was £37.2m
(2016: £68.8m). In 2016 this included £19.0m of
make-whole payments relating to the pay down of
senior notes following the June 2016 Rights Issue.
These were treated as non-underlying as they were
one-off in nature and did not reflect the ongoing
costs of servicing the Group’s net debt.

STRATEGIC REPORTCobham plcAnnual Report and Accounts 2017Chief Financial Officer’s Statement continued

Cash flow

£m
Underlying operating profit
Less: Share of post-tax results of joint ventures
Underlying operating profit (excluding joint ventures)
Depreciation and amortisation
Share based payments
Decrease in provisions
Pension contributions in excess of pension charges
Decrease/(increase) in working capital
Gross capital expenditure
Proceeds on disposal of property, plant and equipment
Operating cash flow
Operating cash/underlying operating profit (excluding joint ventures)
Net interest paid
Taxation paid
Amounts related to prior years’ restructuring programmes
Free cash flow
Dividends paid
Business acquisition and divestment related costs paid
Net Rights Issue proceeds and allocation of treasury shares
Exchange movements
Increase in net debt
Opening net debt
Closing net debt

2017
210.3
0.2
210.5
84.8
5.5
(60.9)
(17.3)
69.7
(79.8)
5.1
217.6
103%
(34.9)
(32.2)
(9.9)
140.6
(0.1)
(0.9)
497.2
7.9
644.7
(1,028.2)
(383.5)

2016
225.0
(0.2)
224.8
80.5
3.8
(16.3)
(16.7)
(8.2)
(92.2)
6.1
181.8
81%
(71.2)
(20.1)
(39.8)
50.7
(126.1)
(2.5)
492.9
(236.4)
178.6
(1,206.8)
(1,028.2)

Included within the underlying net finance charge
was a net expense on cash and debt holdings of
£34.9m (2016: £48.0m). This benefited from lower
average net debt following the 2016 and 2017
Rights Issues, as well as from the Group’s free cash
flow generation. The non-cash finance charge from
pension schemes was £2.3m (2016: £1.8m).

The Group made a statutory profit before tax
of £66.9m (2016: loss of £847.9m). The Group’s
underlying profit before tax was £173.1m
(2016: £175.2m).

Divestments
The Group announced in February 2018 that
it had agreed to divest its AvComm and Wireless
test and measurement businesses for US$455m
in cash payable on completion, which is anticipated
within the first half of 2018. In the year ended
31 December 2017 the businesses recorded
aggregate revenue of £169.6m and underlying
profit of £13.6m (a £24.8m contribution, before
the allocation of central charges and restructuring
costs of £2.4m).

On completion, the coherency of the portfolio will
be enhanced, reducing risk by exiting businesses
with little commonality with the rest of the Group.
The net divestment proceeds (which are subject to
certain post completion adjustments and expenses)
will be used to strengthen the Balance Sheet and,
coupled with existing cash, will pay down
approximately £440m of debt. This will include the
repayment of private placement debt (senior notes),
which will result in estimated accelerated interest
costs (make-whole payments) of up to £30m. After
the accelerated interest costs, which it is expected
will be incurred in the first half of 2018, the Group’s
future interest expense will be reduced by
approximately £18m per full year.

IFRS 15 (Revenue Recognition) and IFRS 9
(Financial Instruments)
The Group is adopting the new revenue recognition
standard, IFRS 15, from 1 January 2018. The
standard impacts the timing of revenue recognition
on some Group development contracts and on
some US government product based contracts. It
is estimated that the impact of IFRS 15 is to increase
Group revenue by £41m and underlying operating
profit by £3m in 2017. There is no impact on
Cobham’s cash generation or net debt, and it has an
immaterial impact on net assets although there will
be changes between amounts recoverable on
contracts and receivables and payables.

The Group is reviewing the implications of the US
tax reform, including the Base Erosion and Anti
Abuse (BEAT) provisions, and resolving certain tax
issues arising from prior years. Given these and the
expected geographical mix of profit, the underlying
tax rate is anticipated to remain at approximately.
the current level, subject to any future changes in
tax legislation.

In addition, the Group previously announced it is
reviewing its internal financing structures and is in
the process of resolving certain tax issues from prior
years, which are set out in more detail in note 6 to
the Group Financial Statements on page 100.

The Group will also adopt IFRS 9 on 1 January 2018.
As a result, the valuation of certain of Cobham’s
minority shareholding investments will increase by
approximately £30m, reflecting a requirement to
hold these at fair value, rather than at cost, with the
change also increasing Group reserves. There are
no other material changes arising from the
adoption of IFRS 9.

Taxation
The Group’s overall tax credit was £11.9m (2016:
£52.8m), in part reflecting an improvement over
prior year Group profit after specific adjusting items.

The Group’s underlying tax rate increased to
23.0% (2016: 22.6%) from an underlying tax charge
of £39.8m (2016: £39.6m). The increased rate was
primarily a result of the geographic profit mix
in the year.

Earnings per share (EPS)
Basic EPS was 3.5p (2016: (45.9)p), including the
restatement of the prior year figure for the 2017
Rights Issue bonus factor. In addition to the
underlying operating performance, basic EPS was
impacted by the specific adjusting items set out in
the paragraphs on statutory operating profit above,
most notably a charge relating to the amortisation
of intangible assets arising on business
combinations, partially offset by favourable
movements in non-hedge accounted derivative
financial instruments.

Underlying EPS was 6.0p, 23% lower than the
prior year, primarily due to the higher share count
following the 2017 Rights Issue, with underlying
profit afer tax broadly flat year on year.

www.cobham.com

Cobham plcAnnual Report and Accounts 2017Under the Group’s borrowing agreements, the net
debt number used in the net debt/EBITDA ratio
calculation is based on an average foreign exchange
rate. On this basis the Group’s year end net debt
figure was £405.3m, resulting in a ratio of 1.3x
(2016: 3.0x). For the purposes of this calculation
specific adjusting items are excluded from EBITDA,
in addition to some smaller adjustments. Interest
cover was 6.8x (2016: 5.1x).

Debt covenants

£m
Net debt –
balance sheet
Net debt –
average rate
EBITDA
Net debt to EBITDA
(not to exceed 3.5x)
EBITA
Net interest
Interest cover
(not less than 3x)

2017

2016

(383.5)

(1,028.2)

(405.3)
308.5

1.3
234.3
34.7

6.8

(937.9)
316.5

3.0
245.2
48.0

5.1

A summary of the Group’s borrowings and
associated maturities together with further details
of the financial covenants are set out in note 16 to
the Group Financial Statements on page 111.

In December 2017, the Group completed a
scheduled refinancing of its revolving credit
facilities maturing in October 2018, with new bank
facilities totalling US$545m and maturities of five
years or over at a similar cost. As a result of the
refinancing three new floating rate loan agreements
were signed and the four existing agreements were
cancelled. Details of the new loan facilities are set
out in note 16 to the Group Financial Statements
on page 111.

As set out in the Divestments paragraph, the Group
intends to use part of the net divestment proceeds
arising from the disposal of the AvComm and
Wireless test and measurement businesses coupled
with existing cash to pay down approximately
£440m of debt.

The Group’s average share count in the year was
2,231.8m (2016: 1,506.3m or 1,732.2m restated
to reflect the bonus element of the Rights Issue
completed during 2017). The share count at 31
December 2017, excluding shares held in treasury,
was 2,391.0m (31 December 2016: 1,707.9m).

Cash flow
Operating cash flow, which is stated after net capital
expenditure, but before interest and tax payments
was £217.6m (2016: £181.8m). Operating cash
conversion was 103% (2016: 81%). This was driven
by a cash inflow from working capital, including
improvements due to advance customer receipts
of £27m. Cash conversion was also assisted by lower
capital expenditure of £79.8m (2016: £92.2m) before
proceeds from asset disposals of £5.1m (2016:
£6.1m). Operating cash flow included £66.6m
of net utilisation against the charges taken at
31 December 2016.

Free cash flow was £140.6m (2016: £50.7m). This
included net interest payments of £34.9m (2016:
£71.2m, including £19.0m of make whole payments
on senior notes paid down). Net tax payments were
£32.2m (2016: £20.1m), in part reflecting the Group’s
increased underlying tax rate.

Also included in free cash flow were payments
relating to prior periods’ restructuring programmes
of £9.9m (2016: £39.8m). A significant element
relates to ongoing lease payments on vacated
premises provided for in previous years.

Below free cash flow, there was a net inflow of
£497.2m (2016: £492.9m), primarily relating to the
net proceeds of the Rights Issues completed in
2017 and 2016 respectively.

Dividend and dividend policy
It was previously announced that the Board
would not recommend a dividend in respect of the
financial year 2017. The Board recognises the
importance of dividend payments to shareholders
and will review its dividend policy as the turnaround
progresses and the risk profile improves, seeking to
resume a dividend when it is appropriate to do so.

The decision on the level of any future payment will
take into account a number of factors including the
Group’s underlying earnings, cash flows and gearing,
its investment needs and the requirement to
maintain an appropriate level of dividend cover.

In addition, in determining whether to pay a
dividend in any one year, in accordance with its
policy, the Board will also consider the level of
distributable reserves and the requirements of
recurring business commitments such as pension
obligations and servicing debt providers.

As stated above, the Group’s risk profile is also
important to its dividend decision and the Board
will continue to consider the Group’s principal risks,
which are set out on pages 36 to 39.

The Group’s Parent Company operates as a holding
company which primarily derives its net income
from dividends paid by its subsidiary companies.
At 31 December 2017 Cobham plc had significant
distributable reserves, amounting to £1,180.1m,
which mainly related to its retained earnings.
The Parent Company Balance Sheet is shown on
page 129.

The Board’s decision not to recommend a dividend
during 2017 was driven by consideration of all the
primary factors above. The Board continues to
believe that in order to retain operational flexibility,
and having due regard to the Group’s current risk
profile and the future cash flows associated with its
contract loss provisions, the payment of a dividend
in 2017 was not justified.

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.

Net debt, gearing and 2017 Rights Issue
The Group’s net debt decreased to £383.5m
(31 December 2016: £1,028.2m) at the year end,
including favourable exchange rate movements of
£7.9m (2016: £236.4m adverse), which were largely
driven by translation of Cobham’s US dollar
denominated debt between the opening and
closing rates.

The Group’s policy was reviewed and updated
during 2017 in respect of the impact of foreign
currency movements on the net debt/EBITDA ratio.
In addition, the proportion of the Group’s net debt
denominated in US dollars, which had been
significantly higher than US dollar denominated
profit through 2016 has been more closely aligned
during 2017. This closer alignment mitigates the
risk of currency related gearing volatility.

Included within net debt are cash deposits,
which are primarily denominated in sterling
US dollars, euros, Danish kroner and Australian
dollars. At 31 December 2017, the Group held total
cash and short term bank deposits, net of
offsettable overdrafts and all with an original
maturity of three months or less, of £451.9m
(31 December 2016: £236.2m).

Cobham announced the results of its fully
underwritten 2 for 5 Rights Issue on 5 May 2017.
The Rights Issue raised gross proceeds of £512.4m,
amounting to £496.7m after expenses. The
proceeds of the Rights Issue were partially used to
repay senior notes of face value US$44m in May
2017 (with no make-whole payment) and US$75m
of scheduled repayment in October 2017, with the
remaining proceeds after partial repayment of the
Group’s revolving credit facilities held on deposit at
the year end.

www.cobham.com

STRATEGIC REPORTCobham plcAnnual Report and Accounts 2017Chief Financial Officer’s Statement continued

The chart (right) summarises the Group’s main
foreign currency transaction exposures (based
on forecast revenues) and the hedging in place
to mitigate it.

Hedging transaction exposure

US$/DKK

2018 Total

US$92m

US$/£

US$144m

Hedging in place

US$86m

93%

US$119m

83%

Average hedge rate

US$1:DKK 6.34

US$1.37:£1

Hedging in place

2019

US$1m

US$85m

Average hedge rate

US$1:DKK 6.20

US$1.36:£1

2020 to 2022

US$1m

Average hedge rate

US$1:DKK 6.01

US$29m

US$1.50:£1

US dollar/euro exposure predominantly hedged for 2018 with US$48m @ 1.15

Historic average
effective rate
2014 US$1.61:£1
2015 US$1.59:£1
2016 US$1.51:£1
2017 US$1.41:£1

Foreign exchange translation exposure arises on
the earnings of operating companies based largely
in the US, Europe and Australia. These are partially
offset by foreign currency denominated interest
costs due to the Group’s current policy of generally
funding acquisitions with borrowings denominated
in the same currency and also to approximately
match the currency mix of EBITDA with the
currency mix of net debt. The interest charge
on this debt provides a partial offset against
currency denominated profits.

The Group’s approximate pro rata Income
Statement sensitivity to currency translation is
as follows, calculated as the impact of a 10 cent
movement in the full year average rate
against sterling:

£m
US$
AUS$
EUR/DKK
Other currencies

Underlying
operating
profit
10
1
2
1
14

Revenue
79
16
23
4
122

Foreign currency transaction
The Group’s aim is to reduce, or eliminate whenever
practical, foreign exchange transaction risk. The US
dollar/sterling and the US dollar/Danish krone
exchange rates are the most significant exposures,
together with a number of other, smaller foreign
exchange transaction exposures, including the
euro/US dollar.

All foreign exchange hedging transactions are
approved under delegated authority from the
Board. A number of financial instruments are
used to manage transactional foreign exchange
exposure, such as forward rate contracts. The
Group has a policy of hedging at least 80% of
estimated transactional exposure for the next
12 months, a proportion of exposures between
12 and 36 months, and firm exposures on long term
contracts. Details of the most significant of these
instruments are described in notes 19 and 21 to
the Group Financial Statements.

Some 83% of the Group’s anticipated transaction
exposure to the US dollar/sterling exchange rate is
hedged for 2018 at an average rate of US$1.37/£1,
with additional forward sales in place to partially
cover anticipated exposure in subsequent years.

Interest rates
Cobham has various borrowings at both fixed
and floating rates of interest. During the year ended
31 December 2017, the Group cancelled floating
to fixed interest rate swaps following repayment of
the associated floating rate borrowings. The Group
monitors its exposure to movements in interest
rates to bring greater stability and certainty to its
borrowing costs, with the policy being to assess the
proportion of borrowings that are fixed and floating
in the context of prevailing market conditions.

Retirement obligations
Cobham operates a number of defined benefit
pension schemes, with the largest being the
Cobham Pension Plan (CPP) in the UK. At the year
end the estimated deficit for all defined pension
schemes for accounting purposes, which is the
difference between the aggregate value of the
schemes’ assets and the present value of the
future liabilities, was £63.2m before deferred tax
(2016: £87.0m).

Maturity profile of Group’s outstanding
debt facilities (£m)

2017

2018

2019

2020

2021

2022

2023

2024

1,241

1,052

907

722

314

–

£383.5m net debt at
31 December 2017

The Group has exposure to a number of
financial risks, including liquidity risk and credit
risk, which are described in note 21 to the Group
Financial Statements. In addition, it has exposure
to the effects of changes in foreign currency
exchange rates and interest rates, and these are
described below.

Foreign currency translation
The following are the average and closing rates
for the four foreign currencies that have the most
impact on the translation into sterling of the
Group’s Income Statement and Balance Sheet:

2017

2016

Income Statement
– average rate
US$/£
AUS$/£
EUR/£
DKK/£

Balance Sheet
– closing rate
US$/£
AUS$/£
EUR/£
DKK/£

1.29
1.68
1.14
8.49

1.35
1.73
1.13
8.39

1.35
1.83
1.22
9.11

1.24
1.71
1.17
8.71

www.cobham.com

Cobham plcAnnual Report and Accounts 2017

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, 13, 19 and 21 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
with liquidity available on the Balance Sheet from
its cash resources and it has a spread of maturities
on its debt. It has a mix of shorter and longer term
contracts and leading market positions with
customers across different geographical areas. As
a consequence, the Board believes 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 financial 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.

See also the Group’s Viability Statement
on page 35.

David Mellors
Chief Financial Officer
1 March 2018

A reconciliation of the movements in the pension
deficit in the year is shown in the table below.

Pension deficit at 1 January 2017
Service cost
Admin cost
Interest charge
Total employer contributions
Actuarial gains
Exchange differences
Pension deficit at
31 December 2017

2017
(87.0)
(0.7)
(0.2)
(2.3)
18.2
7.4
1.4

(63.2)

At 31 December 2017, the scheme assets were
£816.3m (2016: £790.0m) and the present value of
scheme obligations was £879.5m (2016: £877.0m).

Significant movements within the deficit were:
− An increase of £35m due to a reduction in

the discount rate;

− A reduction due to net investment returns

of £31m;

− A reduction of £11m due to changes to

mortality assumptions; and

− A reduction of £18m due to employer

contributions.

The CPP was closed to future accrual from 1 April
2016 and 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. The next triennial valuation
of the CPP is at 1 April 2018. This exercise will take
place during 2018, which may result in an updated
schedule of contributions to take effect in 2019
and future years.

Further details on the Group’s retirement benefit
schemes in the year, including the primary
assumptions, the amounts recognised in the
Income Statement and the changes in value
of defined benefit schemes are given in note 20
to the Group Financial Statements.

www.cobham.com

STRATEGIC REPORTCobham plcAnnual Report and Accounts 2017Principal Risks

The Group’s principal risks
have been updated to reflect
its operational priorities

How we manage risk
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 principal risks reported
across the Group by businesses and functions, and
satisfying itself that these risks are managed within
the Group’s risk appetite, the Board ensures that
the Group’s risk exposure remains appropriate
and that this links to the effective delivery of its
strategic objectives.

1 st Line

O p e r a t i onal Management

Monitoring
and Reporting

Risks and
Actions

ERM

Policy and
Controls

Functions

2nd Lin

The Board has ultimate accountability for the
execution of risk management and internal control
systems, with the Group Executive responsible
for overseeing execution of risk management
throughout the Group. During 2017 a new Risk
Committee was formed as a formal Board
committee to review the risk management
activities of the Group Executive.

The Board has delegated responsibility for the
monitoring and reviewing of the effectiveness of
the Group’s risk management and internal control
systems to the Audit Committee. Assurance over
the effectiveness of these systems is provided
through regular management reporting to the Audit
Committee. For the Advanced Electronic Solutions
Sector, which holds classified US Defence
programmes and so operates under a US DoD SSA,
specific assurances and authorised assurance
reports are given by representatives of the SSA
Board, which has its own Audit Committee. The
Group’s CEO and CFO both sit on the Board of the
SSA, as described on page 51.

The process for monitoring and controlling risk,
illustrated in the diagram (left), emphasises ongoing
evaluation and monitoring by the management
teams at each appropriate entity level: Business
Unit, Sector, specialist function and at Group level.
The Group’s Enterprise Risk Management (ERM)
framework is structured to ensure that risks are
identified promptly by management teams to
ensure that they are mitigated and managed
appropriately in support of the delivery of the
Group’s strategic plan. Risks are categorised in terms
of inherent risk (before mitigation) and current risk
(after existing mitigation). This allows the Group to
identify risks that are heavily dependent on internal
mitigating controls and to allocate resources
appropriately. The risks identified are documented
and measured, including the ownership of individual
risks. Data from this process has been aggregated
and has been used as the basis for the Group’s
principal risk disclosure on pages 36 to 39.

www.cobham.com

Cobham plcAnnual Report and Accounts 2017

As a result of this process, several changes
have been made to the Group’s principal risks.
Following the completion of the Rights Issue and
the refinancing of the Group’s loans in 2017, and the
divestment of the AvComm and Wireless test and
measurement businesses that is expected to
complete in the first half of 2018, the risk associated
with breaching borrowing covenants has been
retired as a specific principal risk, although it is
still being tracked as part of principal risk 10 –
Governance Framework. In addition, the risks
arising from the execution of the Group’s strategy
and the realisation of integration benefits from
the Aeroflex acquisition have also been retired,
reflecting the completion of a strategic review in
2017, which identified new strategic objectives and
the completion of Aeroflex integration activities.
Finally, a new principal risk was identified associated
with meeting customers’ expectations, as a result of
increased focus being put on this area as one of the
Group’s operational priorities.

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 risk management and
internal control systems. They are supported by a
number of Group functions which, together with
performance management procedures, form
the second line. Internal Audit, which forms
the third line, is empowered to provide an
independent assessment of the effectiveness of
risk management and internal control systems, as
well as identifying areas for improvement. These
lines of assurance include the Group’s ethics
reporting system, which enables employees to
raise concerns over ethics and compliance
matters. The Internal Audit function reports
directly to the Audit Committee to ensure its
independence and objectivity.

Risk appetite
The Board has established a risk appetite baseline
through which Cobham’s risks can be managed
with appropriate controls and assurance measures.
Risk events can be categorised under four main
headings: Strategic, Operational, Financial/Reporting
and Compliance. The Group has broken down these
risk categories into a number of subcategories and
defined its risk appetite for each. The risk appetite
is articulated as low, medium or high across the
various elements of the risk framework.

There is a higher appetite for areas of Strategic risk
including the promotion of growth, for example in
business and product portfolios, and in the strategic
planning processes. There is a low appetite for
Compliance risk – including zero tolerance for
certain ethical issues such as bribery – with a
medium appetite for Operational and Financial/
Reporting risks.

In making its assessment, the Board has taken into
account the potential impacts of the principal risk
events identified in the latest risk review to consider
whether these could prevent the Group from
achieving its strategic objectives. These principal
risks are described in detail in the Principal Risks
section of this report on pages 36 to 39. The Board
considers the potential financial and operational
impact of plausible downside scenarios resulting
from these risk events occurring individually or in
combination. Consideration was also given to the
occurrence of other individual events that in their
own right could have a material impact on the
Group’s viability, including a failure to complete
the AvComm and Wireless divestment. Whilst the
conclusion on the viability of the Group is
unchanged in most plausible downside scenarios,
if the divestment were not to complete the Balance
Sheet would be less resilient in the event of other
material risks crystallising.

Based on the consolidated financial impact of
the sensitivity analyses and associated mitigating
internal controls and risk management actions that
are either now in place, or could be implemented,
the Board has been able to conclude that the Group
will be able to maintain sufficient bank facilities to
meet its funding needs over the three year period.

Confirmation of longer term viability
Based upon the assessment of the principal risks
facing the Group and robust downside sensitivity
analysis, all of which are described above and on
pages 36 to 39, the Board has a reasonable
expectation that the Group will be able to continue
in operation and meet its liabilities as they fall due
over the period to December 2020.

The Group’s going concern statement is detailed
on page 33.

The Group’s controls, mitigation activities and
associated assurance measures implemented
reflect the risk appetite for each position.

Viability Statement
The Board considers the Group’s viability as part of
their continuing programme of monitoring and
managing risk. The Board has concluded that the
most relevant time horizon for this review is three
years, taking account of the diversity in demand
characteristics of the Group’s end markets. These
range from relatively long cycle businesses, such as
Aviation Services and US defence related businesses
which both contain predominantly multi-year
contracts, to the less predictable, largely
commercial, shorter cycle businesses, such as
SATCOM, which typically operates with an order
backlog of a few months or less.

Assessing viability
The starting point in assessing the prospects of the
Group was the annual strategic planning process.
The output of this process is considered to contain
all of the key underlying assumptions that will
provide the most appropriate information on which
to assess the Group’s viability.

www.cobham.com

STRATEGIC REPORTCobham plcAnnual Report and Accounts 2017Risk
appetite

Risk status
indicator

High

Unchanged
Overall in 2017,
the volatility in
global
macroeconomic
conditions
continued to
affect the
Group.

Medium

Unchanged
In 2017, the
Group remained
challenged in a
number of areas,
in particular with
regard to fixed
price
development
contracts. The
Group’s markets
and the resultant
contracting
environment
continue to
increase in
complexity.

Principal Risks continued

Element

Risks and impact

Mitigation

1. The Group operates
within a volatile
macroeconomic
environment

Cobham’s revenues and costs are dependent on a complex mix of
macroeconomic, fiscal, commercial and strategic defence and security
factors, arising from the global defence/security and commercial markets
within which the Group participates.

Links to KPIs
− Organic revenue
− Underlying

operating margin

− Underlying EPS
− Operating cash
conversion

2. The characteristics
of the Group’s
markets and the
resulting
contractual
environment are
highly complex

Links to KPIs
− Organic revenue
− Underlying

operating margin

− Underlying EPS
− Operating cash
conversion

36% of the Group’s revenue is derived directly or indirectly from the US
Government. Due to a number of factors, including the US Government
operating under a continuing resolution and the US statutory debt ceiling,
US defence spending levels are difficult to predict beyond the near term.

24% of the Group’s revenue is derived directly or indirectly from non-US
governments. While heightened regional security tensions have led to an
increase in demand for the Group’s products, the general level of public
deficits and indebtedness remains high, which the Group expects will act
to limit growth in defence and security investment in the region.

The Group also has exposure to commercial markets which have historically
been cyclical and have experienced downturns in response to weakness in
commodity markets (such as oil and gas, iron and steel, and precious metals)
and other factors such as interest rates and foreign exchange rates.

Government and commercial customers are increasingly focused on pricing
as budgetary pressure requires them to do more with less, even where
headline budgets are expected to increase, in areas such as US Defence.
Protectionism by governments is also growing in response to the perceived
effects of globalisation on national economies.

The Brexit vote in 2016 may lead to uncertainty in future trade
arrangements between the Group’s UK businesses and the various end
markets which they serve, together with potential restrictions on the
international movement of capital and the mobility of personnel.

If the Group does not anticipate changes in the various end markets which
it serves (including deterioration in demand or a fundamental shift in how
customers procure products and services), changes in input costs, and
changes in other macroeconomic factors, its business, results of operations
and financial condition could be adversely affected.

The various end markets served by Cobham are highly competitive. The
Group relies on its ability to win business ahead of its competitors through
a combination of differentiated technology, contractual terms and price.
There is no assurance that the Group will be able to maintain its current
market share with respect to its products or services due to the
development of competing technologies, the periodic retender and
renewal of existing contracts, the inability to develop existing products
due to resource constraints or the emergence of new competitors.

The Group has a number of contracts which span more than one
accounting period, some of which have a fixed price. If the Group fails to
accurately estimate the resources and time necessary to meet contractual
milestones, the Group may be subject to claims for damages for late
delivery. If the costs required for the delivery of such contracts are higher
than those agreed, as a result of the performance of new or developed
products, schedule over-runs or other external factors (such as inflation
resulting in an increase in input costs), which cannot be passed on to a
customer, the profitability of a contract may be reduced, or result in a
contract becoming loss making.

The timing of order receipt from customers could have a material impact
on the Group’s performance in a given reporting period, as the amounts
payable under such contracts can be individually substantial.

The Group’s existing contractual arrangements are subject to periodic
renewal and retender. There can be no assurance that the Group will be able
to successfully renew such contracts, for example the contract with the UK
MOD for helicopter pilot training, which expires in 2018 was lost on retender
in 2016. Other significant contract renewals are approaching, for example
the contract with the UK MOD for provision of airborne operational
readiness training which expires at the end of 2019.

Some of the Group’s contracts have terms (which are not unusual in the
Group’s markets), that provide for unlimited liabilities for the Group or
termination rights for the customer and, in some cases, damages and
consequential loss exposure. Many of the Group’s contracts are also across
international borders, leading to increased complexity in interpretation.

The Group is reliant on third party manufacturers and key suppliers, to
whom certain manufacturing and engineering functions are outsourced.
This results in a reduction in control over capacity allocation and quality
and may result in disputes regarding the ownership of intellectual property.

The occurrence of any or all of these factors may result in the financial
performance of the Group being impaired, through reductions in revenue,
increased costs or the emergence of unexpected liabilities.

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 risks are minimised and
managed effectively.

Periodic reviews of externally sourced market
demand data, with the re-forecasting and
adjustment of internal planning in line with
market demand.

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

The Group uses financial instruments where
applicable to assist in the management of
foreign exchange and interest rate risks,
principally forward exchange contracts and
interest rate swaps.

Emerging issues and opportunities arising as a
result of the UK decision to leave the EU will
be monitored.

The Group seeks to focus on areas within
those markets in which its deep customer
understanding and technical expertise
provide it with an advantage in bidding, to
reduce the likelihood of an emergent
technology or competitor affecting the
competitive position.

Fixed price bids and projects are reviewed for
early detection and management of issues
which may result in cost over-run or excessive
delivery risk.

The Group’s Life Cycle Management (LCM)
process is applied to significant contracts, to
identify and mitigate cost and schedule over-
runs or other issues.

The Group seeks to mitigate risks associated
with the complex characteristics of its
markets through the use of a Contract Policy
which is intended to ensure that the Group
enters into contracts with an appropriate
balance of risk and reward.

The Group’s bid and approval process and
contract policy is applied to all bids, contracts
and development programmes to ensure that
a consistent approach is followed.

Appropriately trained personnel are
embedded within the business to ensure that
the contract policy is adhered to, and that
delays to negotiating and agreeing contracts
are minimised.

Training is conducted for key staff with
responsibility for negotiating contracts.

The Group continues to review its level of
exposure to individual suppliers to ensure that
the level of reliance is appropriately managed.

www.cobham.com

Cobham plcAnnual Report and Accounts 2017
Element

Risks and impact

Mitigation

Lifecycle Management (LCM) ensures that
the Group’s key contract and programme
management policies and procedures are
applied consistently and appropriately
across all areas of the business. The Group is
currently investing in quality management
to improve both in house and supply chain
performance. On time delivery is a KPI for
all Business Units.

A project and programme watch list has been
established to ensure increased focus is given
to large and technically complex projects.

Continuing professional development of
project managers is undertaken against
agreed standards and identified
development needs.

3. Project and
Programme
Management is
not effective

Links to KPIs
− Organic revenue
− Underlying

operating margin

− Underlying EPS
− Operating cash
conversion
− On time delivery

The Group designs, develops and delivers products and services that are
often customised, utilising complex technologies, outsourced supply
chains and both fixed price contracts that can be long term in nature and
through internally funded PV projects to exploit an identified market
opportunity. Development projects can take place across a wide range
of markets and technologies. The decision to outsource, and the selection
of the appropriate suppliers can add additional risk to programmes if the
supply chain is not properly managed.

The Group employs a system of project and programme management
known as Lifecycle Management (LCM) to ensure that all such projects are
managed within a common framework. The current deployment of LCM
across the Group is at varying levels of maturity.

The Group is currently undertaking a number of significant development
projects, notably the aerial refuelling development programmes within
the Mission Systems sector and the Aviator ‘S’ system within the SATCOM
Business Unit. Failure by the Group to execute or deliver these or other
projects or programmes, and to deliver them concurrently in the same
locations (for example in Wimborne, UK) gives rise to the risk of increased
costs, damages, product liability claims, litigation and other financial
liabilities, reduced future profitability and reputational risk. Poor
operational performance could also lead to customers withholding new
and existing business from the Group.

Certain programmes on which the Group has won positions are scheduled
to ramp up to meet user requirements, for example the San Diego facility
in the US. The growth in production required puts added pressure on
quality management and therefore adds additional risk to on time delivery
and contractual performance and reputation.

Risk status
indicator

Risk
appetite

Medium

Unchanged
The Group is in
a significant
phase of
engineering
and
development
activity on
various
programmes
and platforms,
which will
continue in
2018.

4. Shortage of

appropriate skills
and talent

Links to KPIs
− Voluntary staff

turnover

Key to execution of the Group’s strategic plan is the recruitment,
development and retention of sufficient personnel with the appropriate
skills to meet the needs of the business, in engineering, technical and other
specialist and managerial roles, which are amongst the most sought after
skills within the labour market on a worldwide basis. This is exacerbated by
nationality restrictions in certain of its markets, which prevent the Group
from accessing a worldwide talent pool. Insufficient availability of
personnel will generate a resource gap that will impair the Group’s ability to
deliver against its strategic plan.

The Group undertakes workforce planning to
ensure that skill gaps are identified and plans
are established to close them. This includes
ensuring that the Group’s compensation
planning and review process takes into
account any key shortages and that
succession planning is carried out to ensure
that a pipeline of suitable candidates for key
roles is maintained.

Medium

Partly as a result of recent operational and financial challenges, the Group
was required to hire new senior managers in certain of its business units,
including the SATCOM, Antenna Systems and Wireless Business Units. The
Group is also seeking to strengthen its central capabilities through hiring
new employees within its corporate functions. Employee retention has
been and may continue to be challenging, and the Group must continue
to motivate employees and keep them focused on its strategies and goals.

Development programmes are undertaken
to ensure that internal candidates develop
the skills and experience necessary to
undertake more senior roles within
the organisation.

See the CRS section on pages 40 to 43 for
information on talent management actions.

The resulting talent gap could lead to a reduced ability to execute on
growth plans and key programmes, resulting in reduced customer
confidence and an adverse impact on the Group’s financial position
and financial outlook.

5. Customer

expectations of
service, quality
and innovation are
not met

It is crucial to the Group’s current and future development that the
expectations of its customers are fully understood and fulfilled, in areas
such as the development of new products, the delivery of existing
products in accordance with customer requirements and the support
provided in respect of products that have already been delivered.

If the Group fails to understand the future requirements of its customers,
and achieve the level of service that they expect, failure to win new
contracts and difficulty in renewing existing contracts may result. In
addition, the Group may suffer financial penalties and possibly the loss of
existing contracts. Customer pricing pressure may also intensify where
customers perceive that the Group is not providing a level of service that is
commensurate with expectations.

Cobham is undertaking several business change programmes that are
important to the Group’s future prospects, in areas such as the
re-organisation of its supply chain, the implementation of improved
Information Technology systems across the Group, and the ramp up of
production at facilities in certain Business Units.

If these programmes are not successfully executed, the Group’s ability to
deliver its strategic objectives will be impaired, which could lead to
reputational damage, deteriorations in financial performance, loss of
customer confidence and reduced success in winning new business from
existing customers.

Links to KPIs
− Organic revenue
− Underlying

operating margin

− Underlying EPS
− Operating cash
conversion
− On time delivery

6. Business change
programmes are
not successfully
executed

Links to KPIs
− Organic revenue
− Underlying

operating margin

− Underlying EPS
− Operating cash
conversion
− On time delivery

www.cobham.com

Medium

The Group has made customer focus a key
strategic objective during 2017 and this is
expected to continue into the future. As a
result, the level of senior engagement with
key customers has been substantially
increased.

Regular tracking of on time delivery has
commenced across the Group.

Internal project teams have been formed to
deliver business change programmes against
agreed objectives.

Medium

Business change programmes are being
managed using the LCM process to ensure
that adherence to budgets and schedules is
being tracked.

Increasing
Risk
The Group
continues to
experience
difficulties with
attracting and
retaining
personnel with
the range of
skills and
experience that
it requires.

Increasing
Risk
This is a newly
identified
Principal Risk
during
2017 and the
effectiveness
of mitigation
actions will be
assessed during
2018.

Unchanged
During 2017, the
number of
centrally driven
programmes
was reduced
and refocused.
A smaller
number of
significant
programmes
remain in
operation.

STRATEGIC REPORTCobham plcAnnual Report and Accounts 2017Risk status
indicator

Risk
appetite

Medium

Decreasing
Risk
The Group’s
portfolio is
being managed
to optimise the
total
performance in
continued
challenging
markets.

Unchanged
IT security
threats remain
significant, and
continual
updates and
improvements
are required to
keep pace with
their ever
changing
nature.

None

Increasing
Risk
The regulatory
landscape in
many areas,
continues
to develop.

Principal Risks continued

Element

Risks and impact

Mitigation

7. Value creating

Mergers,
Acquisitions
(M&A) and
Divestment
activity is not
identified and/or
executed

Links to KPIs
− Organic revenue
− Underlying EPS

8. Occurrence of an
event leading to a
significant
business
interruption

Links to KPIs
− Organic revenue
− Underlying

operating margin

− Underlying EPS
− Operating cash
conversion
− Lost work case
incident rate
− On time delivery

9. Failure to comply
with laws and
regulations

Links to KPIs
− Organic revenue
− Underlying

operating margin

− Underlying EPS
− Operating cash
conversion
− Lost work case
incident rate

Focus on operational execution to pay down
debt and create scope for future M&A activity
in the medium term.

Conducting divestments through a
competitive process rather than through
the identification of single buyers should
optimise sale proceeds.

For the Group’s larger manufacturing
locations, programmes have been
implemented that seek to meet or exceed
best practice loss prevention guidance,
and for its smaller locations effective loss
prevention programmes and incident
management plans have been put in place.
The Group also maintains major incident/IT
failure business continuity plans. Employees
are trained in relevant procedures.

IT security and capability are monitored
and strengthened when needed.

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

See the CRS section on pages 40 to 43 for
further details on mitigating actions against
business interruption risk arising from
environmental factors.

Cobham employs procedures to ensure
it remains in compliance with all legal
requirements and regulations, and continues
to drive a culture that ensures that ethical,
environmental, and health and safety
considerations are embedded in all of the
Group’s activities.

Policies and procedures are included in
the Group’s corporate framework to ensure
all of the Group’s compliance requirements
are met. This 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 and anti-bribery and corruption.

See the CRS section on pages 40 to 43
for further details on human rights,
environmental, and health and safety actions.

Cobham’s track record for M&A has been adversely affected by the
Aeroflex acquistion in 2014. The Group’s focus is currently on operational
execution, which may result in the Group not being an active participant
in the M&A market, except for smaller acquisitions that “bolt-on” to
existing operations.

This could result in the Group failing to capitalise on time sensitive
opportunities and effectively maintain a robust M&A pipeline. This could
cause a failure to meet strategic targets, as well as reputational damage
which could affect the success of future acquisitions.

Divestments that are conducted within confined timescales may result
in optimum valuations not being achieved. Businesses that are subject to
divestment processes can suffer from distraction and morale issues if
staff are uncertain about their future.

Cobham’s businesses could be impacted by natural disasters or other
external events affecting its operational locations, 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. In some cases this can be exacerbated by the historic
selection of key suppliers which has created significant reliance within
the supply chain.

Unscheduled interruption to business activities would result in the inability
to deliver products to customers in accordance with their expectations.
This would result in reduced profits, loss of customer satisfaction, potential
cost outlays, and reputational impact.

Cobham operates in a highly regulated environment and is subject to
the laws, regulations and restrictions of many jurisdictions, notably
including those of the US and the UK as well as many other countries
in which it operates.

These include but are not limited to anti-bribery provisions, import and
export controls, tax, government contracting rules, human rights,
environmental, and health and safety regulations. A lack of understanding
of legal and regulatory restrictions in force in the jurisdictions in which it
operates could lead to the Group being in contravention of applicable
laws or regulations.

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 a potentially significant impact on the Group’s reputation. Such
sanctions could also have an impact on the Group’s financial position
and future operations.

Safety is a key priority throughout the Group, particularly within the
Aviation Services Sector which conducts flying operations in support of
our customers. Safety is carefully managed through Group-wide processes,
but the Group recognises that an accident could have a major impact on
its employees, customers and other stakeholders. Such an incident could
also result in legal claims, financial damage and reputational loss.

Cobham’s US defence business is managed through an SSA, the terms of
which are agreed with the US Government. The SSA is intended to ensure
that the US defence business is not subject to the effects of FOCI (Foreign
Ownership, Control or Influence). Further details of the SSA can be found
on page 51. The terms of the SSA may reduce the ability for the Group to
effectively manage its US defence business due to reduced visibility into
the business and its performance.

The Group is currently the subject of an investigation by the UK Financial
Conduct Authority (FCA) in connection with the Group’s handling of inside
information prior to its trading update in January 2017 and announcement
of its intention to undertake its Rights Issue in 2016. The Group continues
to co-operate fully with the FCA, but is unable to predict the timing, cost,
or outcome of the investigation.

www.cobham.com

Cobham plcAnnual Report and Accounts 2017Element

Risks and impact

Mitigation

10. Governance
framework is
poorly constructed
and implemented

The Group’s organisational structure delegates some operational
autonomy and responsibility to its business units, including with
respect to the negotiation and performance of the Group’s contracts
with its customers.

Links to KPIs
− Organic revenue
− Underlying

operating margin

− Underlying EPS
− Operating cash
conversion
− Voluntary staff

turnover

11. Information

assurance security
measures are
insufficient to
prevent data loss

Links to KPIs
− Organic revenue
− Underlying

operating margin

− Underlying EPS
− Operating cash
conversion

The Group is implementing an enhanced internal governance framework,
following the identification of certain internal control issues that affected
the business primarily during 2016. There is a risk that the revised internal
governance framework could misalign the level of constraint with the
levels of risk appetite in different aspects of the Group’s operations, leading
to the over and under control of risks in different areas of the business.

This could lead to exposure to unacceptable risks in areas requiring
conservatism, potentially damaging shareholder value. Conversely, it may
also prevent the acceptance of risks required in order to grow the Group’s
business, hindering the ability to deliver an acceptable return on
shareholder investment.

The Group has a capital structure that is partially funded through
borrowings from banks and other financial institutions. The associated
banking agreements incorporate financial covenants and other provisions,
breach of which may lead to potential defaults and costs associated with
obtaining temporary waivers or the requirement to reduce debt through
divestment or additional capital raising.

Cobham relies upon its IT systems to store and process its data securely.
Due to the nature of its business, the Group faces various security threats,
including cyber security attacks from computer hackers, viruses and
malicious code intended to gain access to proprietary or sensitive
information, as well as threats to the physical security of its IT facilities
and infrastructure.

Although various bespoke and industry standard procedures and
controls are utilised to monitor and mitigate exposure to these threats,
the impact of any future attack cannot be predicted with any certainty
due to the evolving nature of these security threats. These could include
compromising the security of intellectual property and customer and
employee data and the corruption of embedded product data and data
for external services.

Significant data breaches or losses could also lead to litigation and fines
for breaking data privacy law and other regulations. This would result in
reputational damage and potentially the loss of new and existing
contracts.

12. Taxation liabilities
may be larger than
anticipated

Links to KPIs
− Underlying EPS

Cobham is subject to corporate and other tax rules in the jurisdictions in
which it conducts its business operations. Due to changes in tax laws and
regulations, changes in interpretation of taxation regulations, an increase
in tax audits and challenges and the testing of interpretations through
litigation, tax liabilities are being challenged and may ultimately be deemed
inaccurate. Tax authorities may also pursue additional taxes based on
retroactive changes to, and interpretations of tax laws.

For example, the availability of interest deductions on one of the Group’s
internal financing arrangements, principally as a result of various US
acquisitions, has been under challenge for some time. Over the life of this
financing arrangement, the aggregate tax value of the interest deductions
amounted to approximately £130m, before interest. If decided adversely
to the Group, this could lead to increased tax liabilities in excess of those
provided in the Group’s Balance Sheet and result in a substantial tax
payment becoming due. The Group has taken external advice and
considers that it has strong support for its position, but the timing
and resolution of this issue is uncertain.

An adverse outcome could also result in potential damage to the
Group’s reputation.

The Group maintains a number of defined benefit pension schemes which
are closed to new entrants and future benefit accrual, the largest of which
is the Cobham Pension Plan in the UK. This pension scheme is in deficit,
and this deficit may change in the future in response to changes in the
value of assets and liabilities.

According to the current schedule of contributions agreed with the
scheme trustees, the Group expects to contribute £18.1m in 2018, £18.2m
in 2019 and £8.8m in each subsequent year through to 2022. This deficit
funding could change in the future, following the next triennial valuation
of the Group’s defined benefit pension schemes which is expected to be
completed during the second half of 2018.

The Trustees view of the strength of the Company covenant is also taken
into account in the setting of recovery plans to address the deficit.

13. The deficit within
the Cobham
Pension Plan may
change

Links to KPIs
− Underlying EPS
− Underlying operating

margin

− Operating cash
conversion

www.cobham.com

Risk status
indicator

Risk
appetite

Medium

Decreasing
Risk
The updated
delegation of
authorities, and
the roll out of a
streamlined set
of policies and
procedures has
improved the
Group’s internal
governance.

The ongoing review of governance is being
conducted in accordance with established
principles to ensure that it delivers a
streamlined governance framework,
facilitates appropriate risk taking, and
drive improvements in performance
through application of effective
governance principles.

A revised delegation of authorities has
been issued to ensure that the degree of
delegation is commensurate with the
management capabilities within each
business unit, Sector and specialist function.

An internal governance committee has been
established to review and approve a revised
set of policies and procedures being rolled
out during 2017 and 2018.

Medium

IT policy compliance is assessed on a
quarterly basis to ensure that processes and
procedures in place are reflective of all legal
and regulatory requirements.

Constant monitoring of events and
vulnerabilities is conducted by both internal
resources and trusted external third parties.

Primary and secondary data centres have
been established to provide contingency.

External advisors review all
major transactions.

Medium

Known risk areas such as transfer pricing
are monitored by the Group.

Significant tax computations are reviewed
by external advisors prior to submission.

The Group has established and published its
tax policy.

Unchanged
Information
security
measures
continue to be
strengthened
in response to
the increasing
level of threats
being
experienced.

Increasing
Risk
Tax authorities
continue to
assess and
challenge
significant
taxation
judgements.

The trustees of the Cobham Pension
Plan seek to ensure that the scheme’s
assets and liabilities remain matched, the
most significant element of which involves
the acquisition of insurance policies that
match existing liabilities.

Medium

Unchanged

STRATEGIC REPORTCobham plcAnnual Report and Accounts 2017Corporate Responsibility and Sustainability

Cobham has made progress
against its key objectives
during the year

Acting responsibly and sustainably enables Cobham
to enhance its culture, manage risk and capitalise on
opportunities creating long term value for the
Company and stakeholders. Products and services
often provide important environmental and social
benefits whether through enhancing aviator
survival, reducing the size and weight of products
and their consequent environmental impact, or
providing reliable communications in
demanding environments.

Cobham takes a strategic approach to corporate
responsibility and sustainability (CRS). The Group
identifies and prioritises the CRS issues most
relevant to it. This is completed through a mapping
process that includes stakeholder research,
feedback and engagement on material issues
important to the Group’s industry sectors and to
employees, customers and investors. The table
below shows the material CRS issues that have been

identified as part of this process, and maps them
against the Group’s operational priorities to illustrate
how they are being managed. The identified issues,
which have been reviewed and are unchanged from
2016, have been grouped into three dimensions for
ease of reporting – Economic, Social and
Environmental. Further information on each
dimension is set out below.

Material issue

Economic dimension

Business ethics

Material sourcing and supply
chain management

Social dimension

Talent attraction, development
and retention

Diversity and inclusion

Employee health and safety

Human rights

Environmental dimension

Environmental sustainability

Customer
Focus

Leadership

Simplification

Control

Execution

•

All material disclosures are verified internally. Cobham also obtains limited external assurance on its recording of greenhouse gas (GHG) emissions. Bureau Veritas
has provided assurance on the Group’s 2017 GHG emissions data (see page 74 for more information).

The Group’s policies and assurance statements are available at www.cobham.com/the-group/corporate-responsibility-and-sustainability/
performance-data-policies/performance-data/.

Economic dimension
Business ethics
Cobham operates in specialist markets, a number
of which are highly regulated. It is Group policy
to comply with all applicable laws and regulations.
Non-compliance with applicable laws and
regulations is a Group principal risk (refer to risk 9
on page 38).

The Group is committed to sustaining an ethical
culture. The Cobham Ethics and Compliance
Programme (CECP) has been developed to support
this culture through a range of policies, processes
and activities. The implementation and
effectiveness of the CECP is overseen by the
Business Ethics and Compliance Committee (BECC),
and ultimately the Board. The programme is
underpinned by the Code of Business Conduct
(COBC), which outlines the Group’s core values and

the behavioural standards it mandates for all its
officers, employees and representatives on a range
of issues, including anti-bribery and anti-corruption.

Cobham has a clearly stated zero-tolerance approach
to bribery and corruption in any form. All employees
are required to receive training on the COBC and other
ethics and compliance training, including anti-
corruption. Cobham maintains an independent Ethics
Helpline and website where potential compliance
violations can be reported. In 2017, it sought to
improve the handling of concerns raised via the Ethics
Helpline through a range of steps, including providing
specialist training to a panel of newly appointed
internal investigators. Further details on the Group’s
approach to ethics and compliance can be found at
www.cobham.com/the-group/corporate-
responsibility-and-sustainability/ethics/.

A related risk area is the use of third party
intermediaries as a route to market. Failure by an
intermediary to comply with laws and regulations,
or the failure of the Group to complete appropriate
intermediary due diligence can impact the Group’s
reputation as well as lead to a range of sanctions,
including significant fines or debarments from
government contracts and new business. Cobham’s
Anti-Bribery and Anti-Corruption policy requires
intermediaries to undergo a comprehensive
due diligence and approval process prior to
engagement. In 2017 Cobham took steps to
improve its intermediary risk management process.
Enhancements included an increased number of
counterparties subjected to additional due diligence
and the use of technology to provide a continuous
real time due diligence monitoring system.

www.cobham.com

Cobham plcAnnual Report and Accounts 2017Cobham measures the effectiveness of the CECP
and improvements to it through a range of Key
Performance Indicators (KPIs), one of which is the
completion of mandatory COBC training. In 2017,
99.8% (2016: 99.5%) of Cobham employees
completed COBC training.

Material sourcing and supply chain
management
Cobham is seeking to simplify its supply chain by
reducing the number of suppliers used, to manage
risk, reduce cost and improve quality. The Group
is committed to maintaining responsible business
practices across the supply chain, which it puts
into effect through the Group’s Responsible Supply
Chain Management (RSCM) policy and Supplier
Code of Conduct, details of which can be found at
www.cobham.com/the-group/suppliers/
supplier-documents.

During 2017, Group-wide supplier compliance
campaigns were conducted with respect to bribery
and corruption, modern slavery and human
trafficking, and conflict minerals. In addition
to reinforcing the Group’s responsible business
practices, this supported Group regulatory
disclosures and customer information requests.

During 2018 Cobham will continue to focus on
repeating its supplier campaigns and enhancing
key supplier engagement.

Cobham is legally, and sometimes contractually,
required to disclose certain information regarding
its global supply chains. Compliance with applicable
laws and regulations and the characteristics of its
markets and the resulting complex contracting
environment have been identified as principal risks
(for further details refer to risks 9 and 2 on pages
38 and 36 respectively).

Social dimension
Attraction, development and retention
of talent
The ability to attract and retain talented and
engaged employees is critical to enable Cobham to
achieve its growth plans, deliver on key programmes
and meet ongoing commitments. The talent
strategy looks to create a talent and organisational
development framework that ensures Cobham is a
high performing and sustainable organisation. The
shortage of appropriate skills and talent has been
identified as one of the Group’s principal risks (refer
to risk 4 on page 37).

The Group continues to invest in emerging talent,
and as a result has increased the number of places
within its graduate and apprentice development
programmes. The Group has also created a
vocational programme to provide an additional
pathway into key management and other technical
roles. The graduate development programme
continues to expand its geographical reach, with
opportunities for graduates created in Denmark,
in addition to existing opportunities in the US and
the UK. Alumni from the graduate and apprentice
schemes are progressing into senior roles and are
increasingly featuring on succession plans,
evidencing the success of the schemes. The
graduate scheme continues to be accredited by
the UK Institute of Mechanical Engineers and the
Royal Aeronautical Society, and in 2017 the Group
employed 4.5% (2016: 4.2%) of its UK workforce
as apprentices, graduates or undergraduate
placements, putting it on track to meet its 5% Club
commitment by 2019 – for further information
see: www.5percentclub.org.uk.

During 2017, Cobham has invested in developing
leadership capability though the ongoing delivery
of the Cobham Certificate in Management
programme which is accredited through the
Institute of Leadership and Management. In
addition, development assessments were
undertaken across the organisation to support the
continued development of individuals in critical
roles, and this activity will continue during 2018.

The Emerging Talent Career Pathway
Cobham’s apprentice and Graduate Development Programmes enable emerging talent to choose and follow multiple career pathways. Different skills, development needs and
interests are accommodated and cultivated as demonstrated with the success stories below.

“The Cobham Apprenticeship developed
my core skills and the Graduate Development
Programme allowed me to apply those other
areas of the business – I know I wouldn’t
be in this job now without coming through
both of these programmes.”

Apprentice
(UK)

4 Year
Apprenticeship
Programme

Alex Seton(UK) Apprentice and
Graduate Development
Programme Alumni Production
Manager (Repairs) Cobham
Antenna Systems (UK)

Apprentice
(UK)

Graduate
(UK and US)

2-3 Year Graduate
Development
Programme

Transition to a full time
leadership, technical or
functional role

Transition from
an Apprentice
to the Graduate
Development
Programme

Ladan Sadjadi
(UK) Graduate Development
Programme Alumni
Business Controller
Cobham SATCOM (Denmark)

“I chose the Graduate programme
because I wanted to gain a range of
experience in an exciting company
at the start of my career. I have had
a strong professional support network
on every site I’ve worked on.”

Mike Popadick
(US) Graduate Development
Programme Alumni
VP Business Transformation
Cobham Mission Systems (UK)

Claire Bewley
(UK) Apprentice Alumni
Manufacturing Engineer
Cobham Antennas (UK)

4 Year
Apprenticeship
Programme

Transition to a full time
BU Technical role

“The graduate program is valuable because of the
opportunities it affords the participants to explore their
career paths. You will have a variety of roles at a variety
of different locations which enables you to grow
personally and professionally.”

www.cobham.com

STRATEGIC REPORTCobham plcAnnual Report and Accounts 2017
Corporate Responsibility and Sustainability continued

Development activity linked to career frameworks
has been deployed across the Group in key
capability areas, including delivery of Association
of Project Management accredited programmes,
and continuous improvement (Six Sigma) training.
A mentoring programme has been commenced
to support individual development and facilitate
knowledge sharing across the Group.

The Group has enhanced its approach to talent for
2018, which looks to develop Cobham’s pipeline
of leadership and technical capability through
structured development programmes. This will seek
to build on the current structures and integrate
external best practice to ensure that the objectives
of the organisation continue to be supported.

The Group uses voluntary staff turnover to measure
the effectiveness of its talent retention and
employee engagement approach. In 2017, the
Group’s voluntary employee turnover was 10%
(2016: 10%). The Group has completed the first year
of its turnaround and in these circumstances it is
expected that there might be a degree of staff
movement, while the Group’s organisation
structures, ways of working and culture undergo
a period of evolution. Management continue
to expect that the staff turnover will decrease
over time.

Diversity and inclusion
Competition for talent is growing in the Group’s
markets. A combination of ageing populations and
declining numbers of suitable university graduates
is leading to greater competition for the same talent
across industries and geographies, particularly for
science, technology, engineering and mathematics
disciplines on which the Group relies. Cobham must
attract and retain the right skills to meet its plans.
Ensuring the Group’s culture supports the creation
of a diverse workforce will enable the Group to
attract and retain key talent from all backgrounds.
Cobham is committed to developing an inclusive
workplace where employee differences are valued,
enabling everyone to contribute fully.

Under the UK Equality Act 2010 regulations, which
apply to legal entities with at least 250 employees,
Cobham is required to report gender pay gap data.
Gender pay gap data for five Cobham legal entities
is available at www.cobham.com/the-group/
corporate-responsibility-and-sustainability/
performance-data-policies/disclosures/.

In 2017, women were employed in 16% (2016: 17%)
of all senior management roles. The Group
recognises that there is a significant opportunity
to increase the number of women in leadership
positions and is developing plans to proactively
address this issue. Ensuring that the Group is able
to attract and retain a diverse workforce aligns with
the Group’s principal risks relating to a shortage
of appropriate skills and talent as well as failure to
comply with laws and regulations (refer to risks 4
and 9 on pages 37 and 38).

Employee health and safety
Cobham endeavours to create a safe and healthy
culture and framework that fosters employee
engagement at all levels. The Group Safety, Health
and Environment (SHE) Committee has set the
objective of transforming the Group’s organisational
SHE culture. Failure to deliver consistently high
standards of health and safety could lead to
accidents or incidents which may result in
employees being injured or otherwise harmed,
which is totally unacceptable. In addition, accidents
or incidents may result in prosecutions, fines, loss of
assets, business interruption and widespread
reputational damage. Health and safety aligns with
the Group’s principal risks relating to significant
business interruption and failure to comply with laws
and regulations (refer to risks 8 and 9 on page 38).

The Group’s workplace SHE programme, called ‘Zero
Harm’, promotes continuous improvement. Its
objective is to minimise injuries and illnesses
occurring in the workplace, improve environmental
sustainability and ensure employees’ wellbeing.
Accountability for implementing the Group’s SHE
strategy is with line management. This is monitored
by the Group SHE Committee, which is chaired by
the CEO. Technical expertise is provided through a
Group SHE Council – comprising senior business
unit SHE professionals under the leadership of a
dedicated Group SHE Senior Director and the VP
Corporate Responsibility and Sustainability.

The Group’s three year SHE strategy is to:
− Continually improve safety, health, environmental

and sustainability performance;

− Drive a proactive and learning SHE culture

through engaged and empowered people at
all levels; and

− Derive business efficiencies through the

implementation of an integrated, standardised
SHE management system across the organisation.

Cobham continues to enhance its SHE programme,
and has built further on the transformational work
undertaken in 2016. 2017 saw the first full year of
implementation of the new global SHE standards.
Compliance with these standards is measured, and
Cobham’s businesses were expected to achieve a
minimum compliance target by 2017, with the
target increasing by five percentage points in 2018.
Testing is through an annual self-assessment
exercise, periodic peer-to-peer auditing and a
biennial external audit. In 2017 all assessed sites
achieved or exceeded the minimum SHE
compliance target, an improvement compared to
2016 when 5 of the 47 sites assessed did not
achieve the standard.

In addition, the Group Executive monitors SHE
performance on a monthly basis, using a balanced
scorecard of leading and lagging indicators. Leading
indicators (indicators that correlate with future
performance) are used to drive correct behaviours.
They include safety training, risk assessments,
workplace inspections, SHE Committees and
reporting of safety observations. Lagging indicators
(indicators that are based on historic performance)
are used to measure the effectiveness of the
approach, and these include the incidence of
workplace injuries and illness, environmental issues
and regulatory interventions. During 2017, the
Group achieved 94% of its leading indicator metrics.

With regard to lagging indicators, there were no
fatalities in 2017. The occupational lost time injury
and illness incident rate (defined as the number
of cases resulting in one or more days lost time or
restricted duties) fell to its lowest level since the
Aeroflex acquisition in 2014, at 0.503 incidents per
200,000 hours worked (an industry standard metric
which Cobham has adopted as one of its key
reporting measures in 2017), compared to 0.720 in
2016. Manual handling, minor hand injuries, and slips
and trips were the most common causes of injury
or illness that resulted in lost time during 2017, and
this is consistent with prior years.

There was one significant regulatory intervention
in the year. In May 2017, a defective 40 metre
electrical lead that was used to power aircraft on
the ground at the Aviation business in Adelaide,
Australia was identified which led to the issuance
of a prohibition notice by the government regulator
for South Australia (Safework SA). All defective
leads were removed from service and destroyed
immediately, and a new worldwide inspection
regime implemented to prevent recurrence.

Gender Diversity in the Cobham Workforce

Females/Total (%)1
Board of Directors
Senior Managers2
Senior Managers3
Total workforce

2017
2/10 (20%)
16/112 (14%)
24/151 (16%)
2,877/11,070 (26%)

2016
2/9 (22%)
21/113 (19%)
24/138 (17%)
2,904/10,845 (27%)

2015
2/10 (20%)
20/135 (15%)
21/144 (15%)
3,649/12,658 (29%)

1 Full time equivalent employees at year end.
2 Statutory definition – Employees with responsibility for planning, directing or controlling corporate activities.
3 Cobham definition – Vice Presidents and above.

www.cobham.com

Cobham plcAnnual Report and Accounts 2017

Further details on Cobham’s SHE policy,
management standards and performance are
at www.cobham.com/the-group/corporate-
responsibility-and-sustainability/
performance-data-policies/policy-
downloads/.

Human rights
Human rights remain an important issue for the
Group. There are growing requirements to comply
with legislation and to respond to customer
information requests on human rights issues such
as modern slavery (for example the UK Modern
Slavery Act 2015) and conflict minerals (for example
the US Dodd-Frank Act). Compliance with
applicable laws and regulations has been identified
as a principal risk (refer to risk 9 on page 38).

Cobham supports the principles contained in the
Universal Declaration of Human Rights and seeks to
reflect these in the context of its business activities.
Cobham also respects the human rights of its
employees as set down in the International Labour
Organisation Declaration on Fundamental Principles
and Rights at Work. Cobham demonstrates its
support and respect for human rights through the
principles and policies contained in the COBC, the
Corporate Framework and the Group’s policies
and≈processes.

In 2017, the Group issued its first annual Anti-Slavery
and Human Trafficking statement in compliance
with section 54 of the Modern Slavery Act. The
statement outlines the Group policy and approach
to managing risk in Group operations and in its
supply chains. The statement can be downloaded
at www.cobham.com/the-group/corporate-
responsibility-and-sustainability/
performance-data-policies/disclosures/.

Cobham believes that community issues are best
addressed locally wherever possible. Individual sites
are encouraged to manage their operations and
activities with due consideration for the wellbeing
of their neighbours and local communities. In 2017
the Group donated £275,726 (2016: £269,933) to a
range of good causes including armed services,
rescue and health based charities, as well as local
community interests. It is Cobham’s policy not to
make political donations.

Environmental dimension
Environmental sustainability
Cobham recognises that its operations, activities,
products and services have an impact on the
environment. A material environmental issue is
the Group’s response to climate change. The table
below outlines Cobham’s governance, strategy,
risk management, and performance measurement
approach with regard to this issue.

Task force on climate related disclosures
(TFCD) – our initial response
Governance
The Corporate Responsibility and Sustainability
Committee, chaired by the CFO, has overall
accountability for CRS strategy, including climate
change and carbon management. The Committee
has responsibility for reviewing the effectiveness of
controls in place for identifying and managing risks
and opportunities, challenging Group performance,
and maintaining strategic and policy oversight.

Strategy
Climate change affects the Group’s approach to its
drivers of change. Climate change regulation, taxes,
international agreements such as the Paris accord,
volatile energy costs and changes in weather
conditions have all informed the Group’s strategic
decisions as Cobham adapts to changing operating
environments. Investment in new technology that
reduces size, weight and power consumption of
products is an important differentiator in the
Group’s markets.

Material issues identified include:
− Greenhouse gas (GHG) emissions from aircraft
fuel combustion in its Aviation Services Sector
(which represents the majority of the Group’s
GHG emissions);

− GHG emissions from electricity and fuel used in

the lighting, heating, ventilation and cooling of its
facilities and supply chain Group-wide;

− The impact of the size, weight and power efficiency
of Cobham products upon the fuel burn and GHG
emissions of customer aerospace platforms; and
− Business interruption at its facilities, and those of
its key suppliers, due to adverse weather events
(e.g. flooding, wildfire).

Risk management
Risks and opportunities are monitored, prioritised and
managed in a number of ways, including by the
Group’s insurance partner, in local risk registers and
business unit SHE self assessments.

Failure to address environmental sustainability issues
aligns with the Group’s principal risks of failure to
comply with laws and regulations and of significant
business interruption (refer to principal risks 8 and 9
on page 38).

The Group addresses environmental sustainability
issues by:
− Reducing environmental impacts from its

operations wherever practicable;

− Reducing legacy aircraft fuel consumption and

seeking to transition to more fuel efficient aircraft
where possible;

− Reducing GHG emissions across a number of

operating sites through practical energy efficiency
measures, including to lighting, heating, ventilation
and air conditioning;

− Investing in design to reduce the size and weight of
products which reduces energy consumption with a
corresponding reduction in environmental impacts;

− Reinforcing business continuity measures and
effective emergency response planning, in
preparation for adverse weather events and natural
disasters; and

− Aligning the Group’s environmental standards to

ISO14001 and encouraging business units to certify
to ISO14001 standards.

Performance measurement
The Aviation Services Sector sets an annual aviation
fuel consumption per hour reduction target for the
aircraft under its operational control. In 2017, the
Sector achieved a reduction of 18.6 kg /hr in fuel burn
intensity, which is a reduction of 3.25% compared to
2016, well in excess of the 0.5% target. This equated
to a saving of 1,714 tonnes of carbon dioxide
emissions. This reduction was achieved through the
implementation of a number of measures, including
the use of improved flight planning software with
more accurate weather forecasts, a reduction in flight
speeds and reduced engine usage during the taxi
phase of the flight.

Facility energy intensity decreased by 8% (2016: 18%
decrease) narrowly missing the target of 10%. Reductions
in facility energy intensity were achieved through a
number of planned energy saving initiatives, some of
which were deferred and will be implemented in 2018.

Further details on the Group’s GHG emissions can be
found in the Other Statutory Information report on
pages 73 and 74.

The Group measures and discloses its greenhouse
gas emissions strategy, risks, opportunities and
performance on www.cobhamsustainability.
com/environment.aspx and through the annual
CDP investor climate change and customer supply
chain surveys. CDP is a not-for-profit charity that
runs the global disclosure system for companies
and others to manage their environmental impacts.

Cobham achieved an A- Leadership rating from CDP
for a second year based on its 2016 performance,
placing it among the best performers in the UK
aerospace and defence sector.

Summary of 2017 CRS KPIs

Key Performance Indicator
% Employees trained on Code of Business Conduct
% Voluntary employee turnover
% Female representation in total workforce
Lost Work Case Incident Rate1, 4
Recordable Incident Rate2, 4
Facility energy intensity3

Target

2017

2016

2015

100.0%
<10.0%

<0.64
<1.26
-10%

99.8%
10%
26%
0.50
0.95
-8%

99.5%
10%
27%
0.72
0.93
-18%

100.0%
11%
29%
0.60
1.18
5%

1 Number of lost workday injury or occupational illness cases multiplied by 200,000 divided by the hours worked.
2 Number of recordable incidents per year per 100 full time equivalent employees.
3 MWh per £1m revenue.
4 Targets are re-assessed annually to ensure that they drive continuous improvement.

www.cobham.com

STRATEGIC REPORTCobham plcAnnual Report and Accounts 2017Board of Directors

Chairman

Senior Independent Director

Michael Wareing
Chairman
CMG, FCA, FCCA, MCSI

Executive Directors

John McAdam
Senior Independent Director
BSc, PhD

David Lockwood
Chief Executive Officer, Executive Director
OBE, BA, FCA, RSA, FAeS

David Mellors
Chief Financial Officer, Executive Director
MA, ACA

Changes to the Board of Directors

Corporate Governance Index

David Mellors

Michael Wareing

(David) Jonathan Flint

John McAdam

René Médori

Norton Schwartz

David became Chief Financial Officer on
1 January 2017

Michael was appointed as Non-executive Chairman
on 1 January 2017

Jonathan retired as Senior Independent Director
and Non-executive Director on 3 August 2017

John was appointed Senior Independent Director
and Non-executive Director on 3 August 2017

René was appointed as a Non-executive Director on
1 January 2018

Norton was appointed as a Non-executive Director
on 1 January 2018

1. Board of Directors

2. Corporate Governance Report

3. Compliance with the UK Corporate Governance Code

4. Nomination Committee Report

5. Audit Committee Report

6. Directors’ Remuneration Report

7. Other Statutory Information

8. Statement of Directors’ Responsibility

www.cobham.com

Cobham plcAnnual Report and Accounts 2017Non-executive Directors

Michael Hagee
Independent Non-executive Director

Birgit Nørgaard
Independent Non-executive Director
MA, MBA

Alan Semple
Audit Committee Chair
BA, CA

Alison Wood
Remuneration Committee Chair
MA, MBA

Director appointments post year end

René Médori
Independent Non-executive Director
Doctorate Degree, Masters in Finance

Norton Schwartz
Independent Non-executive Director
BSc, MA

www.cobham.com

CORPORATE GOVERNANCECobham plcAnnual Report and Accounts 2017Board of Directors continued

Chairman
Michael Wareing
CMG, FCA, FCCA, MCSI

Senior Independent Director
John McAdam
BSc, PhD

Age: 64
Appointed: Director December 2010, Chairman January 2017
Skills and experience: Michael was, until 30 September 2017, the Senior
Independent Director, Audit Committee Chair and member of the
Remuneration and Nomination Committees at Intertek plc. He was previously
a Non-executive Director, Audit Committee Chair and member of the
Remuneration and Nomination Committees of Wolseley plc from 2009 until
2014. Prior to these Board roles, he held a number of senior executive positions,
including International Chief Executive Officer at KPMG, where he worked from
1973 until 2009. He previously served as Audit Committee Chair for Cobham,
and chaired not for profit organisations, including Business in the Community
International, and two roles on behalf of the British Government, namely as the
Prime Minister’s Envoy for Reconstruction in Southern Iraq, and the Economic
Development Adviser to the Government of Afghanistan.
External appointments: None.
Committee membership: Chair of the Nomination Committee and of
the Board Risk Committee.

Age: 69
Appointed: August 2017
Skills and experience: John is currently Chairman at Rentokil Initial plc and
United Utilities Group plc, roles he has held since 2008. Prior to this, he held
a number of Non-executive Director appointments at companies including
Rolls-Royce Holdings plc, J Sainsbury plc, Sara Lee Inc. and Severn Trent plc.
He was also Senior Independent Director for Electra Private Equity plc, a London
Stock Exchange listed investment trust, until March 2018. John previously
served as the Chief Executive Officer of ICI plc, a position he held from 2003
until it was taken over by Akzo Nobel in 2008. He holds a BSc from the
University of Manchester and a PhD.
External appointments: Chairman at Rentokil Initial plc and United
Utilities Group plc.
Committee membership: Member of the Remuneration Committee
and Nomination Committee.

Executive Directors
David Lockwood
Chief Executive Officer, Executive Director
OBE, BA, FCA, RSA, FAeS

Age: 55
Appointed: December 2016
Skills and experience: David was formerly the Chief Executive of Laird plc,
the FTSE 250 global technology company, a position he held since 2012. Prior
to this, he was Vice President Global Defense and Security at BT Global Services.
David has also held senior management positions with Thales Group, Intense
Limited and BAE Systems plc. He has held Non-executive Director and
Chairman positions with WFEL Ltd, Photonix Ltd, and the Scottish Government’s
Technology Advisory Group, and was previously the Non-executive Chair of
Knowledge Transfer Network Limited, a vehicle established to support the work
of Innovate UK, the UK’s innovation agency which is sponsored by the UK
Government Department for Business, Energy and Industrial Strategy (BEIS).
David is an accountant (FCA) by training, holding a degree in mathematics from
the University of York. He is a Fellow of the Royal Society of Arts and
Commerce (RSA) and in 2005 was awarded as the Scottish Entrepreneur of the
Year for Technology. In the 2001 Queen’s Birthday Honours, David was awarded
the OBE for services to industry in Scotland.
External appointments: Member of the Dunedin International
Advisory Board.
Committee membership: Chair of the Executive Directors Committee.

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 the Group’s strategy;
− Set the Group’s risk appetite and monitor the Group’s risk

management processes;

− Ensure 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.

Board of Directors as at 31 December 2017

Non-executive
Chairman
12%

Independent
Non-executive Directors
63%

Executive Directors
25%

David Mellors
Chief Financial Officer, Executive Director
MA, ACA

Age: 49
Appointed: January 2017
Skills and experience: David was CFO of QinetiQ, the FTSE 250 science and
engineering group operating primarily in the defence, security and aerospace
markets, a position he held from 2008, and was interim Chief Executive for a
period during 2015. Previously, he was Deputy Chief Financial Officer of Logica
plc, Chief Financial Officer of Logica’s international division, covering operations
in North America, Australia, the Middle East and Asia, and prior to that he was
the Group Financial Controller. David formerly held various roles with CMG plc,
Rio Tinto plc and Price Waterhouse, now PwC. He is a Chartered Accountant,
holding a degree in physics, from Oxford University.
External appointments: None.
Committee membership: Member of the Executive Directors Committee.

Board meeting attendance for 2017
12 Board meetings were held during the year, attended as follows:

Michael Wareing

John McAdam 1

David Lockwood

David Mellors

Michael Hagee

Birgit Nørgaard 2

Alan Semple 3

Alison Wood

(David) Jonathan Flint 4

Unable to attend

Attended

1 John McAdam joined the Board on 3 August 2017.
2 Birgit Nørgaard missed a telephone meeting due to other Board commitments.
3 Alan Semple missed a telephone meeting due to ill health.
4 (David) Jonathan Flint retired from the Board on 3 August 2017.

www.cobham.com

Cobham plcAnnual Report and Accounts 2017Non-executive Directors
Michael Hagee
Independent Non-executive Director

Birgit Nørgaard
Independent Non-executive Director
MA, MBA

Age: 73
Appointed: December 2008
Skills and experience: Michael 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. Michael
retired from his role as Non-executive Director of Remington Outdoor
Company Inc. in February 2015.
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 DynCorp International 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 Committee.
Michael is retiring by rotation following the 2018 Annual General Meeting.

Age: 59
Appointed: April 2014
Skills and experience: Birgit, a Danish national, currently holds a number
of non-executive roles in the private and public sectors. 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: Birgit is a Non-executive Director of IMI plc, 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 NCC AB, a construction and property development company
listed on Nasdaq OMX Stockholm. She also holds board positions in private
companies and public sector positions.
Committee membership: Member of the Audit Committee and
Board Risk Committee.
Birgit is retiring from the Board following the 2018 Annual General Meeting.

Alan Semple
Independent Non-executive Director
BA, CA

Alison Wood
Independent Non-executive Director
MA, MBA

Age: 58
Appointed: February 2015
Skills and experience: Alan was formerly CFO and a Director of John Wood
Group plc, a role he had held since 2000 and retired from in May 2015. Prior to
this, he held a number of senior finance roles in Wood 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: Non-executive Director and member of the Audit
Committee of Teekay Corporation. Non-executive Director and Chair of the
Audit Committee of Cactus, Inc.
Committee membership: Chair of the Audit Committee and member
of the Board Risk Committee and Nomination Committee.
Alan is retiring from the Board following the 2018 Annual General Meeting.

Age: 54
Appointed: July 2011
Skills and experience: Alison 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 held two previous Non-executive Directorships with BTG
plc and THUS plc, and was Senior Independent Director and Chair of the
Remuneration Committee for e2v technologies until March 2017.
External appointments: Non-executive Director and Chair of the
Remuneration Committee of Costain Group plc, TT Electronics plc and
The British Standards Institution (a non-listed Royal Charter Company).
Committee membership: Chair of the Remuneration Committee and
member of the Nomination Committee and Board Risk Committee.

René Médori
Independent Non-executive Director
Doctorate Degree, Masters in Finance

Norton Schwartz
Independent Non-executive Director
BSc, MA

Age: 60
Appointed: January 2018
Skills and experience: René was Finance Director at Anglo American plc
for 12 years, having retired at its AGM in April 2017. Prior to joining Anglo
American he held a number of senior financial positions, including Group
Finance Director at The BOC Group plc. René holds a doctorate degree in
economics and degrees in finance and economics from the Université de Paris
– Dauphine, France.
External appointments: Since 2013 René has been on the Board of Petrofac
Limited, a company listed on the London Stock Exchange, and the Chairman
of their Audit Committee. Having become Senior Independent Director of
Petrofac in 2017, he will become Chairman in May 2018. Before that, he was a
Non-executive Director and Chairman of the Audit Committee at SSE plc.
Committee membership: Member of the Audit Committee and Board
Risk Committee.

Age: 66
Appointed: January 2018
Skills and experience: General Schwartz retired from military service in
October 2012 after serving over 39 years in the US Air Force. He was the 19th
Chief of Staff of the US Air Force from 2008-2012 and a member of the US
Joint Chiefs of Staff. He also held a number of other senior military positions
including Commander US Transportation Command, Director for Operations
and Director of the Joint Staff and Deputy Commander of US Special
Operations Command.
External appointments: Norton sits on the Board of Wesco Aircraft
Holdings, Inc, and the US Board of Directors of CAE Inc, both NYSE listed
companies. He is currently the President and CEO of Business Executives for
National Security (BENS) in the US, a position he has held since 2013. BENS
applies best practice business solutions to improve the performance of
US Government national security partners.
Committee membership: Member of the Remuneration Committee
and Board Risk Committee.

www.cobham.com

CORPORATE GOVERNANCECobham plcAnnual Report and Accounts 2017Corporate Governance Report

2017 has seen enhancements to
internal control, increased transparency,
strengthening of the Balance Sheet
and other governance changes

Dear Shareholder
As we noted in last year’s report, the early part of 2017 was focused on the
actions needed to start the operational turnaround. As I also noted last year,
my fellow Board members and I spent time in the early part of the year
considering the Board’s strengths and, more importantly, our development
areas. I have also been working on the composition of the Board and we have
announced a number of new non-executive appointments, namely: the new
Senior Independent Director, John McAdam in August 2017, René Médori, the
Audit Committee Chair Elect, and Norton Schwartz, a Non-executive Director,
both in December 2017. Biographies for the new Directors have been included
on page 47.

The Chief Executive Officer and Chief Financial Officer, who joined the Board
in late 2016 and early 2017 respectively, have settled into their new roles
quickly and have been instrumental in formulating the focus for 2017, namely
on customer focus; leadership and simplification; and control and execution.
We also recognised the need to improve our succession planning, starting at
Board level and then at all levels through the business. Below Board level,
there have been a number of significant senior appointments in the year to
enhance our management team which are identified in the CEO’s Statement.

During the year we formed a Board Risk Committee, chaired by me and
comprising a number of the Non-executive Directors. Meetings were also
attended by our Chief Executive Officer, Chief Financial Officer, Chief
Operations Officer, VP Risk Management, Group Head of Internal Audit and
Assurance and Company Secretary.

We have complied with the UK Corporate Governance Code (the Code) except
in relation to the membership of our Remuneration Committee, where, due to
the number of Board members being reduced, we could not comply with the
Code in terms of numbers of Committee members, although we did comply
with our own terms of reference and were therefore quorate. The Audit
Committee membership dropped to two members between the resignation
of (David) Jonathan Flint and Birgit Nørgaard being appointed to the
Committee, but no formal meetings were held during that period.

The Directors present their report and the audited Group and Parent Company
Financial Statements of Cobham plc for the year ended 31 December 2017.

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 2017 and at the date of this Annual
Report, it was compliant with the provisions of the Code subject to the
committee membership point noted above; please refer to page 64 for
further details.

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

Responsibility statements
The statement relating to the responsibilities of the Directors is on page 75,
and that relating to the auditors is on page 82.

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 on
page 72.

The focus during the
year has been to
address the Group’s
operational issues and
to enhance controls

www.cobham.com

Cobham plcAnnual Report and Accounts 2017Financial reporting
At its February 2018 meeting, the Board reviewed and was satisfied that the
Annual Report and Accounts for the 2017 financial year, taken as a whole, is
fair, balanced and understandable and the Board believes that the information
contained provides the information necessary for shareholders to assess the
Group’s position and performance, business model and strategy. The Audit
Committee, supported by management, has adopted a process to enable the
Board to take this view and this process is set out in the Audit Committee
Report on page 61.

The Directors have adopted the going concern basis in preparing the Annual
Report and Accounts as stated in the CFO’s Statement on page 33.

Key events for 2017
− The Company completed a £512m Rights Issue (£497m raised, net of

costs), strengthening the Balance Sheet and allowing the management
team to focus on the business aims of: customer focus; leadership and
simplification; control and execution;

− The Board has agreed a different approach to its strategic review process,
including more Board time spent on matters of a strategic nature. The new
approach commenced in October 2017 with a full day starting to consider
strategic questions. 2018 will see time spent on reviews of each Sector to
assist the Board in its understanding of the Group;

− Non-executive Board appointments during the year have included John
McAdam as the new Senior Independent Director, the Audit Committee
Chair Elect, René Médori and Norton Schwartz;

− In terms of increased controls, improvements have been made to the risk
management process, with a focus on management of the accumulated
known risk within the business and the formation of a formal Board Risk
Committee, wider mandatory training (including more training at Board
level), enhanced disclosure and transparency arrangements and a Corporate
Framework and policy refresh, with roll out currently underway including
training as necessary; and

− We announced on 27 March 2017, that the Company is the subject of an

investigation by the Financial Conduct Authority (FCA). That investigation is
ongoing and relates to the Company’s handling of inside information prior
to its trading update and announcement of its intention to undertake the
2016 Rights Issue on 26 April 2016 and subsequent trading updates during
2016 and early 2017. The Company is cooperating fully with the FCA and
will update the market on the outcome in due course.

Priorities for 2018
− Review and challenge the organisational design to support a simplified

corporate structure;

− Review and challenge the strategic direction of the Group as we finalise

the turnaround;

− Review the capital allocation and dividend policy; and
− Continued focus on the operational and control improvements which

commenced during 2017.

Corporate Governance Report
The Board composition
The Board comprises a Non-executive Chairman (Michael Wareing), a CEO
(David Lockwood), a CFO (David Mellors), a Senior Independent Director (John
McAdam) and six other Non-executive Directors. All Non-executive Directors,
except the Chairman, are considered to be independent and the Chairman was
considered to be independent on appointment. They all held office throughout
the year except John McAdam who was appointed on 3 August 2017, at which
point the previous Senior Independent Director, (David) Jonathan Flint retired
from the Board. René Médori and Norton Schwartz both joined the Board as
additional Board members on 1 January 2018.

Biographies of the Directors, giving details of their experience and other
significant commitments, are set out on pages 46 and 47. The attendance of
Directors at Board meetings is set out on page 46 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 55, 59 and 64.

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 Annual General Meeting (AGM).

In accordance with the Code, which recommends that all Directors of FTSE 350
companies seek re-election by shareholders on an annual basis, all Directors
currently in office will retire and those eligible and wishing to do so will seek
re-election at the AGM. 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. They also provide another point of contact for
shareholders if they have concerns that communication through the normal
channels of Chairman, CEO or CFO has failed, or where these contacts
are inappropriate.

Michael Wareing
Chairman
1 March 2018

www.cobham.com

CORPORATE GOVERNANCECobham plcAnnual Report and Accounts 2017Corporate Governance Report continued

Board proceedings
Board meetings
Board meetings, scheduled in accordance with the annual timetable, were held
six times during the year on a face to face basis and three times by telephone.
In addition, there were three short notice meetings to support Board decisions
required between scheduled meetings and for approvals necessary to support
the Rights Issue completed during the year. There is also contact between
Board meetings to progress the Group’s business as required. Meetings are held
in London, Wimborne and at other UK and international operational locations.

Site visits
In 2017, the Board visited operational sites in Wimborne in the UK, and
Lyngby, Denmark. Site visits help the Board to understand the business
and its strategy better, as well as the problems being faced by the business
and how they (as Board members) may be able to help.

Performance reviews
John McAdam, the Senior Independent Director, held a meeting with the other
Non-executives, in the absence of the Chairman, to appraise the Chairman’s
performance. The Chairman also held meetings with the Non-executives in
the absence of the Executive Directors, and one to one performance appraisals
with each Non-executive Director and the CEO.

Board of
Directors

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.

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.

Audit

Remuneration

Nomination

Risk

Executive Directors

Contracts

Disclosure

Board appointments
At the start of the Board composition review process, the Chairman
agreed a role specification and shortlist for the first appointment. The first
role to be filled was the Senior Independent Director (SID) role, due to the
seniority of this role. The Chairman undertook the initial screening of the
candidates, in consultation with Egon Zehnder, following which further due
diligence was undertaken which included meeting other members of the
Board and reference taking. The Board approved the appointment of John
McAdam to the role of the Senior Independent Director. A similar process
was followed for the other two new Board appointments made, effective
on 1 January 2018. All new Board appointments will be considered by the
Nomination Committee.

Board Diversity
The Board is, by necessity, a diverse group of individuals, some with business
backgrounds, and others with defence specific or more general management
experience. This level of diversity is needed to make sure the decisions made
at this level have the right input and challenge. It is also important for the Board
to try to understand and influence the culture around the business, which
cannot be achieved solely from inside the boardroom.

Matters reserved for the Board
The Board has adopted a schedule of matters reserved for its specific approval.
The schedule provides the framework for those decisions that can be made by
the Board and those that can be delegated. Among the key matters on which
the Board alone may make decisions are the Group’s strategy, its three year
financial plan, its consolidated budget, Group policies, dividends, acquisitions
and disposals, and all appointments to and removals from the Board. Authority
is delegated to management by way of a delegation matrix in accordance with
the provisions of the Group’s 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 expenditure and financing arrangements.

Other Board proceedings
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 that 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 2017.

= New committee established during the year

The principal Board committees include the Nomination Committee, Audit
Committee and Remuneration Committees; please refer to pages 54, 56 and
62 respectively. The other principal Board committee is the Executive Directors
Committee. The Executive Directors are the only 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:
− 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 above the limits delegated

to the Sectors.

This Committee met on 15 occasions during the year and, in addition, decisions
were made as required to respond to business needs and market conditions.
Such decisions were subsequently ratified by the Committee in formal meeting.

The Board Risk Committee was set up during 2017, providing assurance to the
Board regarding the management of principal risks (as defined in the Annual
Report and Accounts, see pages 36 to 39). It is this Committee’s intention to
formally report on its work in the 2018 Annual Report and Accounts.

As noted last year, the arrangements to manage disclosure of information
to the market were strengthened in January 2017. A Disclosure Committee
comprised of the Executive Directors, the Chairman and the Company
Secretary has been tasked with ensuring that policies, systems and controls
exist to ensure that potential share price sensitive information is escalated,
considered, verified and promptly released to the market, where required.
A Disclosure Panel, comprised of senior executives has been set up which
reports up to the Board’s Disclosure Committee. Enhanced disclosure
arrangements and transparency training has been delivered through
the Group during the year. This has resulted in the Panel meeting on 28
occasions throughout 2017 to consider potential price sensitive information.

www.cobham.com

Cobham plcAnnual Report and Accounts 2017
Management committees
The Group Executive Committee and the other principal management
committees are shown in the table below. In addition, business reviews,
focusing on financial performance for each business unit, were held on a
monthly basis during 2017.

Group
Executive

Operational Risk

Safety, Health and Environment

Business Ethics and Compliance

Governance

Corporate Responsibility and Sustainability

Disclosure Panel

Board and committees performance evaluation
The Board conducts an evaluation of its activities on an annual basis.

During the early months of 2017, the Chairman undertook in-depth evaluation
interviews with each individual Non-executive Director to collate learning
points to consider with the full Board at its April 2017 meeting. The areas
covered included:
− Assessment of the challenging market conditions and other developments

during 2016, including lessons learnt;

− How the Board can ensure that better execution against plan is achieved

by the business;

− How the Board can assist the new Executive Directors as they settle

into role; and

− To assess the performance of each individual Board member.

As a result of this exercise, a number of changes have been instigated, including:

Board evaluation actions

Observations

Actions

Improved strategic
input from the Board

Improved
understanding of the
business

Better Board evaluation/
composition review

− Adopting a different approach to the

Board’s strategic review process, including
much more Board time spent on matters
of a strategic nature. October 2017 kicked
off the new approach with a full day
spent on starting to formulate answers to
strategic questions;

− During 2018, half-day sessions will be held
with each Sector for a deep dive into their
business in order to support the Board in
its understanding of the business and to
enable deeper insight into the Group;

− Re-energising the Board Nomination

Committee, reducing membership but
increasing involvement in the Board
skills composition review and succession
planning process; and

Improved management
of the Group’s risk
management processes

− The introduction of a Board

Risk Committee.

The CAES Sector/SSA Governance
The CAES Sector participates in classified US Defense programmes. It therefore
operates under a US DoD SSA as required by the US National Industrial Security
Program. In order to protect US national security interests, the SSA is designed
to ensure that foreign ownership, control or influence (FOCI) does not affect
the way that CAES conducts its business affairs or its performance on classified
contracts. There are certain areas in which CAES and the wider Group operate
under an Affiliate Operations Plan (AOP), pursuant to which certain services
(such as US Legal support) can be provided by the Group to the SSA, or can be
shared by the Group and the SSA.

The CAES Board has undergone a process during the year, led by the CEO of
the Group, to strengthen the governance and personnel and is currently made
up of:
(i) the Group’s CEO and CFO and General Michael Hagee (known as Inside
Directors under the SSA), whose biographies can be found on pages 46
and 47;

(ii) the CAES Sector President and CFO (known as Officer Directors under the

SSA); and

(iii) a number of other individuals who have no prior relationship with Cobham

plc (known as Outside Directors under the SSA) approved by the US
Defense Security Service (DSS), identified below:
− Lt. General Thomas McInerney USAF (retired) – who has served in

multiple high level military positions under the Secretary of Defense and
the Vice President of the United States;

− Admiral Steve Abbot USN (retired) – former Deputy Commander in

Chief US European Command;

− Cindy Moran – President and managing partner of IT consultancy,

Pikes Way LLC, and former Director of Network Services, US Defense
Information Systems Agency; and

− Scott Webster – Co-founder and Executive Director of Orbital

Sciences Corporation.

Outside Directors and Officer Directors, who must be US citizens with
appropriate US security clearances, also make up the Government Security
Committee (GSC) of the CAES Board. The SSA does not permit Inside Directors
to be members of the GSC, which is responsible for maintaining independent
policies and processes facilitating insulation of CAES operations as a US cleared
defense contractor from the foreign parent.

The SSA restricts the level of participation that Cobham can have in certain
CAES activities. For example, it limits Cobham’s ability to decide matters
affecting the management or operations of the US cleared defense
contractor (CAES) in a manner that may result in unauthorised access to
classified information.

Cobham maintains its involvement in CAES activities primarily through
participation of Cobham’s CEO and CFO (as Inside Directors) in the deliberations
and decisions of the CAES Board and authorised committees, or interactions
through a series of shared services provided pursuant to an AOP approved by
the DSS.

All CAES Board Directors have a fiduciary duty to Cobham plc, as shareholder,
and the Outside Directors need to perform their duties reasonably and in good
faith in a manner believed to be in the best interests of the SSA but consistent
with the national security concerns of the US, as set out in the SSA. Cobham
plc, as shareholder, retains the right to remove/replace any member of the
CAES Board, subject to the consent of the DSS in the case of an Outside
Director. In addition, under the current SSA, the CAES Board cannot carry
out any of the actions listed below without Cobham’s express approval:
− Sell, lease or otherwise dispose of property or assets otherwise than in

the usual course of business;

− Merge, consolidate, reorganise, dissolve or wind up the business; or
− Terminate the SSA itself.

The effectiveness of governance and assurance procedures between the
Group and the CAES Sector are regularly reviewed.

www.cobham.com

CORPORATE GOVERNANCECobham plcAnnual Report and Accounts 2017Corporate Governance Report continued

Investor Relations activity during 2017

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Preliminary
Results 2016;
Rights Issue
announced

Annual General
Meeting;
Trading

Rights Issue
completed

Interim
Results 2017

Trading
Update

Investor
Site Visit

Airshow;
Investor
Site Visit

Trade Show;
Investor
Site Visits

Investor
Site Visit

Investor
Site Visits

Results/
AGM/
Trading
Update

Investor
meetings

Other
investor
activities

The purpose of the shareholder relations programme is to keep current and
potential investors regularly informed of the Group’s prospects and progress
and significant developments as they occur. An effective shareholder relations
strategy will keep the Company’s Board regularly informed of investor views so
that there is the opportunity for these to impact Board strategy and objectives.
Done appropriately, this process should result in an effective two-way flow of
information between a company’s owners and its managers.

The year started with a new executive management team in place as well as
a new Chairman. There were a number of emerging trading and other issues
that were communicated up to and at the 2 March 2017 preliminary results
announcement. In April, this was followed by the Annual General Meeting
and a Rights Issue was announced in March and completed in May.

The year continued with further announcements, including the Financial
Conduct Authority investigation and three new Cobham Non-executive
Director appointments.

Within the scheduled preliminary and interim results announcements and
trading updates, shareholders were informed of the early progress made so
far to turn around the Group’s operational performance, including progress
that was being made against the Group’s three operational priorities.

Given the priority to improve the Group’s operational performance, the
shareholder relations programme in 2017 focused on existing shareholders,
with the aim of maintaining an effective two-way information flow with them
through a period of change. This has taken the form of meetings with the CEO
and CFO and visits to operating locations, with these trips hosted by business
unit management. There have been opportunities for shareholders to view
Cobham products and meet business unit based management at two trade
shows attended during the year. These activities are intended to reinforce
the quality of the underlying businesses and of operational management.

The Chairman has also offered to meet major shareholders during the year to
discuss a range of matters including Board changes and governance and Group
strategy, and he has elicited feedback from the investors met. This feedback
has been communicated to the Board.

The Board is interested in the views of smaller investors, who would not
ordinarily meet them. The AGM is a forum for this communication.

The focus during the year on meeting existing shareholders has meant that
the aggregate number of investor meetings conducted was lower than in the
previous year at 188 (2016: 273).

A project was undertaken during the year to refresh the Cobham investor
website, to improve it visually and sharpen the navigation and messaging.
The results of this can be found at www.cobhaminvestors.com.

www.cobham.com

Cobham plcAnnual Report and Accounts 2017
Compliance with the UK Corporate Governance Code

A. Leadership
A.1. The Board’s role
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 review
and approve the Group’s strategic plan, and to monitor management
performance against plan. The Board also sets the Group’s risk appetite, and
oversees the Group’s risk management processes. The Board has adopted a
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 starting on page 49.

A.2. 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, formulating the strategy and delivering against the strategy when
approved by the Board.

A.3. Role of the Chairman
The Chairman is responsible for the leadership and effectiveness of the
Board. He sets the agendas for meetings and manages the meeting timetable.
The Chairman facilitates open and constructive dialogue between Executive
and Non-executive Directors and also ensures effective communication
with shareholders. 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.

A.4. 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 Board has appointed six other Non-executive Directors
whose role is primarily to constructively challenge and help the CEO formulate
proposals on strategy. They also scrutinise the performance of management
in meeting agreed objectives, monitor the reporting of performance and
satisfy themselves on the integrity of the financial information and that
financial controls and risk management processes are robust and defensible.

B. Effectiveness
B.1. The Board’s composition
The Board currently consists of ten individuals: the Chairman, two Executive
Directors and seven independent Non-executive Directors, reducing to four
after the 2018 AGM. 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 46 and 47 and identify the experience that each Director brings to the
Board. A table identifying the skills and experience of the Board members
may also be found on page 55. 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.

B.2. 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 its responsibility regarding Board appointments.
Further details of succession planning, including the Board’s policy on diversity,
including gender, can be found on page 55.

B.3. Time commitments
The time commitments of Non-executive Directors are defined in their
appointment letters and are regularly reviewed. The impact of any new role
proposed by a Non-executive Director on existing time commitments is
considered by the Chairman before approval is granted.

B.4. Training and development
A structured induction programme is available to each new Board member,
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. Further details can be found
in the Directors’ professional development section on page 55.

B.5. 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, when
the Directors judge it necessary to discharge their responsibilities.

B.6. Board and committee performance evaluation
An external evaluation of Board and committee performance will be held in
2018. A thorough exercise to review the working of the Board, how it could
be improved and how lessons from the past could be learnt was completed by
the incoming Chairman during January and February 2017, the results of which
are summarised on page 51.

B.7. Directors’ re-election
All Directors were subject to shareholder vote at the AGM.

C. Accountability
C.1. Financial and business reporting
The Statement of Directors’ Responsibility is set out on page 75, and the
Independent Auditors’ Report commences on page 76. The Company’s
business model is explained on pages 10 and 11.

C.2. Risk management and internal control systems
The Board, through the Board Risk Committee, conducts a robust assessment
of the principal risks. An annual review of the effectiveness of the Group’s
risk management and internal control systems is undertaken by the Audit
Committee. Further details on the risk management and internal control
systems can be found on page 59.

C.3. Role and responsibilities of the Audit Committee
Details of the composition of the Audit Committee and how the Committee
has discharged its responsibilities during the year are provided in the Audit
Committee Report on pages 56 to 61. The terms of reference for the Audit
Committee are reviewed annually and are available on the Company website.

D. Remuneration
D.1. 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 on pages 62 to 71.

D.2. 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
E.1. Shareholder engagement and dialogue
Effective communication and engagement with investors is of paramount
importance to the continued success of the Company, and roadshows are
held during the year between investors and the Chairman and Director of
Investor Relations. The CEO and CFO have held meetings with existing
shareholders through the shareholder relations programme during 2017.
Further details can be found in the Corporate Governance Report on page 52.

E.2. 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.

www.cobham.com

CORPORATE GOVERNANCECobham plcAnnual Report and Accounts 2017Nomination Committee Report

The composition of the Board remains
under review, with the Committee focused
on the recruitment of new Board members

Dear Shareholder
As the new Chairman, I have been identifying candidates for appointment to
the Board as I committed to do as part of the Rights Issue and in following the
programme of changes agreed by the Board at that time. The first role filled
was that of the Senior Independent Director, due to the seniority of this role.
With John McAdam’s appointment secured in August, the Nomination
Committee was slimmed down and now includes me, the Senior Independent
Director and the Chairs of both the Audit and Remuneration Committee.
The terms of reference for the Committee are being revisited to incorporate
best practice.

In December 2017, the Board announced that René Médori would be joining
the Board with effect from 1 January 2018. René Médori joins the Board with a
wealth of financial and listed company experience. Alan Semple will retire from
the Board and as the Audit Committee Chair at the 2018 Annual General
Meeting and René Médori will take over from Alan Semple as the Chair of the
Audit Committee.

Also in December 2017, the Board announced that General Norton Schwartz
would be joining the Board with effect from 1 January 2018. Norton joins the
Board with a US Military background having been Chief of Staff for the US Air
Force (2008-2012). Michael Hagee will retire by rotation at the AGM in April
2018 after serving nine years on the Board.

Full due diligence was completed for all Board candidates, including meetings
with Board members before their formal appointment was confirmed.

I have been very conscious that some shareholders have concerns regarding
directors taking on too many non-executive roles. For those members of the
Board who have more than one other Board position, I have assessed their
ability to be able to meet our time commitments going forward, particularly
as we go through the operational turnaround. I am satisfied that all Board
members put forward for election or re-election at the AGM have the capacity
to meet the time commitments we need. All Board members are required to
complete their own continued professional development. As a Board we are
also conscious of the need to keep up to date with current regulatory
requirements and have, accordingly, built time into the 2018 work plans to
receive updates from our external advisors, alongside the routine updates we
receive from our Company Secretary and internal subject matter experts.

My thanks go to all of the Board members, including those who have left
during 2017 and those leaving after the 2018 AGM. I would extend particular
thanks to the Remuneration Committee Chair, who helped the executive
management through their induction, the early part of the turnaround and in
replacing senior management positions below the Board.

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.

Key events for 2017
− Conducted a complete Board evaluation as I took up the role of Chairman;
− Reviewed the structure, size and composition of the Board;
− Reviewed Committee structure;
− Formed a new Board Risk Committee;
− Oversight of the search for the new Board members; and
− Led by John McAdam as Senior Independent Director, conducted a full

review of the performance of myself as Chairman.

The Committee focused
on the recruitment
process for the newly
appointed Non-executive
Directors and a process is
underway to complete a
skills review at Board level

www.cobham.com

Cobham plcAnnual Report and Accounts 2017Skills and experience

Michael Wareing

John McAdam

David Lockwood

David Mellors

Michael Hagee

René Médori

Birgit Nørgaard

Norton Schwartz

Alan Semple

Alison Wood

Independence

Years with Cobham

UK Corporate
Governance

Engineering

Defence

Finance

US Market

UK Listings

Human
Resources

Skills and Experience

•

All of the Directors, Executive and Non-executive, have leadership, strategy and risk experience.

Priorities for 2018
− Complete a Board skills review to inform the structure, size and composition
of the Board and to ensure experience and competencies remain aligned
with the strategic plan and are appropriately balanced;

− Complete the programme of changes to be made to the Board; and
− Oversight of a succession planning exercise for the Executive Directors.

Diversity and inclusion
The Committee is aware of the need for diversity when considering the
composition of the Board. In recruiting for Board roles, targets are generally
set around ensuring a proportion of female and ethnically diverse applicants
are included in the candidate pool for Non-executive Director positions.
The representation of women on the Board as at December 2017 was 20%.

The Committee’s terms of reference, which are under review, are available on
Cobham’s website or by application to the Company Secretary.

Please refer to page 42 for details of diversity and inclusion initiatives within
the business.

Membership and attendance
Two formal meetings were held during the year, attended as follows:

Michael Wareing
John McAdam 1
Michael Hagee 2
Birgit Nørgaard 2
Alan Semple
Alison Wood
(David) Jonathan Flint 3

Succession planning for Board members and senior management
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.
The succession planning process is in need of review, which is a focus area
for 2018.

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.

Attended

1 John McAdam joined the Board on 3 August 2017.
2 The Committee constitution was reviewed and Birgit Nørgaard and Michael Hagee left

the Committee on 24 July 2017.

3 (David) Jonathan Flint retired from the Board on 3 August 2017.

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 advisors and external
courses. In addition, Directors’ knowledge of the legal and regulatory
environment is updated through the provision of information by the Group’s
advisors and by means of regular updates from the Company Secretary and the
legal team. There is also time reserved in the Board’s work plan and within those
of its committees to receive updates and teach-ins from advisors and subject
matter experts. As mentioned on page 50, site visits are considered critical to
ensure that the Directors remain close to the business of the Group.

M Hagee

M Wareing

A Wood

B Nørgaard

A Semple

J McAdam

R Médori

N Schwartz

2007

2012

2018 AGM

2022

2027

1st term

2nd term

3rd term

The Board composition in relation to length of service and current term as at
31 December 2017, is shown above.

Michael Wareing
Nomination Committee Chair
1 March 2018

www.cobham.com

CORPORATE GOVERNANCECobham plcAnnual Report and Accounts 2017
Audit Committee Report

A significant focus area for the Audit Committee
during 2017 has been oversight of enhancements
to the Group’s control environment including
assessing progress on major development contracts

Dear Shareholder
This has been a critical year for Cobham, given the start of the Group’s
turnaround, including the completion of the 2017 Rights Issue. The Audit
Committee has focused on working with the CEO and CFO in their first
year in the Group with an emphasis on improvements in the risk and
control environment.

Key issues for 2017
− The Audit Committee agreed the scope and reviewed the outcome of the
2016 Balance Sheet review, including key judgements and provisions, and
the process undertaken to complete the exercise.

− The new CFO led the lessons learnt exercise from the 2016 Balance Sheet
review and has updated the Audit Committee on progress. This exercise
identified a number of control improvement actions. Implementation of
these actions by the management team has progressed well with a number
of further activities ongoing.

− The Committee has monitored the implementation of improvements to

the control environment throughout the year. This has included:
− An enhanced governance structure and its key components;
− A revised, proportionate minimum standards of financial

control, reporting of control standards at business unit level, and
enhanced tracking and reporting of open and overdue Internal Audit
recommendations; and

− Ongoing monitoring and reporting of the usage and adequacy of

provisions given the significant charges created for 2016.

− Oversight of the key development contracts and programmes has remained
a priority throughout the year, and the Committee has been assisted by
management enhancing the programme watchlist review process.
− Increased assurance has been provided to the Audit Committee over

controls in operation within the SSA through changes to the CAES Board
and Audit Committee, enhancements to the governance framework and
improved reporting.

− Oversight of the response to the FRC following their review of Cobham’s
2016 Annual Report and Accounts including approval of plans to improve
disclosure in this report.

The Committee
has worked with
management to ensure
the lessons learnt from
past underperformance
are being addressed and
support the process of
improving the Group’s
control environment

www.cobham.com

Cobham plcAnnual Report and Accounts 2017In addition, during 2017 the Committee continued its work plan which included:
− A review of financial statements and associated reports;
− A review of the effectiveness of the Group’s risk management and internal

control systems;

− A review of management’s readiness to adopt new accounting standards

including revenue recognition (IFRS 15);

− A review of reports from management on key governance, risk and
compliance activities including LCM, tax, treasury and ethics and
compliance matters;

− Oversight of the enhancement of existing IT controls (including cyber

security and disaster recovery), and the requirement for enhanced controls
in certain areas;

− Continued review and support of the Internal Audit and Assurance Function
with its increased risk based scope including the audit plan, reports and
effectiveness;

− A review of all matters relating to external audit including audit scope,

independence, effectiveness and fees; and

− Working with PwC to implement improvements to the documentation of
the audit process identified through the FRC’s Audit Quality Review (AQR).

Priorities for 2018
− Ensuring a successful transition to the new Committee Chair and members.
− Completion of a satisfactory audit tender exercise in 2018 with a view to
the new independent auditors commencing as from the 2019 year-end
audit. As previously disclosed, PwC will not participate in this tender.
− Continued oversight of the implementation of improvements to risk

management and internal controls systems.

− Continued oversight of the reporting of, usage and adequacy of provisions,

including those created at the time of the 2016 Balance Sheet review.

− Ongoing focus on the key programme watchlist review process.
− Preparation for the new leasing accounting standard IFRS 16.

I will be stepping down from the Board at the 2018 AGM and my successor,
René Médori, who joined the Board on 1 January 2018, will be appointed as the
Group’s Audit Committee Chair with effect from 26 April 2018. René has
valuable financial and commercial experience from his career at both Anglo
American plc and The BOC Group plc and his non-executive experience with
both Petrofac Limited, a company listed on the London Stock Exchange, and
SSE plc. I wish him well in his new role.

At the 2018 AGM, I and my fellow members of the Committee will be available
to respond to any questions shareholders may wish to raise on this report or
the Committee’s activities.

Alan Semple
Audit Committee Chair
1 March 2018

www.cobham.com

CORPORATE GOVERNANCECobham plcAnnual Report and Accounts 2017Audit Committee Report continued

Financial reporting and significant financial judgements
The Committee reviews whether suitable accounting policies have been adopted and whether management has made appropriate judgements and
estimates, and also seeks support from the independent auditors to assess these matters. The Committee identified the issues below as significant in the
context of the 2017 Group Financial Statements with regard to the facts and circumstances then existing, on account of the level of materiality and the
degree of judgement exercised by management.

Area of focus

Key issue

Role of the Committee

Conclusion

Changes in estimates
to complete and
customer schedules
(Refer to notes 18 and
26 in the Group Financial
Statements)

The Committee considered the estimated costs to complete,
customer schedule requirements, working capital levels and
profitability of material development projects and contracts.
The new process of monthly business reviews has identified
accounting judgements at an early stage and more readily
allowed the Committee to monitor conclusions on key
judgements and matters.

Programme
watchlist

Revenue/
contract
accounting

Provisions and
material disputes

Inventory
provisions

Uncertain tax
positions and
deferred tax

Goodwill and
acquired
intangible assets

Pensions

Presentation,
disclosures and
new accounting
standards

Appropriateness
and completeness
of provisions and
their utilisation
(Refer to note 18
in the Group Financial
Statements)

Valuation, obsolescence
provisions and
recoverability
(Refer to note 12
in the Group Financial
Statements)

Judgements on
provisions for the open
tax years, authority
enquiries and changes in
legislation (Refer to note
6 in the Group Financial
Statements)

Measurement of
carrying values of
goodwill and acquired
intangibles relative to
the present value of the
associated cashflows
(Refer to note 9 in the
Group Financial
Statements)

Sensitivity to changes in
various metrics
(Refer to note 20 in the
Group Financial
Statements)

FRC thematic review,
our own correspondence
with the FRC and new
accounting standards
for IFRS 9, IFRS 15 and
IFRS 16 (Refer to note 1
in the Group Financial
Statements)

The Committee has had regular updates on the Balance Sheet
review items from 2016, provisions and material disputes ahead
of and during the year end process.

The Committee has had regular updates on balance sheet values
and the levels of provisions against these.

The Committee has reviewed the accounting judgements made
to account for uncertain tax positions.

The Committee has reviewed management’s computation of
the present value of cash flows and has compared to goodwill
and acquired intangibles in order to test for impairment.

The judgements of management as
regards estimated costs to complete,
outcome of negotiations with customers
and amounts recoverable and related
disclosures were deemed appropriate.

Whilst the final outcome of a number
of matters is still uncertain, there has
been control and consideration of these
amounts, so that we are satisfied with
their use and the year end position.

Inventory remains a focus for working
capital management, especially linked to
production ramp up on development
programmes and business units with
short-cycle customer demand. Adequate
provision has been made for risks
identified at year end.

The Committee is satisfied that the
material estimate made at the year end
reflects advice that has been taken, by
management, from relevant experts
and specialists, while taking into account
that there may be more than one route
to settlement.

The Committee considers the
impairment charges, and reversals for
2017 to be appropriate. The change to
the assessment of Cash Generating Units
at the Sector level is deemed appropriate.

The Committee received an update from management on
the changes in assumption for mortality and discount rates.

The Committee satisfied itself that all
assumptions were within acceptable
ranges and up to date.

The Committee was involved in the response to the FRC following
their review of the 2016 Annual Report and Accounts.

The Committee reviewed the appropriateness of judgements
for IFRS 15.

Appropriate changes have been made
in this Annual Report to respond to
FRC comment.

The Group is ready for the adoption of
IFRS 9 and IFRS 15 from 1 January 2018.

www.cobham.com

Cobham plcAnnual Report and Accounts 2017
Objectives and responsibilities
The Committee’s main objectives and responsibilities are set out in its terms
of reference, which are available on the Group’s website. The Committee’s
terms of reference are reviewed annually and were updated to take account of
the allocation of responsibilities to the newly formed Board Risk Committee.

Composition
The Committee consists of independent Non-executive Directors only. The
current members, as at the date of this report, are Alan Semple, René Médori,
Birgit Nørgaard and Michael Hagee. The Committee membership in 2017
included (David) Jonathan Flint, until his departure from the Board. Birgit
Nørgaard joined the Committee officially on 5 December 2017.

Biographical details for all of the Committee members may be found on
pages 46 and 47. The membership of the Committee has been selected
with the aim of providing the range of financial, risk and business expertise
necessary to meet its responsibilities, and the particular skills and experience
of each member may be found on page 55.

Given Alan Semple’s experience as a Chartered Accountant, and formerly as
Chief Financial Officer of John Wood Group plc, the Board has designated
him as the financial expert on the Committee for the purposes of the Code.

René Médori, who joined the Board on 1 January 2018, will pick up the role of
Audit Committee Chair upon Alan Semple’s retirement at the AGM in April
2018. René has financial and commercial experience from his executive career
as Finance Director at Anglo American plc for 12 years, having retired at its
AGM in April 2017. Prior to joining Anglo American he held a number of senior
financial positions, including Group Finance Director at The BOC Group plc.
The Board will designate René Médori as the financial expert on the Committee
with effect from the 2018 AGM, for the purposes of the Code.

Meetings
Six Audit Committee meetings were held during the year, attended as follows:

Alan Semple (Chair)

(David) Jonathan Flint 1

Michael Hagee

Birgit Nørgaard 2

(David) Jonathan Flint retired from the Board on 3 August 2017.
Birgit Nørgaard attended the July meeting and joined the Audit Committee officially
on 5 December 2017.

Attended

During the year the Committee invited the Chair of the Board, Non-executive
members of the Board, CEO, CFO, Group Director of Financial Control, Group
Head of Internal Audit and Assurance, the PwC lead audit partner, other
representatives from PwC, and other key senior management to attend their
meetings, as appropriate.

Key issues and activities
Matters considered by the Committee during 2017 were:

Feb

Apr

Jul

Dec

Financial Statements and reports

Full year results

Half year results

Fair, balanced and understandable assessment

Key accounting matters

External Audit

Independence, objectivity and effectiveness of the
external auditors

Appointment recommendation to the Board

Approval of non-audit fees

External audit scope and fees

Independent auditors’ reports

Internal Audit

Effectiveness review of Internal Audit

Internal Audit report including performance
against plan

Annual Internal Audit plan

Governance, risk and assurance

Risk management report

Risk management framework and internal controls

IT controls including cyber security

Key programme watchlist review oversight

Compliance, whistleblowing and fraud

Other

Updates on accounting and corporate governance
developments

Audit Committee evaluation

Terms of reference

Meetings with senior finance management (CFO)

Risk management and internal control systems
The Board has the ultimate responsibility for risk management and internal
control systems, and has delegated to the Committee the review of
effectiveness of these systems in order to assist the Board in meeting this
responsibility. The Board Risk Committee, which was established during 2017,
is responsible for providing assurance to the Board regarding the management
of principal risks.

At least twice a year, immediately following a Committee meeting, the
Committee meets separately with the PwC lead audit partner and the Group
Head of Internal Audit and Assurance to give them the opportunity to discuss
matters without executive management being present. In addition, regular
contact is maintained between the Chairman and the PwC lead audit partner
and the Group Head of Internal Audit and Assurance between meetings, often
without the presence of management.

The Committee reviews internal financial controls, that is, the systems
established to identify, assess, manage and monitor financial risks. The Group
Executive (GE), chaired by the CEO, retain accountability for the management
of operational risks, including mitigating actions. 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.

Further information on the Group’s principal risks and the risk management
process may be found on pages 34 to 39.

The Group operates under a system of internal controls which has been
developed over time to meet the needs of the business and the risks and
opportunities to which it is exposed, recognising differences in the nature
and type of each of the Group’s operations.

www.cobham.com

CORPORATE GOVERNANCECobham plcAnnual Report and Accounts 2017
Audit Committee Report continued

These controls include:
− The preparation and consideration of the three year plan;
− A comprehensive budgeting system with an annual budget which is

The work must also be permitted under relevant regulations and must not
impinge on the independence of the audit firm.

approved by the Board;

Total fees paid to the external auditors (2017)

− Monthly review of business and financial performance in the month

and year to date and update of financial forecasts for the year;

− The monitoring of financial performance and key dependencies for the

full year;

− The monitoring of project and programme management, through LCM; and
− The appropriate delegation of authorities to operational management.

Legacy control systems still exist from previous acquisition activity and other
key control processes, including IT, are not fully standardised and implemented
across the Group. The implementation and operation of certain key controls is
decentralised in the business units. Sector, functional and central oversight
activities and controls are in place to support this.

During the year we have strengthened controls over known areas of weakness.
This has included strengthened financial controls through increased independent
review of the most material development contracts; extended governance
and regulatory training; monthly Sector and business unit reviews by the CEO
and CFO; the communication of a revised delegation matrix and Letter of
Representation; the enhanced tracking and reporting of open and overdue
audit recommendations and the communication of revised, proportionate
minimum standards of financial control and a ‘hard financial close’ exercise
in Q4, ahead of the year end.

Delegated authorities and other 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 Sector and business units. Included in those letters are written
acknowledgements that financial reporting is based upon reliable data, that
there is compliance with the Group’s Minimum Standards of Financial Control
and that the results are properly stated in accordance with Group policies. The
Letter of Representation process has not highlighted any material weaknesses.

The Committee’s review covers 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 systems which are embedded in the business, have operated
effectively in the review period notwithstanding that management continues
to implement plans to improve those systems. The three principal lines of
assurance are outlined on page 34. The Committee receives assurance from
the Inside Directors on the CAES Board on matters relating to CAES. It should
be noted that due to the restrictions of the SSA our assessment of the control
environment in CAES differs from that operated elsewhere in the Group. In
order to meet the requirements of the SSA and US DSS, oversight is indirect
and flows primarily through the Inside Directors. Further details on how
governance procedures are maintained in the SSA may be found on page 51.

External audit
The Committee is responsible for overseeing relations with the independent,
external auditors PwC, including the approval of fees, and makes
recommendations to the Board on their appointment and re-appointment.
The total fees paid to PwC in the year ended 31 December 2017 equalled
£2.3m, with non-audit fees of £0.2m, which included £0.2m of other assurance
services, representing 9% of the total. An analysis of the fees paid to the
external auditors in respect of audit and non-audit work during the year
can be found in note 4 to the Group Financial Statements.

The provision of non-audit services is controlled by a policy which states that
the external auditors will not be engaged to provide any element of non-audit
services, without approval in advance from the CFO for fees up to £10,000,
from the Chair of the Audit Committee for fees between £10,000 and £100,000
and by the Audit Committee for fees over £100,000. The Committee recognises
that there may be some element of non-audit services for which the Group
might wish to use the external auditors.

Audit fees £2.1m (91%)

Non-audit fees £0.2m (9%)

Total fees paid to the external auditors (2016)

Audit fees £2.5m (75.8%)

Non-audit fees £0.8m (24.2%)

Significant engagements included work related to the interim results
announcement and 2017 Rights Issue.

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 2017. The Independent
Auditors’ Report to the members of the Company can be found on page 76.

PwC’s presentation of their audit plan to the Committee set out the scope and
objectives of the audit, together with an overview of the planned approach, an
assessment of the Group’s risks and controls, and proposed areas of audit focus.
The Committee reviewed and approved the terms, areas of responsibility and
scope of the December 2017 year-end audit.

The Committee received feedback, compiled by the Group Finance Function,
from each business unit, on the performance of the external auditors
through the year end process. On consideration of this feedback, the
Committee confirmed that they were satisfied with the effectiveness of
the external auditors.

The Committee is responsible for the development, implementation and
monitoring of the Group’s policies on services from external auditors, which
are designed to maintain the objectivity and independence of the external
auditors. These policies set out the approach to be taken when using the
external auditors for non-audit work and regulate the appointment by the
Group of former employees of PwC. In addition to an independence review
conducted by management, PwC has provided specific assurance and the
Committee has considered the arrangements and safeguards that PwC has
in place to maintain its independence and objectivity. The external auditors
follow regulatory requirements to maintain the objectivity of the audit
process; these stipulate a five year rotation policy in relation to the senior
engagement auditor. Pauline Campbell was appointed lead audit partner in
2014. The Committee continues to be satisfied that PwC remain independent
and objective.

The Committee has previously stated its intention to re-tender for the 2019
audit during 2018, to coincide with the next rotation of the PwC lead audit
partner. As PwC have acted as external auditors for more than 20 years, the
Committee will not be inviting them to re-tender in 2018. The Committee
last conducted a tender exercise in 2015 in which PwC were successful.

www.cobham.com

Cobham plcAnnual Report and Accounts 2017
Following its review, the Committee was of the opinion that the 2017 Annual
Report and Accounts was representative of the year and presents a fair, balanced
and understandable overview, providing the necessary information for
shareholders to assess the Group’s position and performance, business model
and strategy.

In reporting on Alternative Performance Measures, the Group followed the
FRC recommendation to consider the Guidelines on Alternative Performance
Measures, as published by the European Securities and Markets Authority, and
specifically addressed points raised by the FRC in its thematic review. Account
has also been taken of the disclosures of our peers, and current best practice.

On 26 September 2017, the Group received a request for information from
the FRC in relation to the 2016 Annual Report and Accounts. The Alternative
Performance Measures used in those accounts were one of the items included
in the FRC review. This review also covered ‘Revenue recognition policy’, ‘Key
judgements and estimates’ and ‘Customer funded research and development’.

The Audit Committee considered management’s response and a number of
changes have been made in response to that review, the most fundamental
being to separate judgements and estimates into two distinct areas within
the accounting policies.

On 22 February 2018, correspondence was received from the FRC concluding
the review to their satisfaction.

The FRC’s review did not benefit from detailed knowledge of our business
or an understanding of the underlying transactions entered into but was
conducted by staff who have an understanding of the relevant legal and
accounting framework.

Code of Business Conduct violations and fraud
The COBC, which incorporates the Group’s whistleblowing policy, contains
arrangements for an independent external service provider to receive, in
confidence, complaints on suspected violations of the COBC for reporting to
the Committee as appropriate. Details of the COBC are provided in the CRS
section of this report, on page 40. The Committee regularly received reports
on matters relating to the COBC.

Evaluation of the effectiveness of the Committee
The Committee Chair initiated an internal review of the effectiveness of the
Committee towards the end of 2017. The review was conducted by questionnaire,
taking comments from Committee members, regular meeting attendees and
the independent auditors. The results were considered and actions required
are in progress.

Audit Quality Review
The Committee considered the findings of the FRC’s AQR report into the
conduct of PwC audits generally. In addition, the AQR team selected to review
the audit of the Group’s 2016 Financial Statements as part of its 2017 annual
inspection of audit firms. The Chairman of the Committee received a copy
of the findings of the AQR team and PwC has confirmed that those areas
identified for improvement have been addressed during the 2017 Audit.

Internal Audit and Assurance
In December 2017, the Committee conducted a review of the effectiveness
of the Group’s Internal Audit and Assurance Function, taking into account the
views of Directors and senior management on matters such as independence,
proficiency, resourcing, audit strategy, planning and methodology. The
Committee was satisfied with the performance of the Internal Audit and
Assurance Function.

The Group Head of Internal Audit and Assurance attended every Audit
Committee meeting throughout 2017 where Internal Audit was on the agenda
and in addition, had ongoing contact with members of the Audit Committee
throughout the year with and without management present including private
sessions with members of the Audit Committee.

The findings of each Internal Audit review are summarised for the Committee,
which focuses its discussions on unsatisfactory findings and on the action plans
in place to address them. The Internal Audit reports are also made available
in full, to the Board. Particular areas of focus for Internal Audit during 2017
included continuation of financial control audits in line with the increased focus
on control improvements, programme related Internal Audits in line with the
programme watchlist review process, the introduction of a specialised IT audit
programme and a number of risk based reviews.

In addition, Internal Audit has continued to maintain a programme of follow-up
audits to assess the timely implementation of Internal Audit recommendations
by the businesses and key matters from the Internal Audit reviews.

The Committee received regular updates against the 2017 Internal Audit
programme throughout the year.

The Committee approved the Internal Audit plan for 2018, including the
proposed audit approach, coverage and allocation of resources. The 2018
plan was prepared considering a number of factors, including the principal risks
of the Group. The key points of focus in the 2018 plan include:
− Continued focus on internal financial controls assurance;
− Increased focus on non-financial areas of risk, including corporate

governance and business interruption;

− Increased focus on IT controls and cyber security including compliance

with new regulations; and

− Continued improvement in the Group’s assurance mapping process

across the three lines of assurance.

Where the operation of the SSA results in limitations of visibility when
compared to other areas in the Group, the Audit Committee gains its assurance
over CAES internal controls via the CAES Audit Committee of which Cobham’s
CFO is a member, and with Cobham plc’s CEO and CFO representing Cobham
on the CAES main Board, in their capacity as Inside Directors. Further details
can be found in the Corporate Governance Report on page 51.

Fair, balanced and understandable report and accounts
At the request of the Board, the Committee considered whether, in its
opinion, the 2017 Annual Report and Accounts were fair, balanced and
understandable. In forming its opinion, the Committee reflected on the
information it had received and its discussions throughout the year. The
assessment was assisted by an internal verification of the factual content by
management, a review at different levels of the Group to ensure consistency
and overall balance, and a comprehensive review by the senior management
team and the external auditors.

www.cobham.com

CORPORATE GOVERNANCECobham plcAnnual Report and Accounts 2017Directors’ Remuneration Report

Remuneration outcomes align with
delivery of the first year of the turnaround

Dear Shareholder
I would like to set out how the Remuneration Committee has determined
the outcome of remuneration decisions for the Executive Directors, along
with how we intend to implement our Remuneration Policy in 2018.

As outlined earlier in this report, 2017 has been a critical year of transition.
The Committee has, throughout 2017, been focused on the key issue of pay
for performance and ensuring that the performance metrics against which
our Executive Directors and senior management team are assessed, are closely
aligned with our turnaround strategy and to the commitments given to our
shareholders during the Rights Issue process.

During the year we have welcomed a new Board member to the Committee,
John McAdam. General Norton Schwartz also joined us early in 2018.

Remuneration Policy
Shareholders were asked to approve a new Remuneration Policy at our AGM in
April 2017. Given the degree of change in the business at the time, both in terms
of key executives and business challenges, the Committee determined that it
was not the right time to be undertaking a significant overhaul of pay. Instead,
some minor revisions were incorporated to reflect developing best practice.

The Committee is conscious that our new executive team should have time
to thoroughly embed the new strategic direction for Cobham, and that pay
should then align fully with this direction. Given timings, we will continue to
operate under our 2017 Policy for 2018, with the expectation that a thorough
review of remuneration will be performed during 2018, with the potential for a
new Policy to be presented to shareholders at the 2019 AGM.

Some modest changes which we are making to our arrangements are set out
in more detail in the ‘2018 remuneration framework’ section below.

How company performance during the year is reflected in the
remuneration outcome
The Committee’s primary focus was to ensure that the targets set for the 2017
annual bonus and LTI were fully aligned with the commitments made to
shareholders at the time of the May 2017 Rights Issue. Recognising the review
of the Balance Sheet and re-baselining of the financial plan by the incoming
CEO and CFO at the start of 2017, the Committee gave particular scrutiny to
setting these 2017 targets to ensure these were appropriately stretching.

With that backdrop, the CEO and CFO’s bonus targets were set to achieve,
at threshold payout, an operating profit of £200m and an operating cash
flow of £100m.

In line with the reported performance of the Group, the CEO and CFO have
therefore achieved a 2017 bonus award at 81.1% and 79.6% respectively of
the maximum opportunity of 150%. Further details on the bonus performance
measures are given later in this report.

The Committee deferred setting the LTI targets until May to ensure that the
targets set fairly reflected the outcome of the Rights Issue and that the CEO
and CFO would therefore receive no benefit from the short term volatility in
the share price.

No salary increases for the Executive Directors or fee increases for the
Chairman and Non-executive Directors have been made during 2017.

Salaries for all the
Executive team will
remain unchanged
in 2018

www.cobham.com

Cobham plcAnnual Report and Accounts 2017Incoming CEO – relocation
When David Lockwood was appointed as CEO in 2016, it was agreed that he
would be based at Wimborne (his predecessor had been based in London).
The Board believed it was important that both the CEO and CFO be based at
Wimborne to enable them to drive the necessary re-structuring and culture
change and provide the visible senior leadership that the Group required.

It was agreed that the CEO would permanently relocate to Wimborne in 2017
and the Company provided an appropriate relocation package to support this.
The CFO is not able to permanently relocate so the Committee agreed to
provide funding to support the CFO’s costs of working from Wimborne.

The Board has seen a significant improvement in senior leadership and wider
employee engagement, as evidenced by a recent senior staff survey, so the
Committee are satisfied these relocation expenses are justified.

2018 remuneration framework
As outlined above, substantial changes are not proposed to the overall
remuneration framework for Executive Directors, which is considered to remain
largely fit for purpose. Instead, the Committee has taken the opportunity to
review whether any minor modifications are required to ensure that we
continue to align pay with performance.

During internal discussion over the course of 2017, there was consensus that
the performance measures under the LTI should be refined to ensure that they
align with the key areas of focus communicated to the market. In particular, the
Committee considers that the long term incentive framework should reflect
the importance to Cobham at the current time of earnings progression, margin
improvement and cash generation. As such, the 2018 LTI awards will be based
on an even split of underlying EPS growth and cumulative free cash flow.

We will not be increasing Executive salaries in 2018, nor making any material
change to the variable reward elements.

Leaving arrangements for the departing CEO and CFO
In line with our disciplined approach to the principle of pay for performance,
neither of the departing CEO or CFO received any payment in respect of their
2016 annual bonus, and all outstanding incentive awards lapsed on cessation of
employment. Full details of the leaving arrangements are detailed on page 69.

Key issues to be addressed by the Committee during 2018
The Committee will undertake a detailed review of remuneration strategy to
address aligning reward at all levels of the Group with delivering the next phase
of the turnaround.

Comment on stakeholder engagement conducted
I will write to our top 20 shareholders in March 2018 to engage with
them regarding the LTI targets for 2018 set by the Committee. We would
expect greater engagement in 2018 as part of the Remuneration
Policy/strategy review.

Conclusion
Throughout 2017, as Chair of the Remuneration Committee, I have sought
to ensure that we exercise rigour and discipline in all remuneration decisions
and have continued the drive for transparency. The priority for 2018 will be to
ensure that the remuneration structure supports the evolving strategy as the
Group works through the turnaround.

The Committee considers that EPS remains the single most important financial
metric for the business, encompassing the aggregate impacts of revenue
growth, operating margin progression and financing costs. Meanwhile cash
flow reflects the importance of this measure to the business over the next
few years.

Alison Wood
Remuneration Committee Chair
1 March 2018

These performance conditions are subject to a ‘quality of earnings’ assessment,
under which awards will not vest unless the Committee is satisfied that there
has been a sustained improvement in the underlying financial performance of
the Company. This provides assurance that achievement of the EPS and cash
flow targets does not put at risk the ability of the Company to generate
sustainable future value.

We recognise that some shareholders may question the removal of relative
Total Shareholder Return (TSR) from the framework. On balance though, the
Committee believes that its attractions are outweighed by a number of
challenges that it presents for Cobham: selecting a relevant comparator group
is difficult given that Cobham has few direct peers; it can reward share price
volatility, rather than the incremental growth that we are aiming to deliver; and
it provides limited line-of-sight for participants. Given this, we consider that
replacing it with more strategically relevant financial measures for 2018 is a
positive step.

www.cobham.com

CORPORATE GOVERNANCECobham plcAnnual Report and Accounts 2017Directors’ Remuneration Report continued

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
Six Remuneration Committee meetings were held during the year, attended as
follows:

Alison Wood

John McAdam 1

Birgit Nørgaard 2

Michael Wareing

Key issues and activities
Set out in the table below is a summary of matters considered by the
Committee during 2017.

Feb Mar May Jun*

Jul

Oct Oct* Nov* Dec

Compensation awards
– previous year

Outgoing CEO/CFO

Compensation awards
– current year

Buy-out awards

LTI performance dashboards

NED/Chairman remuneration

GE leaver/starter awards

Remuneration strategy

1 John McAdam joined the Committee on 3 August 2017.
2 Birgit Nørgaard left the Committee on 5 December 2017.

Attendee

Member

AIP

LTI

Other

Updates on corporate
governance developments

Effectiveness of the
Committee

DRR Policy and Report review

Approval of LTI and Deferred
Bonus Plan – new rules

Committee work planning

Gender pay reporting

* An asterisk against a month denotes that this business of the Committee was agreed by way

of a written resolution.

Upon appointment as Chairman in January 2017, Michael Wareing ceased
to be a member of the Remuneration Committee. The Committee remained
quorate with two members but below the Code requirement for three
independent directors. John McAdam joined the Committee on his
appointment in August. In the period prior to this appointment, the Chair
also consulted with the SID and other Board members on key remuneration
decisions. The Committee became two members again when Birgit Nørgaard
joined the Audit Committee on 5 December 2017, moving back to three
members upon the appointment of Norton Schwartz on 1 January 2018.

In addition to the formal meetings, there were three written resolutions
circulated during the year to approve urgent matters of business.

Other attendees
Executive Vice President Human Resources and Communications, Senior Vice
President Compensation and Benefits, Deloitte LLP and the 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 by application to the Company Secretary.

www.cobham.com

Cobham plcAnnual Report and Accounts 2017Our remuneration structure
Introduction
The revised Directors’ Remuneration Policy (the Policy) set out below was approved by over 93% of our shareholders at our AGM held on 27 April 2017. 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:

Key elements

Key features

Fixed pay

Base salary

Reviewed annually with changes typically effective from
1 March.

How it was
implemented in 2017

Due to the timing of the new
CEO joining, he was not eligible
for a 2017 pay review.

How it will be
implemented in 2018

No increase will be
made to base pay
during 2018.

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.

No increase was made to the CFO’s
base salary in 2017.

Retirement
Benefits

The Company may make a payment into a pension scheme
and/or make a cash allowance payment set as a percentage
of salary.

For 2017, the CEO was paid cash in
lieu of 25% and the CFO, 20%.

2018 cash in
lieu payments:

Annual
Incentive

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)
are designed to
drive sustainable
profitable growth
and align
Executive
Directors’
interests with
shareholders’
interests.

Cash bonus

Maximum opportunity under the Policy is 150% of salary.

2017 awards:

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

CEO – 150% of base pay opportunity

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

Malus and clawback provisions are in place.

Deferred bonus 25% of any cash award is mandatorily deferred into

Company shares for a period of three years.

Malus and clawback provisions are in place.

Long term
Incentive

LTI – PSP

PSP allows for conditional share awards or nil-cost options up
to 200% of base salary to be granted annually.

Threshold level of vesting is 16.7% of maximum award.

CFO – 150% of base pay opportunity

Payments of £839,747 (81.1%) and
£621,153 (79.6%) have been earned
by the CEO and CFO respectively.

25% of each of the CEO’s and
CFO’s AIP has been put into deferred
share awards with a three year
vesting period.

Awards of 200% of salary for the
CEO were made in 2017 with
performance conditions as set out
on page 68.

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

Awards of 150% for the CFO.

Malus and clawback provisions are in place.

Share
Ownership
Guidelines

There is a requirement to retain a percentage of salary in
Company 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%.

A two year holding period post the end of the three year
performance period for LTI awards is in place.

CEO 25%

CFO 20%

2018 awards:

CEO – 150% of base
pay opportunity

CFO – 150% of base
pay opportunity

Applicable to 2018
AIP

Awards of 200% of
salary for the CEO will
be made in 2018 with
performance
conditions based on
an even split between
underlying EPS growth
and cumulative free
cash flow.

Awards of 150% will be
made for the CFO.

As 2017, the CEO is
required to retain
200% of annual
salary, and the CFO,
100%.

All employee
share
schemes

Save as You
Earn/Share
Incentive Plan

Both of these plans are available to all employees,
including both the CEO and CFO on the same basis as all
other employees.

Both CEO and CFO have invested in
the 2017 Save as You Earn offer to the
maximum allowable under the Plan.

Not applicable

Aligning remuneration to deliver operational performance
We have taken a disciplined approach to ensure that our Policy supports
Cobham’s emerging strategy and delivery of both the long and the short term
operational and financial priorities. 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 2017 AIP framework supported our priorities of driving continuous
improvement in operational excellence and programme execution with
inclusion of operational KPIs and by directly targeting organic revenue growth
in operating profit and operating cash flow. In addition, individual objectives
were set as part of the 2017 AIP to specifically address the strategic
development of the Group’s portfolio.

In 2018, the AIP will continue to focus on delivering operational performance
to meet the strategic actions. We have carried forward the same financial and
performance measures from 2017 to 2018 to retain a strong focus on the key
financial objectives of the Group, particularly improved cash flow generation.

The LTI is designed to support the creation of long term growth and value for
the Group, by aligning shareholder expectations with that of performance.

www.cobham.com

CORPORATE GOVERNANCECobham plcAnnual Report and Accounts 2017Directors’ Remuneration Report continued

The annual report on remuneration
Both Executive Directors were in role throughout the year. The only change to the Board membership during 2017 was the appointment of John McAdam
as Senior Independent Director and (David) Jonathan Flint, who retired on John’s appointment.

Single total figure table

£k
David Lockwood

David Mellors

Previous Executive Directors

£k

Robert Murphy

Simon Nicholls

2017
2016
2017

2016

Salary
and fees
690
40
520

Taxable
benefits
422
10
50

Salary
and fees

Taxable
benefits

871

440

404

AIP

840
–
621

AIP

–

LTI

Pensions

–
–
–

LTI

–

173
10
104

Pensions

243

Buy-out
awards
–
–
1,031

Buy-out
awards

–

Total
2,125
60
2,326

Total

1,518

674

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

Taxable benefits

The taxable benefit figures are as follows:

£k

2,000

1,500

1,000

500

2,125

2,326

Salary and fees
Taxable benefits
AIP
Buy-out award
Pensions
LTI

1,518

Benefit

Car and private petrol allowance

Private medical insurance

Life cover

Income protection

674

Allowance to cover financial/tax advice

Relocation

Total

David
Lockwood
£k

David
Mellors
£k

3941

422

172

2017

2016
David Lockwood

0
2016

2017

David Mellors

2016
Robert Murphy Simon Nicholls

2016

1 One of the conditions within the CEO’s employment contract was that he relocate to be

based out of the Corporate Head Office in Wimborne, UK. A cap of £500,000 was placed on
the relocation package offered to the CEO. The final figure reflects Mr Lockwood’s personal
circumstances at the time of his move and primarily represents the following elements:

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

2017 Approved Policy:
Reviewed annually with changes typically effective from 1 March. 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.

Element

Purchase costs of the house

Removal fees

Legal fees

Structural survey

Gross-up tax

Qualifying relocation allowance

Total

Cost
£k

203

177

(8)

394

2 The Company provides support to the CFO whilst working from the corporate head office

Wimborne by payment for travel and subsistence in lieu of relocation expenses.

David Lockwood joined the Company on 12 December 2016 and his base salary
on joining was set at £690,000. David Mellors joined the Company on 1 January
2017 and his base salary on joining was set at £520,000. Neither Director received
an increase at the 1 March 2017 pay review.

www.cobham.com

Cobham plcAnnual Report and Accounts 2017

Annual Incentive Plan

2017 Approved Policy:

Cash bonus

Maximum opportunity under the Policy is 150% of salary.

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.

CFO – David Mellors
KIG 1: To develop and embed standardised financial processes across the
Group. Progress: As noted in the Audit Committee report, the CFO has
successfully implemented a series of process changes that have delivered
a significant improvement in the control framework across the Group.

KIG 2: To deploy across the Group an improved monthly reporting framework
and a set of standard KPIs that would focus on cash performance of the
business. Progress: The reporting across the Group is now at an acceptable
standard and as evidenced by the reported financial performance in 2017,
the cash performance of the Group has much improved, achieving a cash
conversion rate of 103%.

Deferred bonus 75% paid in cash and up to 25% mandatorily deferred into

Company shares for a period of three years.

As a result of the personal elements of the AIP, the CEO achieved 100% of
the maximum opportunity and the CFO, 92.5%.

Malus and clawback provisions are in place.

Taken together, the business and personal elements achieved an 81.1% payout
for the CEO and 79.6% for the CFO.

Long term incentives

2017 Approved Policy:
PSP allows for conditional share awards or nil-cost options. Up to 200%
of base salary may be granted annually.

Threshold level of vesting is 16.7% of maximum award.

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

Malus and clawback provisions are in place.

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

PSP awards vesting in 2017
No Executive Directors hold PSP awards under the 2015-2017 cycle.

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.

David Lockwood

David Mellors

Type of award

PSP

Basis on which award
is made

200% of base salary

150% of base salary

Date of award

24 May 2017

Face value of award
(No. of shares awarded)

£1,380,000
(982,206)

24 May 2017

£780,000
(555,160)

Performance period

1 January 2017 to
31 December 2019

A further two year holding
period is applicable

− The award has been made in accordance with the relevant plan rules.
− The face value has been calculated by multiplying the number of shares

awarded by the mid-market price of those shares for the three trading days
immediately preceding the date of the award.

Awards were subject to the performance measures set out in the table below
which are aligned to the key financial and strategic objectives of the Company
over the previous 12 months:

Performance measure

Group Operating Cash Flow

Group Revenue

Group Operating Profit

Key Individual Goals

Weighting %

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

Measure1
Group
Operating Cash
Flow (£m)
Group Organic
Revenue
Growth (%)
Group
Operating Profit
(£m)

Threshold

Full Year Targets
Maximum

Target

Actual Performance

100

105

125

+1.2

200

210

252

222

1.2

215

1 Performance and targets are measured based on 2017 budgeted foreign exchange rates.

As a result of the actual performance in the table above, the business element
of the AIP award achieved was 76.4% of the maximum opportunity.

As noted in the Chairman’s Statement, the Board believe that the CEO and
CFO have made good progress in 2017. Recognising that the turnaround
would require the CEO and CFO to address a range of operational priorities,
their Key Individual Goals (KIGs) were set to address specific priorities that the
Board believed needed particular attention in 2017.

The KIG’s for the two Executive Directors, and the actions taken in relation to
them, were as follows:

CEO – David Lockwood
KIG 1: Complete a full strategic portfolio review of the Group and identify
non-core assets for disposal. Progress: The CEO has established a revised
strategy for the Group, with its focus on restructuring and growing its core
aerospace, defence and space activities. In addition, the CEO, with the support
of the CFO, has successfully negotiated the disposal of the AvComm and
Wireless testing businesses.

KIG 2: Drive an improved relationship with the CAES SSA Board and the Group’s
key US stakeholders. Progress: The CEO has established effective working
relationships with the new US Outside Directors and key US Government and
senior industry contacts which has contributed to the improvement in the
Group’s performance in relation to its SSA obligations in 2017.

www.cobham.com

CORPORATE GOVERNANCECobham plcAnnual Report and Accounts 2017
Directors’ Remuneration Report continued

Performance conditions for the PSP awarded in 2017 are set out in the
table below:

Pensions

Metric

Weighting %

Performance

TSR

EPS

Threshold
(Median 50th percentile)

Mid-point
(60th percentile)

Maximum
(75th percentile)

Threshold

Mid-point

Maximum

Award
vesting at

16.7

100

16.7

100

TSR Peer Group
The companies in the TSR comparator group for awards granted in 2017
were based on FTSE 250 constituents, excluding investment trust and financial
services companies.

Buy-out awards

As we disclosed last year, and in RNS announcements in May and June 2017, we
granted buy-out awards to the two incoming Executive Directors who forfeited
awards at their previous employer as a result of joining Cobham. These awards
have been made on a comparable basis to those of the forfeited arrangements,
the details of the awards are below:

David Lockwood1

David Mellors

Type of award

Buy-out award

Basis on which
award is made

200% of previous
employer’s salary

See note 3 below See note 4 below

Date of award

24 May 2017

14 June 2017

2017 Approved Policy:
The Company may make a payment into a pension scheme (e.g. a defined
contribution plan) and/or make a cash allowance payment set as a
percentage of salary.

David Lockwood’s pension contributions are paid as a cash in lieu amount,
which equates to 25% of his base salary. The amount paid during 2017
was £172,500.

David Mellors’ pension contributions are paid as a cash in lieu amount,
which equates to 20% of his base salary. The amount paid during 2017
was £104,000.

Non-executive Directors (audited information)
The 2017 remuneration and current fees of the Non-executive Directors,
including the Chairman, have remained unchanged since 2008 and are
stated below:

£k
Michael Wareing (Chairman)1
John McAdam 2
Michael Hagee 3
Birgit Nørgaard
Alan Semple 3
Alison Wood
(David) Jonathan Flint 4
John Devaney (Chairman) 5
Mark Ronald 3, 6
Total

Total payable
2016
68

2017
2705

58
70

–

596

–

278

685

Face value of
award
(No. of shares
awarded)

£1,100,000
(782,918)2

£391,494
(278,571)3

Not applicable as
the awards being
replaced were
no longer in a
performance
period.

Performance
period

1 January 2017 to
31 December 2018

To match the
conditions attached
to forfeited awards,
this award is subject
to underlying EPS
performance for
FY2018.

A further two
year holding period
is applicable.

£320,850
(246,998)4
Not applicable as
the awards being
replaced were
no longer in a
performance
period.

1 The Chairman, Michael Wareing, received taxable benefits of £3,989 during the year related

to reimbursed travel expenses to the Wimborne office, which is considered to be his
principal place of work.

2 John McAdam joined the Board on 3 August 2017.
3 Except as noted in 1 above, 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. Messrs Hagee, Ronald and Semple
received a taxable benefit in kind for financial services (tax) advice for the amounts of
£1,800, £2,092 and £3,475 respectively.

4 (David) Jonathan Flint retired from the Board on 3 August 2017.
5 John Devaney retired from the Board on 31 December 2016.
6 Mark Ronald retired from the Board following the April 2016 AGM.

Non-executive Directors do not have a permanent place of work specified in
their service contract. All reasonable and properly incurred expenses claimed
in performance of duties as Board members are reimbursed by the Company.

Non-executive Directors are paid a fee of £2,500 per annum for Committee
work and a £5,000 fee is paid for Directors travelling from continental locations.
A £10,000 per annum fee is paid to each of the Chair of the Audit and
Remuneration Committees and to the Senior Independent Director.

As disclosed in the 2016 DRR, David Lockwood forfeited the deferred share portion of his
2015 bonus as a consequence of joining Cobham and as such will receive a restricted share
award with a face value of circa £66,000. This award will be granted as soon as is practicable,
and will vest in March 2019 to align with the timeframe of the forfeited award.

2 These awards will be tested against the performance conditions shown above and if

satisfied will vest on 8 March 2019.
These awards are compensation for awards forfeited when leaving his previous employer.
Part of the award vested on 25 June 2017 (141,434 shares) and part will vest on 25 June
2018 (137,137 shares). This release schedule matches that of the awards being replaced.
4 These awards are in recognition of bonus opportunity forfeited when leaving his previous

employer. They are due to vest on 14 June 2018 (123,499 shares) and 14 June 2019
(123,499 shares). This release schedule matches that of his previous employer. In addition
to these awards, David Mellors received £320,853 paid to him in cash in relation to the lost
bonus opportunity, representing half of the total value.

− The award has been made in accordance with the relevant plan rules.
− The face value has been calculated by multiplying the number of shares

awarded by the mid-market price of those shares for the three trading days
immediately preceding the date of the award.

www.cobham.com

Cobham plcAnnual Report and Accounts 2017Total aggregate Directors’ fees for the year, including the Executive Director
fees as per the single figure table on page 66, amount to £5,047,000
(2016: £2,659,000).

Shares held by Executive Directors as at 31 December 2017 against
share ownership

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

Michael Wareing
John McAdam
David Lockwood
David Mellors
Michael Hagee
Birgit Nørgaard
Alan Semple
Alison Wood
(David) Jonathan Flint
John Devaney

2017
60,500
5,000
44,578
74,058
10,500
10,500
10,500
10,500
N/A
N/A

2016
30,000
N/A
N/A
N/A
7,500
7,500
7,500
7,500
7,500
30,000

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

All Non-executive Directors took up their rights under the Company’s Rights
Issue on 5 May 2017.

Executive Directors’ share interests
The interests of the Executive Directors in share awards or share options at
31 December 2017 are shown below:

Share awards
subject to
performance
conditions
–

Share awards
subject to
continued
employment
–

Unvested
options
subject to
performance
awards
982,206

All employee
Sharesave
Scheme
–

–

782,918

– 1,765,124

–

555,160

384,135

–

384,135

555,160

–

David
Lockwood

Award
PSP 2017

PSP 2017
Buy-out

Total

David
Mellors

Total

PSP 2017

Restricted
Share Plan
Buy-out

Share ownership requirements
There is a requirement to retain a percentage of salary in shares, which must
be built up from shares vesting from LTI plans.

Ownership guidelines require the Executive Directors to hold 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 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.

David Lockwood

200%

331%

David Mellors

100%

18%

246%

100

150

200

250

300

350

Shares held beneficially

Shares held if options and buyouts
granted in 2017 vest in full

Shareholding guideline

Interests at 1 March 2018, 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 2017.

The market price of the ordinary shares as at 31 December 2017 was 126.3p per
share and the closing price range during the year was 96.2p to 148.0p, all prices
adjusted to account for the Rights Issue adjustment.

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 2017, 0.5m (0.02%) and
0.5m (0.02%) 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 and payment for loss of office
(audited information)
The termination payments made to the CEO and CFO were in line with their
basic entitlements under their employment contracts as outlined in the
table below.

Element
Salary and fees
Contractual base pay
Taxable benefits
Relocation
Car and private petrol allowance
Private medical insurance, disability cover and life
insurance
Legal/Financial advice
Outplacement services
Subsistence
Annual Incentive Plan
Deferred AIP
Pensions
Total

Outgoing
CEO – Robert
Murphy
£k

Outgoing
CFO – Simon
Nicholls
£k

8611

1842
–

25
–
–
–

–
1,014
2,084

–
3

–
36
48
2

373
4
153

1 Upon cessation of employment, the outgoing CEO was entitled to a payment in respect of

12 months’ annual base salary.

2 In accordance with terms of the outgoing CEO’s contract on appointment, the Company

was obliged to reimburse the reasonable cost of relocating him and his family from the UK
to the US, limited to a maximum of 50% of his salary.

3 The CFO has an outstanding payment of bonus which has been withheld pending the

outcome of the FCA investigation.

There were no payments made to past Directors for loss of office during
the year.

www.cobham.com

CORPORATE GOVERNANCECobham plcAnnual Report and Accounts 2017

Directors’ Remuneration Report continued

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 66.

Annual bonus
payout
against
maximum
opportunity %
(£k)

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

CEO single
figure of total
remuneration
(£k)

2,125 81.1 (840)

N/A

1,518

Nil

1,364

18.4 (209)

1,196

Nil

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)

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

Remuneration element

Salary

Benefits
AIP

CEO

0.0%

(2.0)%
81.1%

Average employee per capita figure

2.0%

8.8%
17.4%

The UK payroll has been chosen for comparison as this is the location of the
head office.

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:

740.1

698.0

£m

800

700

600

500

400

300

Year

2017

2016

2015

2014

2013

2012

2011

2010

2009

CEO
CEO4
David Lockwood
CEO4
David Lockwood
CEO3
Robert Murphy
CEO3
Robert Murphy
CEO3
Robert Murphy
CEO3
Robert Murphy
CEO3
Robert Murphy
CEO2
Andrew Stevens
CEO2
Andrew Stevens
CEO2
Andrew Stevens
CEO1
Allan Cook

1,496

93.0 (567) 100.0 (238)

200

134.1

135.5

126.1

121.9

130.2

Performance graph
The graph below illustrates the TSR performance (share price growth plus
dividends) of Cobham against the FTSE 350 Index over the past nine years.
The graph shows the value of £100 invested over the nine year period ending
31 December 2017. The FTSE 350 Index was chosen as it is a recognised broad
equity market index of which Cobham was a member during 2017 and is
currently, as at 28 February 2018, ranked at 148.

100

2017

2016

2017

2016

2017

2016

2017

2016

Aggregate
employment
costs of Group
employees

Underlying
profit after tax

Dividends

TSR performance Cobham vs FTSE 350
£

300

250

200

150

100

31 Dec
2008

31 Dec
2009

31 Dec
2010

31 Dec
2011

31 Dec
2012

31 Dec
2013

31 Dec
2014

31 Dec
2015

31 Dec
2016

31 Dec
2017

Cobham

FTSE 350

Source: Deloitte LLP

The aggregate employment cost of Group employees is detailed at note 4 to
the Group Financial Statements and includes employers’ social security and
similar costs. Group underlying profit after tax is shown above as this is the
measure used by the Board to monitor financial performance, refer to note 2.
No dividends have been paid in the year, refer to note 7. PV relates to the
amount of profit the Group spends on research and development, refer to
note 4.

Statement of implementation of remuneration policy in the current
financial year
Base salary
The base salaries of the CEO and CFO have not been increased as part of the
Company’s annual salary review for 2018.

Benefits
Both the CEO and CFO will continue to receive benefits in line with those
provided for under the Remuneration Policy.

Pension
The pension contributions for the CEO and CFO are paid as a cash in lieu
amount, which equate to 25% of salary for the CEO and 20% of salary for the
CFO, both of which are below the 30% maximum set under the Remuneration
Policy. These amounts are unchanged from 2017.

2018 AIP
The maximum opportunities for the CEO and CFO will remain unchanged at
150% of base salary.

www.cobham.com

Cobham plcAnnual Report and Accounts 20172018 PSP awards
PSP awards will be made to the CEO and CFO with a face value of 200% of
salary and 150% of salary respectively and will be subject to an additional two
year holding period following the end of the performance period.

Advisors to the Remuneration Committee

Advisor

Appointed by

Deloitte LLP Remuneration
Committee in
November 2009, and
reappointed following
a tender exercise
conducted in 2016

Services provided
to the Committee

Remuneration
strategy

Incentive design

Market data

Other services
provided to the
Company

Immigration,
international
mobility and
tax advice

Corporate
tax advice

The Committee received advice during the year from Deloitte LLP, who
comply with the Code of Conduct of the Remuneration Consultants Group.
The Committee is satisfied that the advice they have received has been
objective and independent. Deloitte’s performance was considered by the
Committee as part of the tender process undertaken in 2016. Total fees for
advice provided to the Committee during the year amounted to £64,993
(2016: £83,463) and were provided on a time/cost basis. Additional advice
was received from the Executive Vice President Human Resources and
Communications, Senior Vice President Compensation and Benefits, and
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 advisors.

2017 voting at the Annual General Meeting
At the AGM held on 27 April 2017, shareholders approved the Directors’
Remuneration Policy and voted on the Directors’ Remuneration Report for
the year ended 31 December 2016. 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
32,316,198

%
93.62

Votes against
2,200,906

Votes withheld: 2,542

Directors’ Remuneration Report

Votes for
34,099,321

%
98.79

Votes against
417,666

Votes withheld: 2,661

%
6.38

%
1.21

www.cobham.com

CORPORATE GOVERNANCECobham plcAnnual Report and Accounts 2017Other Statutory Information

Dividends
As previously communicated to the market, no dividend is expected with the
2017 results. Given the Group is continuing to progress a turnaround and the
cumulative risk around significant contract exposures and other contingent
liabilities remains high, the policy on future capital allocation will be considered
by the Board towards the end of 2018.

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 through 2017, 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 69.

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 27 April 2017, the Company was authorised to purchase
up to 170,786,385 ordinary shares. This authority will expire at the conclusion of
the 2018 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. The Company launched a fully underwritten 2 for 5 Rights Issue of
683,145,540 new ordinary shares at 75p per new ordinary share which closed
on 5 May 2017.

Subject to applicable statutes, and to the rights conferred on the holders of
any other shares, shares may be issued with such rights and restrictions as the
Company may by ordinary resolution decide or (if there is no such resolution
or so far as the resolution does not make specific provision) as the Board may
decide. Holders of ordinary shares are entitled to attend and speak at general
meetings of the Company, to appoint one or more proxies and, if they are
corporations, corporate representatives, and to exercise voting rights. Holders
of ordinary shares may receive a dividend and, on a liquidation, may share in
the assets of the Company. Holders of ordinary shares are entitled to receive
the Company’s Annual Report and Accounts. Subject to meeting certain
thresholds, holders of ordinary shares may requisition a general meeting of
the Company or the proposal of a resolution at an AGM.

The shareholders of the 6% second cumulative preference shares are entitled
to receive a fixed cumulative preference dividend at the rate of 6% per annum
in priority to the payment of dividends on the ordinary shares. In addition, on
a return of assets on the liquidation or otherwise of the Company, the assets
available for distribution are to be applied first in repaying to the holders of the
6% second cumulative preference shares the amounts paid up on their shares.

Voting rights and restrictions on transfer of shares
The rights and obligations attaching to the ordinary shares and 6% second
cumulative preference shares of £1 each in the capital of the Company are
set out in the Articles.

On a show of hands at a general meeting of the Company, every holder of
shares present in person or by proxy and entitled to vote has one vote, and on
a poll every member present in person or by proxy and entitled to vote has one
vote for every £1 in nominal value of the shares of which they are the holder.
None of the ordinary or preference shares carry any special rights with regard
to control of the Company.

There are no restrictions on transfers of shares other than:
− Certain restrictions which may from time to time be imposed by laws

or regulations;

− Pursuant to the Company’s Dealing Code 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 16 to
the Group Financial Statements. Borrowing agreements contain clauses that
in the event of a change of control require either, the Company to repay the
lender all amounts owing, or to notify lenders of the change of control and
either simultaneously offer to repay all outstanding amounts or repay all
outstanding amounts if the lenders so require. Both the offer to repay and
obligation to prepay on request are subject to time limits;

− 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; and

− Under contracts with Airbus for the supply of radio and audio integrated

management systems, announced on 2 June 2016, and satellite
communications systems, announced on 23 June 2016, if a change in
control reasonably appears to the purchaser to materially affect the ability
of the supplier to discharge its obligations under the contract or if such
change in control is in favour of a party which is strategically unacceptable
to the purchaser because of existing, latent or potential conflict of interest,
the purchaser shall be entitled to terminate the contract and any order in
connection therewith.

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 holds ordinary shares to be
used for settlement of long term incentives and share option schemes, waive
all rights to vote in respect of any shares they hold within the Trust.

Further information relating to change of control under the LTI
arrangements appears within the Remuneration Policy available on
the Company’s website.

www.cobham.com

Cobham plcAnnual Report and Accounts 2017Major interests in shares
As at 31 December 2017, the Company had been notified of the following
interests in the ordinary shares:

Political donations and expenditure
No contributions were made to political organisations during the current
or prior year.

Number of shares at the date
of notification

Percentage at date
of notification

Causeway Capital
Management LLC
Artemis Investment
Management LLP
Deutsche Bank AG
Lancaster Investment
Management LLP
Massachusetts Financial
Services Company

191,303,713

8.001

118,455,401
Below Threshold

4.960
Below Threshold

66,415,381

85,343,080

2.780

4.997

Since the year end and up to 28 February 2018, being a date not more than a
month prior to the date of the AGM Notice, the Company had been notified
of the following interests in the ordinary shares in accordance with DTR 5:

Greenhouse gas emissions
The majority (86%) of the Group’s total greenhouse gas (GHG) emissions come
from its aviation activity (Figure 1). There was an overall reduction in aviation
emissions in 2017 attributed to operational improvements within Aviation
Services, such as Engine in Taxi out and Auxiliary Power Unit (APU) usage
reduction initiatives. There was also a downturn in flight hours across
Regional Services and Airline Services in Australia.

Total emissions from non-aviation activities decreased from 2016. However,
there was a greater variation in ambient temperatures during the year resulting
in an increase in gas use at multiple sites. Improved data gathering and
management, and use of a wider range of emission factors, have improved the
accuracy and robustness of GHG reporting across the Group.

Figure 1 – 2017 GHG emissions (tCO2e %)
Scope 3 75%

Number of shares at the date
of notification

Percentage at date
of notification

Non-Aviation 4%
Aviation 96%

Scope 1 16%

Non-Aviation 11%
Aviation 89%

Scope 2 9%
Non-Aviation 100%
Aviation 0%

Scope

Year

Aviation

Aviation % Non-Aviation Non-Aviation %

Scope 2
(location)

Scope 1 2017
2016
2017
2016
2017
2016
Scope 3 2017

Scope 2
(market)

72,479
71,960
–
–
–
–
365,736

465,655
438,215

537,915

89
89
–
–
–
–
96

97
86

8,896
9,050
44,388
46,775
43,154
46,303
17,155

16,131
70,438

71,957

11
11
100
100
100
100
4

3
14

Silchester International
Investors LLP
Ameriprise Financial, Inc.
Causeway Capital
Management LLC

239,350,910
244,814,042

192,557,651

10.010
10.239

8.050

Financial instruments
Notes 13, 19 and 21 to the Group Financial Statements and note 11 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
Cobham has continued to meet its commitment to developing people and
creating an environment that embraces diversity and inclusivity.

We have grown our investment in our people by building our Emerging Talent
programmes across the Group, establishing and delivering a consistent
accredited management programme and providing both leadership and
functional career frameworks where employees have visibility of how they
can grow and develop careers.

Total

2016
2017

2016

Strategic Workforce Planning is an activity the Group has been focused on for
some time, using the business strategy to build resource plans that mitigate any
risk and identify those competencies that we need in the future, which ensures
that our career frameworks reflect the future needs of the business.

Our resourcing process is designed to give consistent and fair consideration to
all candidates for employment. We ensure that no candidate feels
disadvantaged at any time during the recruitment process or employment.

We have invested, and will continue to invest, in our resource to enable our
transformation and underpin our future success.

Research and development
The Group continues to invest in the important area of research and
development, further details can be found on page 29, technology
investment. During the year, the Group expended £121.9m (2016: £123.9m)
on non-customer funded research and development.

Events after the balance sheet date
As shown in note 16, the US$75m credit agreement was repaid in January 2018
following the refinancing activity completed in December 2017. The divestment
of the AvComm and Wireless test and measurement businesses was
announced on 2 February 2018, as disclosed in note 15.

www.cobham.com

% total
change

0
–
(5)
–
(7)
–
(21)

–
(17)

–

CORPORATE GOVERNANCECobham plcAnnual Report and Accounts 2017
Other Statutory Information continued

Figure 2 – Emissions intensity (tCO2e/£m)
Scope 1
2017

2016

Scope 2 (location)

2017

2016

Scope 2 (market)

2017

2016

Scope 3
2017

2016

100

150

200

250

300

Aviation

Non-aviation

Scope
Scope 1

Scope 2
(location)

Scope 2
(market)

Scope 3

Year
2017
2016
2017
2016
2017
2016
2017
2016

Aviation
tCO2e/£m
35
37
–
–
–
–
178
236

Non Aviation
tCO2e/£m
4
5
22
24
21
24
8
8

Total
tCO2e/£m
39
41
22
24
21
24
186
245

% total
change
(5)
–
(8)
–
(13)
–
(24)
–

Cobham’s GHG emissions intensity (Figure 2) decreased for all scopes.
The Group’s target is to reduce facility energy intensity by 10% year on year,
with the baseline year set from 2015. In 2017, energy intensity decreased by
8%, narrowly missing the annual target. The Aviation Services Sector has set a
target of 0.5% reduction in aviation fuel consumption for its commercial
aviation services. In 2017 it exceeded this target with a 3.25% reduction,
a saving of 1,714tCO2.

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 using a location based calculation method and
indirect emissions from purchased district heating.

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
The Group collects data annually, as per our financial year, on GHG 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, GHG Protocol
Scope 2 Guidance, the International Aerospace Environmental Group GHG
Reporting Guidance for the Aerospace Industry, a supplement of the GHG
Protocol and the Carbon Disclosure Standards Board to report its greenhouse
gas emissions and defines its GHG emissions boundary as those under its direct
operational control.

Reported data excludes joint ventures not under the Group’s operational
control, sites with fewer 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.cobham.com/the-group/
corporate-responsibility-and-sustainability.

100% of the Group’s wholly owned operations have been reviewed internally
to identify omissions and significant variations from the prior year.

Data assurance
Bureau Veritas UK has been commissioned by Cobham to provide independent
limited assurance using the ISAE 3000 assurance standard over scope 1 and 2
GHG emissions and energy use for the reporting period of 1 January to
31 December 2017. The reporting boundaries cover global operations.

Having completed a verification process including site visits, documents review,
testing of a selection of data points and interrogation of reporting systems,
Bureau Veritas concludes that there is no evidence to suggest that the data
within the scope of our work and presented here is not a fair and accurate
representation of the Group’s performance.

A full verification statement including methodology, limitations and exclusions
and the reporting criteria can be found on the Company website
www.cobham.com/the-group/corporate-responsibility-and-
sustainability/performance-data-policies/performance-data.

Compliance with Listing Rule 9.8.4R
The majority of the disclosures required under Listing Rules 9.8.4R are not
applicable to the Company. The table below gives the location of
information required to be included in the Annual Report and Accounts that
are applicable.

Listing Rule

Information

Response

LR 9.8.4 (12) Details of any arrangement under
which a shareholder has waived or
agreed to waive any dividends.

(13)

Details of any arrangement under
which a shareholder has agreed to
waive future dividends.

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.
Refer to page 72 for
further details.

As noted above.

Annual General Meeting
The Company’s AGM will be held at 10:00am on Thursday, 26 April 2018 at the
Registered Offices of Allen & Overy LLP at One Bishops Square, London E1 6AD.

The Company arranges for the Notice of AGM and related papers to be sent to
shareholders at least 20 working days before the meeting.

By order of the Board

Lyn Colloff
Company Secretary
1 March 2018

www.cobham.com

Cobham plcAnnual Report and Accounts 2017Directors’ 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 1 March 2018 and signed on its behalf by:

David Lockwood
Chief Executive Officer
1 March 2018

David Mellors
Chief Financial Officer
1 March 2018

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 United Kingdom Generally Accepted
Accounting Practice (United Kingdom Accounting Standards, comprising
Financial Reporting Standard 101 (FRS 101), Reduced Disclosure Framework, 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 Parent Company, and of the profit
or loss of the Group and the Parent 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 applicable IFRS, as adopted by the EU, and applicable United
Kingdom Accounting Standards, comprising FRS 101, 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 Group and Parent Company’s transactions
and disclose with reasonable accuracy at any time the financial position of the
Group and Parent Company 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 United Kingdom 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 and Parent Company’s position and
performance, business model and strategy.

Directors’ Responsibility Statement
Each of the Directors, whose names and functions are listed on pages 44 to 47,
confirm that, to the best of their knowledge:
− The Group Financial Statements, which have been prepared in accordance
with IFRS as adopted by the EU, give a true and fair view of the assets,
liabilities, financial position and profit of the Group;

− The Parent Company Financial Statements, which have been prepared in

accordance with United Kingdom Generally Accepted Accounting Practice
(United Kingdom Accounting Standards, comprising Financial Reporting
Standard 101 (FRS 101), Reduced Disclosure Framework, and applicable law),
give a true and fair view of the assets, liabilities, financial position and profit
of the Parent Company; and

− The Strategic Report includes a fair review of the development and
performance of the business and the position of the Group and
Parent Company, together with a description of the principal risks
and uncertainties that the Group faces.

www.cobham.com

CORPORATE GOVERNANCECobham plcAnnual Report and Accounts 2017Independent Auditors’ Report to the members of Cobham plc

Report on the audit of the Financial Statements

Audit scope

− Cobham plc has 58 reporting units which fall into four

Opinion
In our opinion:
− Cobham plc’s Group Financial Statements and Parent Company Financial

Statements (the Financial Statements) give a true and fair view of the state
of the Group’s and of the Parent Company’s affairs as at 31 December 2017
and of the Group’s profit and cash flows for the year then ended;
− The Group Financial Statements have been properly prepared in

accordance with International Financial Reporting Standards (IFRS) as
adopted by the European Union;

− The Parent Company Financial Statements have been properly prepared in
accordance with United Kingdom Generally Accepted Accounting Practice
(United Kingdom Accounting Standards, comprising FRS 101, Reduced
Disclosure Framework, and applicable law); and

− The Financial Statements have been prepared in accordance with the
requirements of the Companies Act 2006 and, as regards the Group
Financial Statements, Article 4 of the IAS Regulation.

We have audited the Financial Statements, included within the Annual Report
and Accounts, which comprise: the Group and Parent Company Balance Sheets
as at 31 December 2017; the Group Income Statement and Statement of
Comprehensive Income, the Group Statement of Cash Flows, and the Group
and Parent Company Statements of Changes in Equity for the year then ended;
and the Notes to the Financial Statements, which include a description of the
significant accounting policies.

Our opinion is consistent with our reporting to the Audit Committee.

Basis for opinion
We conducted our audit in accordance with International Standards on
Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under ISAs
(UK) are further described in the Auditors’ responsibilities for the audit of
the Financial Statements section of our report. We believe that the audit
evidence we have obtained is sufficient and appropriate to provide a basis
for our opinion.

Independence
We remained independent of the Group in accordance with the ethical
requirements that are relevant to our audit of the Financial Statements in the
UK, which includes the FRC’s Ethical Standard, as applicable to listed public
interest entities, and we have fulfilled our other ethical responsibilities in
accordance with these requirements.

To the best of our knowledge and belief, we declare that non-audit services
prohibited by the FRC’s Ethical Standard were not provided to the Group or
the Parent Company.

Other than those disclosed in note 4 to the Group Financial Statements, we
have provided no non-audit services to the Group or the Parent Company in
the period from 1 January 2017 to 31 December 2017.

Our audit approach
Overview

Materiality

− Overall Group materiality: £8.7 million (2016: £9.8 million),

based on 5% of underlying profit before tax.

− Overall Parent Company materiality: £39.7 million (2016: £35
million), based on 1% of total assets. We applied a lower
materiality of £5 million (2016: £5 million) to certain line
items, account balances and disclosures that were in scope
for the audit of the Group Financial Statements.

− In response to the level of historical adjustments raised
within inventory and contract balances, mainly affecting
work in progress and sales reserves we have reduced overall
materiality specifically for these two areas to £5.5 million.

reporting sectors. Of the 58 reporting units 15 were subject
to an audit of their complete financial information due to
their size.

− Specific audit procedures were performed on certain
balances and transactions in respect of other units.

− We visited three out of four overseas locations to directly

supervise the work of component auditors. For all locations
we reviewed work papers and maintained regular dialogue.

Areas of focus

− Revenue and profit recognition on contracts – Group.
− Goodwill and acquired intangible asset impairment

assessments – Group.

− Inventory provisioning – Group.
− Accounting for uncertain tax provisions and recoverability

of deferred tax assets – Group.

− Utilisation or releases of provisions through non-underlying

profit – Group and Parent.

The scope of our audit
As part of designing our audit, we determined materiality and assessed 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.

We gained an understanding of the legal and regulatory framework
applicable to the Group and the industry in which it operates, and considered
the risk of acts by the Group which were contrary to applicable laws and
regulations, including fraud. We designed audit procedures at Group and
significant component level to respond to the risk, recognising that the risk
of not detecting a material misstatement due to fraud is higher than the risk
of not detecting one resulting from error, as fraud may involve deliberate
concealment by, for example, forgery or intentional misrepresentations, or
through collusion. We focused on laws and regulations that could give rise to a
material misstatement in the Group and Parent Company Financial Statements,
including, but not limited to: the Special Security Agreement (SSA) regulation
for the Advanced Electronic Solutions sector, being the most significant
regulatory framework; the Companies Act 2006; Pensions Regulator legislation;
and UK and US tax legislation. Our tests included, but were not limited to:
agreeing the financial statement disclosures to underlying supporting
documentation; review of correspondence with and reports to the regulators;
review of correspondence with legal advisors; enquiries of management;
review of significant components auditors’ work; and review of internal audit
reports in so far as they related to the Financial Statements. There are inherent
limitations in the audit procedures described above and the further removed
non-compliance with laws and regulations is from the events and transactions
reflected in the Financial Statements, the less likely we would become aware
of it.

We did not identify any key audit matters relating to irregularities, including
fraud. As in all of our audits we also addressed the risk of management override
of internal controls, including testing journals and evaluating whether there was
evidence of bias by the Directors that represented a risk of material
misstatement due to fraud.

Key audit matters
Key audit matters are those matters that, in the auditors’ professional
judgement, were of most significance in the audit of the Financial Statements
of the current period and include the most significant assessed risks of material
misstatement (whether or not due to fraud) identified by the auditors, including
those which had the greatest effect on: the overall audit strategy; the
allocation of resources in the audit; and directing the efforts of the
engagement team. These matters, and any comments we make on the results
of our procedures thereon, were addressed in the context of our audit of the
Financial Statements as a whole, and in forming our opinion thereon, and we
do not provide a separate opinion on these matters. This is not a complete list
of all risks identified by our audit.

www.cobham.com

Cobham plcAnnual Report and Accounts 2017Key audit matter

How our audit addressed the key audit matter

Revenue and profit recognition on contracts – Group
Refer to page 58 (Audit Committee Report – Programme watchlist
– Revenue and contract accounting) and page 88 (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 that span
more than one accounting period. These contracts are subject to
a high level of scrutiny by management. In particular, we focused
on complex development and production contracts including
those on aerial refuelling programmes such as KC-46 and A400M.

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 as a result of material
enhancements to the specifications originally assumed under
the contracts. For the contracts detailed above, we focused on:
− The amount of revenue assumed as recoverable from

customer claims which are subject to commercial negotiation;

− The estimation of costs to complete the contract;
− 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;

− 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;

− The recognition of significant revenue milestones which
often involve judgement surrounding the achievement of
those milestones;

− Whether the additional cost contingency meets the definition

for the recognition and measurement of a provision.

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 external
shipping evidence, shipping terms and authorised milestone documentation with customer
acceptance where appropriate. No material misstatements were identified.

We assessed, through our audit of significant contracts, the basis of profit or loss 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, contract terms and accounting standards. We found the
accounting, in all material respects, to be in accordance with accounting standards and
Group policies.

For significant new contracts, we read the key contract terms and for ongoing contracts, we
understood any change clauses or amendments agreed in the year, considering whether any
areas were subject to interpretation or dispute. We looked at the track record of customer
behaviour, and any correspondence, in order to obtain evidence of how terms were being
interpreted. We found the accounting, in all material respects, to be in accordance with our
understanding of customer arrangements.

We challenged the reasonableness of the assumptions behind estimated costs to complete
by meeting with engineering staff to enquire about project estimates, checking the basis
of overhead rates used and, on a sample basis, checking purchase orders for materials. We
also inspected risk registers and the process by which risk was included within the cost to
complete estimate. Where there was insufficient evidence, we reviewed management’s
range of outcomes and prepared an independent range to understand if the estimate was
materiality different from an adverse or favourable position. As part of this work performed,
we check that cost contingency recorded meets the requirements of IAS 37. No material
impacts were identified.

We agreed total contracted revenue to original signed customer contracts, approved
change orders or to evidence of customer discussions and agreements. We evaluated the
reasonableness of estimated revenue through a review of, and discussion about, customer
claims submitted to recover additional costs incurred and considered correspondence
with the customer. No material exceptions were found.

We assessed the recoverability of the assets held on the Balance Sheet by reference to
agreements with customers regarding payment or billing profiles. No material exceptions
were found.

We agreed contract loss provisions recorded through a combination of the procedures
above in respect of the overall outcome anticipated on the contract. No material exceptions
were found.

We read the disclosures relating to key estimates and judgements in these Financial
Statements and are satisfied that the disclosures made were appropriate.

www.cobham.com

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2017Independent Auditors’ Report to the members of Cobham plc continued

Key audit matter

How our audit addressed the key audit matter

Goodwill and acquired intangible asset impairment
assessments – Group
Refer to page 58 (Audit Committee Report – Goodwill and
acquired intangible assets), page 88 (Note 1, Accounting policies,
management judgement and estimation uncertainty – impairment
of goodwill) and pages 105 to 107 (Note 9, Intangible assets).

We assessed management’s impairment testing relating to the ten CGUs with goodwill
balances by obtaining the supporting model and assessing the methodology used and key
assumptions made:
− Future cash flow forecasts: we evaluated the reasonableness of future cash flow forecasts
based on management’s accuracy of forecasting and our knowledge of the businesses;

− Discount rates: to assess the discount rates used in the model, we used an internally

developed range of acceptable discount rates for valuing CGUs, which is based on our
view of economic indicators. All discount rates used fell within the range expected for
all territories; and

− Long term growth rates: we compared the rates applied in the model against our own

internally developed published rates. No inconsistencies were noted.

To assess the Helicopter Services impairment charge, we:
− Compared the future cash flow forecasts to historic performance and considered them
appropriate based on our knowledge of the business, including contract losses in Qatar
and Trinidad during the year;

− We recalculated the impairment charge and confirmed that this had been accounted

for appropriately.

For the remaining CGUs, we performed sensitivity analysis around the key assumptions in
order to ascertain the extent of change in those assumptions required individually or
collectively to result in an impairment of goodwill or acquired intangible assets. For those
business units which were most sensitive, we discussed the basis for these cash flows with
senior management, concluding that these are appropriate with no impairment required.

We obtained evidence that the reversal of the impairment charge in respect of acquired
intangible fixed assets in the Wireless business is compliant with both IAS 36 and IFRS 5 and
has been calculated appropriately. The disclosures in note 9 are considered appropriate.

Management have redefined a CGU to being a Sector. This is considered appropriate
following the completion of Aeroflex integration activities and based on the information
now being provided to, and reviewed by, senior management. This transition is compliant
with IAS 36. We are satisfied with the disclosure provided explaining the change.

Management’s disclosure in note 9 to the Group Financial Statements includes sensitivities at
a Sector level. This is also compliant with IAS 36 which requires disclosure of possible changes
in key assumptions prospectively, during which period the impairment assessment for
goodwill and acquired intangible assets will be monitored at a Sector level.

Through review of the impairments booked and reversed, the disclosures made and the
overall impairment assessment performed by management, we did not identify any
material misstatements.

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, where forecast demands were used in
the assessment, management’s historical forecasting accuracy. In situations where there
was evidence that management forecasts had not been achieved, we assessed whether the
provision had taken account of the likelihood of failure to meet future forecasts.

We also considered whether there was any indication of management bias such as
management overrides to the established methodology.

Management overrides are typically applied in respect of spares held for the servicing of
products on aircraft which have a long service life or where the business has purchased ‘last
time buys’ for components which would no longer be available for purchase. Where overrides
were material, we considered the appropriateness of management’s judgement based on
historical usage and future usage expectations. No material misstatements were identified.

During 2016, an impairment charge of £573.8m was recognised
against goodwill and other intangible assets. A key focus of our
2017 audit was the carrying value of the remaining assets.

Management conducts an annual impairment assessment to test
whether the carrying value of goodwill and acquired intangible
assets exceeds the present value of the cash flows of the Cash
Generating Units (CGUs) to which they relate.

An impairment charge of £33.5m has been recognised against
the Helicopter Services Business Unit. This impairment reflects
lower growth expectations for 2018 onwards following major
contract changes.

As a result of the 2016 impairment assessment, an impairment
charge was recognised against intangible assets in the Wireless
Business Unit. In the 2017 assessment, the future growth
expectations of the business have improved, resulting in the
reversal of this previous impairment.

Amounts relating to the Wireless and AvComm Business Units
have been reclassified as ‘held for sale’ as at 31 December 2017.

Following completion of Aeroflex integration activities and as part
of a wider strategic review, management have redefined a CGU
from having been at a business unit level historically, to now being
at a Sector level, as this is the level at which senior management
now assess the performance of the Group. In this year of transition,
management performed their assessment at a business unit level
before moving to Sector level in order to ensure that necessary
impairments were booked.

Inventory provisioning – Group
Refer to page 58 (Audit Committee Report – Inventory provisions),
page 88 (Note 1, Accounting policies, management judgement and
estimation uncertainty – inventory provisions) and page 107 (Note
12, Inventories).

The nature of some of the Group’s business means that the
products developed can become technically obsolete. There may
be long lead times on the supply of materials which requires the
holding of inventory to meet customer required delivery dates.
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 £465.4m and provisions for
obsolescence of £76.0m on its Balance Sheet. Inventory holdings
and aging remain a particular focus by management.

We focused on this area because inventory provisions include
subjective estimates. They are influenced by assumptions
concerning future realisable value and usage. Some businesses
have experienced lower than expected demand and have had
challenges with revenue forecasting. In addition, the methods used
for this estimate vary between reporting units depending on the
nature of the business and inventory. Furthermore, with the delay
in some of the programmes, the spares inventory is becoming
more aged and is at risk of being damaged or subject to a new level
of conformity.

www.cobham.com

Cobham plcAnnual Report and Accounts 2017Key audit matter

How our audit addressed the key audit matter

We discussed with management the known uncertain tax positions and read
correspondence from tax authorities and external legal counsel on open tax enquiries.

We assessed the adequacy of the Directors’ taxation provisions by considering factors such
as the risk profile of each matter, management’s appetite for settlement and whether the
provision addresses possible penalties and interest.

We met with senior management and management’s expert and challenged the judgements
made in relation to a range of outcomes in respect of open enquiries. We assessed the risk
from tax authorities by comparing management’s assessment against our own views based
on all available correspondence and use of specialists.

We assessed the recoverability of deferred tax assets, comparing the cash flow forecast used
by the Directors in making that assessment against those used for the goodwill impairment
review and viability assessment. We found that the judgements made by management were
within an acceptable range.

We reviewed the disclosures made in respect of tax, in particular around estimates and
uncertainties, as well as contingent liabilities and impact of restatement, and are satisfied
that the disclosures made were appropriate.

We assessed the movements in provisions during the year and obtained evidence for any
releases or utilised amounts.

We reviewed the disclosure made in respect of these movements and the impacts to the
Income Statement, specifically distinguishing between non-underlying and underlying profit.

We performed a look back test for the adjustments made and ensured the utilisation of
the provision was appropriate based on the original nature of the provision.

We challenged any significant releases made in the year and obtained evidence to support
management’s judgement around the basis of the release. We found the accounting, in all
material respects, to be in accordance with accounting standards and Group policies.

Accounting for uncertain tax provisions and
recoverability of deferred tax assets. – Group
Refer to page 58 (Audit Committee Report – Uncertain tax
positions), page 88 (Note 1, Accounting policies, management
judgement and estimation uncertainty – taxation), pages 98 to 101
(Note 6, Taxation) and page 124 (Note 26, Contingent liabilities).

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 a number of centrally held
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 external experts.

The Group has material deferred tax assets, principally in respect
of losses. The Directors apply judgement in establishing whether
deferred tax assets are recoverable.

Utilisation or releases of provisions through non-
underlying profit –Group and Parent Company.
Refer to page 58 (Audit Committee Report – Provisions and
material disputes), page 88 (Note 1, Accounting policies,
management judgement and estimation uncertainty – definitions)
and pages 94 to 96 (Note 2, Underlying measures).

We focused on this area because IFRS does 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 2016, these costs related primarily to the outcome of the closing
Balance Sheet review and were disclosed as exceptional and
business restructuring activity, with provisions being recorded in
the Balance Sheet.

In 2017, we have focused on how these costs unwind and the
correct treatment of utilisation or release to ensure appropriate
classification and disclosure through non-underlying or
underlying profit.

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GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2017Independent Auditors’ Report to the members of Cobham plc continued

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 structure of the Group and the Parent Company, the
accounting processes and controls, and the industry in which they operate.

Of the Group’s 58 reporting units, we performed audits of complete financial
information at 15 reporting units in the UK, Australia, Denmark and France. At
12 US reporting units, we performed audit procedures on certain balances and
transactions (typically including at least revenue and inventory which are areas
of audit focus) rather than an audit of their complete financial information. In
addition to the above, we performed analytical procedures on the remaining
31 reporting units to understand key balances and transactions in the year
and performed additional procedures on any unusual balances identified.

The Group is structured across four reported Sectors, being Advanced
Electronic Solutions, Aviation Services, Communications and Connectivity
and Mission Systems. The Group Financial Statements are a consolidation of
the 58 reporting units within these Sectors, comprising the Group’s operating
businesses and centralised functions. The Advanced Electronic Solutions
Sector operates under an SSA which is required to carry on business with the
US Department of Defence. The SSA places certain restrictions on access to,
and communication of, information outside of the US borders. We planned
our audit to ensure US personnel complete the audit work within the SSA.
We maintained regular dialogue throughout the audit cycle with our US team,
including a face to face meeting at the planning stage to communicate, discuss
and agree the audit plan. We also supervised and reviewed the work performed
through regular dialogue and reviewing their work papers. We agreed the
format and content of communications required. There are seven reporting
units within the SSA that were included in our audit scope. The reporting units
were subject to directed scope procedures, providing reporting to us on
specified financial statement line items including revenue and contract work in
progress, as well as specified procedures on other key areas such as manual
journals and inventory counts. We also performed specific procedures relating
to US taxation.

84% of the Group’s revenue is accounted for by reporting units where we
performed audits of their complete financial information or performed specific
audit procedures over revenue. 45% of the Group’s underlying profit before
taxation is accounted for by the 15 reporting units where we performed audits
of their complete financial information. In combination with the other work
referred to above, together with additional procedures performed at Group
level, including testing of significant journals posted within the Sector and
Group consolidations and significant adjustments made to the Financial
Statements, this gave us the evidence we needed for our opinion on the
Financial Statements as a whole.

Where the work was performed by component 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. We have visited three territories (covering ten in scope reporting units)
during the year, being France, Denmark and the US. We visited France at the
planning stage and met with local management. We visited Denmark at year
end to perform a review of the team’s work and meet local management. We
met with our US team twice, both at the planning stage to discuss and agree
the audit plan, and at year end to review their working papers. We reviewed
the working papers of our Australian team remotely at year end. Finally, we
met regularly with the key audit partner on six other reporting units in the
Communications and Connectivity Sector, who is based in the UK. We
maintained regular dialogue with all component teams throughout the audit.
In addition, members of the Group team lead, or form part of, a number of
significant component teams on the audit, including the two key reporting
units with the aerial refuelling development and production contracts. We
attended clearance calls on all in scope components.

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 on the individual financial statement
line items and disclosures and in evaluating the effect of misstatements, both
individually and in aggregate on the Financial Statements as a whole.

Based on our professional judgement, we determined materiality for the
Financial Statements as a whole as follows:

Group Financial Statements

Overall materiality

£8.7 million (2016: £9.8 million).

How we determined it

5% of underlying profit before tax.

Rationale for
benchmark applied

Underlying profit before tax is defined on page 94.
We believe that underlying profit before tax
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 0.4%.

In response to the level of historical adjustments
raised within inventory and contract balances,
mainly impacting work in progress and sales
reserves, we reduced materiality specifically for
these two areas to £5.5m. This level of materiality
was determined to reflect the level of historical
adjustment for these balances in the prior year and
the continued heightened risk of misstatement.

Parent Company Financial Statements

Overall materiality

£39.7 million (2016: £35.0 million).

How we determined it

1% of total assets.

Rationale for benchmark
applied

We believe that total assets are an appropriate
metric for assessing the Parent Company as it holds
the investments and derivative financial
instruments of the Group.

We applied a lower materiality of £5m to certain
line items, account balances and disclosures that
were in scope for the audit of the Group Financial
Statements.

For each component in the scope of our Group audit, we allocated a materiality
that is less than our overall Group materiality. The range of materiality allocated
across components was between £1 million and £5 million.

We agreed with the Audit Committee that we would report to them
misstatements identified during our audit above £200,000 (Group audit) (2016:
£200,000) and £200,000 (Parent Company audit) (2016: £200,000) as well as
misstatements below those amounts that, in our view, warranted reporting
for qualitative reasons.

www.cobham.com

Cobham plcAnnual Report and Accounts 2017Going concern
In accordance with ISAs (UK) we report as follows:

Reporting obligation
We are required to report if we have
anything material to add or draw
attention to in respect of the Directors’
statement in the Financial Statements
about whether the Directors
considered it appropriate to adopt the
going concern basis of accounting in
preparing the Financial Statements and
the Directors’ identification of any
material uncertainties to the Group’s
and the Parent Company’s ability to
continue as a going concern over a
period of at least 12 months from the
date of approval of the Financial
Statements.
We are required to report if the
Directors’ statement relating to going
concern in accordance with Listing Rule
9.8.6R(3) is materially inconsistent with
our knowledge obtained in the audit.

Outcome
We have nothing material to add or to
draw attention to. However, because
not all future events or conditions can
be predicted, this statement is not a
guarantee as to the Group’s and
Parent Company’s ability to continue
as a going concern.

We have nothing to report.

Reporting on other information
The other information comprises all of the information in the Annual Report
and Accounts other than the Financial Statements and our auditors’ report
thereon. The Directors are responsible for the other information. Our opinion
on the Financial Statements does not cover the other information and,
accordingly, we do not express an audit opinion or, except to the extent
otherwise explicitly stated in this report, any form of assurance thereon.

In connection with our audit of the Financial Statements, our responsibility
is to read the other information and, in doing so, consider whether the other
information is materially inconsistent with the Financial Statements or
our knowledge obtained in the audit, or otherwise appears to be materially
misstated. If we identify an apparent material inconsistency or material
misstatement, we are required to perform procedures to conclude whether
there is a material misstatement of the Financial Statements or a material
misstatement of the other information. If, based on the work we have
performed, we conclude that there is a material misstatement of this other
information, we are required to report that fact. We have nothing to report
based on these responsibilities.

With respect to the Strategic Report and the Directors’ Report, we also
considered whether the disclosures required by the UK Companies Act 2006
have been included.

Based on the responsibilities described above and our work undertaken in the
course of the audit, the Companies Act 2006 (CA06), ISAs (UK) and the Listing
Rules of the Financial Conduct Authority (FCA) require us also to report certain
opinions and matters as described below (required by ISAs (UK) unless
otherwise stated).

Strategic Report and the Directors’ Report
In our opinion, based on the work undertaken in the course of the audit, the
information given in the Strategic Report and the Directors’ Report for the year
ended 31 December 2017 is consistent with the Financial Statements and has
been prepared in accordance with applicable legal requirements.
(CA06)

In light of the knowledge and understanding of the Group and Parent Company
and their environment obtained in the course of the audit, we did not identify
any material misstatements in the Strategic Report and the Directors’ Report.
(CA06)

The Directors’ assessment of the prospects of the Group and of the principal
risks that would threaten the solvency or liquidity of the Group
We have nothing material to add or draw attention to regarding:
− The Directors’ confirmation on page 53 of the Annual Report and Accounts
that they have carried out a robust assessment of the principal risks facing
the Group, including those that would threaten its business model, future
performance, solvency or liquidity;

− The disclosures in the Annual Report and Accounts that describe those

risks and explain how they are being managed or mitigated;

− The Directors’ explanation on page 35 of the Annual Report and Accounts
as to how they have assessed the prospects of the Group, over what period
they have done so and why they consider that period to be appropriate,
and their statement as to whether they have a reasonable expectation
that the Group will be able to continue in operation and meet its liabilities
as they fall due over the period of their assessment, including any
related disclosures drawing attention to any necessary qualifications
or assumptions.

We have nothing to report having performed a review of the Directors’
statement that they have carried out a robust assessment of the principal risks
facing the Group and statement in relation to the longer-term viability of the
Group. Our review was substantially less in scope than an audit and only
consisted of making inquiries and considering the Directors’ process supporting
their statements; checking that the statements are in alignment with the
relevant provisions of the UK Corporate Governance Code (the Code); and
considering whether the statements are consistent with the knowledge and
understanding of the Group and Parent Company and their environment
obtained in the course of the audit.

Other Code Provisions
We have nothing to report in respect of our responsibility to report when:
− The statement given by the Directors, on page 61, that they consider the
Annual Report and Accounts taken as a whole to be fair, balanced and
understandable, and provides the information necessary for the members
to assess the Group’s and Parent Company’s position and performance,
business model and strategy is materially inconsistent with our knowledge
of the Group and Parent Company obtained in the course of performing
our audit;

− The section of the Annual Report and Accounts on page 57 describing

the work of the Audit Committee does not appropriately address matters
communicated by us to the Audit Committee;

− The Directors’ statement relating to the Parent Company’s compliance with
the Code does not properly disclose a departure from a relevant provision
of the Code specified, under the Listing Rules, for review by the auditors.

Directors’ Remuneration
In our opinion, the part of the Directors’ Remuneration Report to be audited
has been properly prepared in accordance with the Companies Act 2006.
(CA06)

www.cobham.com

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2017Independent Auditors’ Report to the members of Cobham plc continued

Appointment
Following the recommendation of the Audit Committee, we were appointed by
the Directors on 1 April 1974 to audit the Financial Statements for the year
ended 31 December 1974 and subsequent financial periods. The period of total
uninterrupted engagement is 44 years, covering the years ended 31 December
1974 to 31 December 2017.

Pauline Campbell
Senior Statutory Auditor
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
1 March 2018

Responsibilities for the Financial Statements
and the audit

Responsibilities of the Directors for the Financial Statements
As explained more fully in the Statement of Directors’ Responsibility set out
on page 75, the Directors are responsible for the preparation of the Financial
Statements in accordance with the applicable framework and for being
satisfied that they give a true and fair view. The Directors are also responsible
for such internal control as they determine is necessary to enable the
preparation of Financial Statements that are free from material misstatement,
whether due to fraud or error.

In preparing the Financial Statements, the Directors are responsible for
assessing the Group’s and the Parent Company’s ability to continue as a going
concern, disclosing as applicable, matters related to going concern and using
the going concern basis of accounting unless the Directors either intend to
liquidate the Group or the Parent Company or to cease operations, or have
no realistic alternative but to do so.

Auditors’ responsibilities for the audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the Financial
Statements as a whole are free from material misstatement, whether due to
fraud or error, and to issue an auditors’ report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that
an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and
are considered material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users taken
on the basis of these Financial Statements.

A further description of our responsibilities for the audit of the Financial
Statements is located on the FRC’s website at: www.frc.org.uk/
auditorsresponsibilities. This description forms part of our auditors’ report.

Use of this report
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.

Other required reporting
Companies Act 2006 exception reporting

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

− 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

− Certain disclosures of Directors’ remuneration specified by law are not

made; or

− The Parent Company Financial Statements and the part of the Directors’
Remuneration Report to be audited are not in agreement with the
accounting records and returns.

We have no exceptions to report arising from this responsibility.

www.cobham.com

Cobham plcAnnual Report and Accounts 2017Financial 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, EPS and specific adjusting items

3. Revenue and segmental information

4. Other income statement disclosures

5. Finance income and costs

6. Taxation

7. Dividends

8. Cash flow from operations

9. Intangible assets

10. Property, plant and equipment

11. Investment properties

12. Inventories

13. Financial instruments

14. Trade and other receivables

15. Non-current assets and disposal groups held for sale

16. Borrowings

17. Trade and other payables

18. Provisions

19. Derivative financial instruments

20. Retirement benefit schemes

21. Financial risk management

22. Share capital

23. Other reserves

24. Share based payments

25. Operating lease arrangements

26. Contingent liabilities

27. Related party transactions

28. Events after the balance sheet date

29. Subsidiaries and other related undertakings

Parent Company Balance Sheet

Parent Company Statement of Changes in Equity

Notes to the Parent Company Financial Statements

101

103

106

107

108

109

110

112

113

114

118

121

122

124

125

129

130

131

www.cobham.com

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2017Consolidated Income Statement
For the year ended 31 December 2017

£m
Revenue
Cost of sales
Gross profit
Operating costs
Operating profit/(loss)
Finance income
Finance costs
Profit/(loss) before taxation
Taxation
Profit/(loss) after taxation for the year

Attributable to:
Owners of the parent
Non-controlling interests

Earnings per ordinary share
Basic
Diluted

EPS for the comparative period has been restated for the impact of the Rights Issue in May 2017.

Consolidated Statement of Comprehensive Income
For the year ended 31 December 2017

£m
Profit/(loss) 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
Hedge accounted derivative financial instruments
Tax effects

Other comprehensive (expense)/income for the year

Total comprehensive income/(expense) for the year

Attributable to:
Owners of the parent
Non-controlling interests

Note

2017
2,052.5
(1,457.9)
594.6
(490.5)
104.1
6.1
(43.3)
66.9
11.9
78.8

78.6
0.2
78.8

3.5p
3.5p

2017
78.8

7.4
–
(1.4)
6.0

(50.4)
0.5
0.9
(0.1)
(49.1)

(43.1)

35.7

35.5
0.2
35.7

2016
1,943.9
(1,567.3)
376.6
(1,155.7)
(779.1)
4.1
(72.9)
(847.9)
52.8
(795.1)

(795.2)
0.1
(795.1)

(45.9)p
(45.9)p

2016
(795.1)

(42.6)
(1.2)
8.9
(34.9)

41.3
1.6
(2.8)
0.4
40.5

5.6

(789.5)

(789.6)
0.1
(789.5)

www.cobham.com

Cobham plcAnnual Report and Accounts 2017
Consolidated Balance Sheet
As at 31 December 2017

£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
Other reserves
Retained earnings
Total equity attributable to owners of the parent
Non-controlling interests in equity
Total equity

Note

2017

2016
(restated)

893.8
380.9
2.4
3.6
64.5
6.1
57.5
25.0
1,433.8

389.4
329.0
7.2
10.4
451.9
171.7
1,359.6

(0.1)
(448.2)
(125.1)
(135.8)
(12.2)
(49.1)
(770.5)

(835.3)
(36.1)
(30.7)
(2.1)
(27.2)
(63.2)
(994.6)

1,028.3

61.7
1,257.9
(8.6)
(284.0)
1,027.0
1.3
1,028.3

1,165.9
422.9
3.6
3.6
66.0
6.1
43.9
19.7
1,731.7

405.3
409.8
3.1
8.5
236.2
–
1,062.9

(60.9)
(440.3)
(180.6)
(141.6)
(42.2)
–
(865.6)

(1,203.5)
(31.5)
(57.3)
(27.6)
(32.2)
(87.0)
(1,439.1)

489.9

44.6
778.3
37.9
(372.0)
488.8
1.1
489.9

Details of the restatement of the 2016 Balance Sheet can be found in note 6.

The financial statements on pages 84 to 128 were approved by a duly appointed and authorised committee of the Board on 1 March 2018 and signed on its
behalf by:

David Lockwood
Directors

www.cobham.com

David Mellors

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2017Consolidated Statement of Changes in Equity
For the year ended 31 December 2017

£m
Total equity at 1 January 2016

Loss for the year
Other comprehensive income/(expense)

Items that will not be reclassified subsequently to profit or loss
Items that may subsequently be reclassified to profit or loss

Issue of shares, net of costs (note 22)
Proceeds on allocation of treasury shares
Dividends (note 7)
Share based payments (note 24)
Transfer of other reserves to retained earnings
Tax effects (note 6)
Foreign exchange adjustments
Total equity at 31 December 2016

Profit for the year
Other comprehensive income/(expense)

Items that will not be reclassified subsequently to profit or loss
Items that may subsequently be reclassified to profit or loss

Issue of shares, net of costs (note 22)
Proceeds on allocation of treasury shares
Share based payments (note 24)
Transfer of other reserves to retained earnings
Total equity at 31 December 2017

Share capital
30.4

Share
premium
301.9

Other
reserves
(note 23)
(0.3)

Total
attributable
to owners of
the parent
908.8

Retained
earnings
576.8

Non-
controlling
interests
0.9

Total equity
909.7

–

–
–
14.2
–
–
–
–
–
–
44.6

–

–
–
17.1
–
–
–
61.7

–

(795.2)

–
–
476.4
–
–
–
–
–
–
778.3

–
40.5
–
–
–
3.8
(5.1)
(1.2)
0.2
37.9

(34.9)
–
–
2.3
(126.1)
–
5.1
–
–
(372.0)

(34.9)
40.5
490.6
2.3
(126.1)
3.8
–
(1.2)
0.2
488.8

–

78.6

–
–
479.6
–
–
–
1,257.9

–
(49.1)
–
–
5.5
(2.9)
(8.6)

6.0
–
–
0.5
–
2.9
(284.0)

6.0
(49.1)
496.7
0.5
5.5
–
1,027.0

0.1

–
–
–
–
–
–
–
–
0.1
1.1

0.2

–
–
–
–
–
–
1.3

(795.1)

(34.9)
40.5
490.6
2.3
(126.1)
3.8
–
(1.2)
0.3
489.9

78.8

6.0
(49.1)
496.7
0.5
5.5
–
1,028.3

www.cobham.com

Cobham plcAnnual Report and Accounts 2017Consolidated Cash Flow Statement
For the year ended 31 December 2017

£m
Cash generated from operations
Tax paid
Interest paid
Interest received
Net cash from operating activities

Cash flows from investing activities
Purchase of property, plant and equipment
Purchase of intangible assets
Capitalised expenditure on intangible assets
Proceeds on disposal of property, plant and equipment
Acquisition of subsidiaries net of cash or debt acquired
(Costs)/proceeds of business divestments
Net cash used in investing activities

Cash flows from financing activities
Issue of share capital
Dividends paid
Dividends paid to non-controlling interests
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

Reconciliation of cash and cash equivalents and net debt

£m
Cash and cash equivalents
Borrowings – current liabilities
Borrowings – non-current liabilities
Net debt at 31 December

Note

2017
282.3
(32.2)
(41.6)
6.7
215.2

(69.0)
(10.8)
–
5.1
(0.3)
(0.5)
(75.5)

496.7
–
(0.1)
0.5
–
(359.6)
137.5

277.2
(61.5)
236.2
451.9

2017
451.9
(0.1)
(835.3)
(383.5)

A reconciliation of the movements in net debt can be found in note 16.

Note 13 includes details of the offsetting of overdrafts with cash and cash equivalents and other financial instruments.

www.cobham.com

2016
226.0
(20.1)
(74.7)
3.5
134.7

(82.8)
(9.1)
(0.3)
6.1
(1.4)
1.0
(86.5)

490.6
(126.1)
–
2.3
9.9
(497.0)
(120.3)

(72.1)
14.3
294.0
236.2

2016
236.2
(60.9)
(1,203.5)
(1,028.2)

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2017Notes to the Group Financial Statements

1. Accounting policies and related information

1.1 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 England, the United Kingdom and its subsidiaries (the Group).

1.3.2 Assumptions and estimation uncertainties
Management considers that there are a number of assumptions concerning the
future and other major sources of estimation uncertainty at the balance sheet
date, which have a significant risk of resulting in a material adjustment to the
carrying amounts of assets and liabilities within the next financial year. Those
key assumptions and estimation uncertainties are as follows:

1.2 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.

These financial statements have been prepared on the going concern basis
under the historical cost convention, unless otherwise stated.

1.3 Management judgement and estimation uncertainty
The preparation of financial statements in conformity with IFRS requires the
use of judgements and estimates that affect the application of accounting
policies and reported amounts of assets, liabilities, revenue and expenses.

These judgements and estimates 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 judgements and estimates, 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.

1.3.1 Significant judgements in applying accounting policies
The following are the judgements, apart from those involving estimations,
that the Directors have made in the process of applying the Group’s accounting
policies and that have the most significant effect on the amounts recognised
in the financial statements:

Consolidation of Cobham Advanced Electronic Solutions Sector
The Cobham Advanced Electronic Solutions Sector operates under an SSA
with the US Government due to the nature of its work on classified US
Department of Defense (DoD) programmes. The results of this Sector
have been consolidated based on a judgement that, whilst the day to day
operation of this Sector is managed by the SSA Board, the Cobham plc
Board retains the right to variable returns and the ability to affect those
returns. Further details can be found in the Corporate Governance section
on page 51;

Classification of assets as held for sale
It is considered that the carrying amount of the assets and liabilities of the
AvComm and Wireless test and measurement businesses will be recovered
through a sale transaction rather than through continuing use, and these
have therefore been classified as held for sale at 31 December 2017.
Following the announcement of the divestment on 2 February 2018, the
Directors believe it is highly probable that the sale will be completed within
a year of the balance sheet date;

c. Revenue recognition – milestone recognition

The recognition of significant revenue milestones which often involve
judgement surrounding the achievement of those milestones; and

d. Capitalisation of development costs

The Group undertakes significant levels of development work which is
largely expensed to the Income Statement. Judgement is exercised in
determining whether the criteria for capitalisation as described in IAS 38,
Intangible Assets are met; in particular in applying the appropriate level of
caution to the requirement for the product to be technically feasible and
capable of generating a financial return. If these tests were met, further
costs would be capitalised as an intangible asset until the intangible asset
was readily available for use and would then be amortised.

a. Long term contract provisions (note 18)

Recognition and measurement of onerous contract provisions includes
estimates of the costs to complete the contracts, the outcome of
negotiations with customers and the amounts recoverable under
these contracts;

b. Impairment of goodwill and intangible assets (note 9)
Determination of the value in use of Cash Generating Units (CGUs) as

assessed in relation to the annual review of goodwill and any subsequent
impairment of goodwill and intangible assets, or reversal of previously
impaired intangible assets;

c. Inventory provisions (note 12)

Recognition and measurement of provisions for obsolete, slow moving
and defective items of inventory;

d. Uncertain tax positions (note 6)

Recognition and measurement of amounts provided in respect of
uncertain tax positions included within net current tax payables in the
Balance Sheet; and

e. Pension assets and liabilities (note 20)
Assumptions are made in assessing the costs and present value of the
pension assets and liabilities, which include the discount rate, inflation
and mortality rates.

1.4 Underlying measures (note 2)
Definitions and a description of the use of non-GAAP alternative performance
measures can be found in note 2.

1.5 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 53.

The Group reports four operating segments whose revenue and results are
reported to the Board. These are the Communications and Connectivity,
Mission Systems, Advanced Electronic Solutions and Aviation Services Sectors.
All operating segments meet the definition of reportable segments as defined
in IFRS 8. Costs of the corporate head office and Group functions are allocated
across the operating segments. The principal activities of these segments are
described on pages 20 to 27.

The Board assesses the trading performance of operating segments based on
revenue and underlying operating profit as defined in note 2. Finance income,
finance costs and taxation are not segmented and are reviewed by the Board
on a consolidated basis. 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.

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Cobham plcAnnual Report and Accounts 2017

1.6 Principal accounting policies
The principal accounting policies, which have been consistently applied unless
otherwise stated, are as set out below.

1.6.1 Basis of consolidation
The Group Financial Statements include the financial statements of the Parent
Company, Cobham plc, and of all its subsidiaries.

Subsidiaries are all entities over which the Group has control, which is defined
as the right to variable returns and the ability to affect those returns.
Subsidiaries are fully consolidated from the date on which control is transferred
to the Group until the date that control ceases. Joint ventures and associates
are not consolidated but are accounted for using the equity method.

All intra-group transactions, balances, income and expenses are eliminated
on consolidation.

As noted in section 1.3.1 above, the consolidation of the Cobham Advanced
Electronic Solutions Sector is the subject of a significant judgement.

1.6.2 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 Income Statement.

For consolidation purposes, the assets and liabilities of foreign operations
are translated at closing exchange rates. Income statements of such
undertakings are consolidated at average rates of exchange as an
approximation for actual rates during the year. Exchange differences arising
on these translations are accounted for in the translation reserve in Other
Comprehensive Income (OCI). On divestment, these exchange differences
are reclassified from the translation reserve to the Income Statement.

1.6.3 Revenue recognition
Revenue is measured at the fair value of the right to consideration, net of
returns, other allowances, value added tax and other sales taxes.

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 in accordance with contract
terms, 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. For
customer funded development programmes, revenue is usually recognised
based on the value attributed to completed performance milestones, net of
any amounts expected to be repaid to the customer arising from penalties or
claims.
Margin is recognised based on the estimated total costs and revenues from the
contract, taking into account amounts expected to be incurred and recovered
on contract variations and modifications.

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.

1.6.4 Taxation including deferred taxation (note 6)
The tax expense is the sum of current tax and deferred tax. 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 tax is also dealt with in OCI or in
equity respectively.

Current tax is provided at the amounts expected to be paid, 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. It 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.

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.

1.6.5 Intangible assets (note 9)
Goodwill
Goodwill arises on business combinations and represents the excess of the fair
value of consideration transferred over the fair value of the Group’s share of the
identifiable net assets acquired. Goodwill 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.

On divestment of a business the attributable amount of goodwill is included
in the determination of the profit or loss on divestment.

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.

These intangible assets are amortised over the asset’s estimated useful life
on a straight-line basis as follows:

Customer relationships
Technology based assets
Development costs
Order book and trade names
Software and other

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.

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GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2017Notes to the Group Financial Statements continued

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 it is then amortised as described above. All
development costs not capitalised are written off as incurred together
with all research costs.

For customer funded research and development projects, costs are initially
recognised within inventory as work in progress, to the extent that they are
considered recoverable, until the criteria of the revenue recognition accounting
policy are met.

1.6.6 Property, plant and equipment (note 10)
Freehold and leasehold land and buildings, plant and machinery, and fixtures,
fittings, tools and equipment are held at historic cost less accumulated
depreciation and any recognised impairment losses. Cost comprises the
purchase price and any costs directly attributable to the asset.

All property, plant and equipment other than land and assets under
construction is depreciated on a straight-line basis to the estimated residual
values over the estimated useful lives. These lives are as follows:

Freehold buildings
Leasehold properties
Plant and machinery
Fixtures, fittings, tools and equipment

50 years
Period to next break clause
3 to 15 years
3 to 15 years

Estimated residual values and the estimated useful lives are reviewed annually
and adjusted where necessary. Freehold land is not depreciated, and is
reviewed for impairment at least annually.

Assets under construction are held at cost and transferred to the appropriate
category of property, plant and equipment once construction is complete and
they enter into service. They are depreciated from this point in accordance
with the policies described above.

Assets held under finance leases are depreciated over the term of the
relevant lease.

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.

1.6.7 Investment properties (note 11)
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.

1.6.8 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.
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
operating costs in the Income Statement.

An impairment loss, other than arising on goodwill, is reversed only after a
change in the estimates used to assess the 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 operating costs in the Income Statement.

1.6.9 Leasing (note 25)
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.

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.

1.6.10 Inventories (note 12)
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.

1.6.11 Non-current assets and disposal groups held for sale (note 15)
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 further 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.

1.6.12 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 and 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
values of non-financial assets and liabilities, which includes net assets classified
as held for sale, 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.
These measurements all fall within Level 2 of the IAS 39 fair value hierarchy.

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.

There have been no changes to the valuation techniques used during the year.
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.

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Cobham plcAnnual Report and Accounts 20171.6.13 Financial instruments (note 13)
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 and are initially recognised at fair value at trade date. Subsequent
measurement is dependent upon the classification of the instrument which is
determined at initial recognition with reference to the purpose for which the
instruments were acquired and re-evaluated at each reporting date.

All financial assets and liabilities are classified as current or non-current
dependent upon the maturity date of the instruments. 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.

Financial assets (note 13)
Assets held at fair value through profit or loss are those categorised as held
for trading under IAS 39 and 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
include trade and other receivables, and cash and cash equivalents. Subsequent
to initial recognition, assets categorised as loans and receivables are carried at
amortised cost using the effective interest method.

The effective portion of changes in fair value is recognised in OCI through
the hedge reserve and the gain or loss relating to the ineffective portion is
recognised immediately in the Income Statement. Amounts accumulated
in OCI are reclassified to finance income or finance costs in the Income
Statement in the periods when the hedged item affects profit or loss.

The majority of foreign exchange contracts entered into to mitigate
foreign exchange impacts of trading in non-functional currencies and
inflation swaps entered into to mitigate inflation risks are not accounted for
using hedge accounting.

Foreign currency borrowings are also 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 net investment hedges. Where net investment hedging applies,
the borrowings are designated as fair value hedges of the foreign currency risk
attributable to the foreign equity investment and the exchange differences
arising 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.

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.

Where hedge accounting is not applied, the movements in fair value of the
derivative instruments are included in the Income Statement within operating
costs. The fair value of such derivatives is classified as a current or non-current
asset or liability dependent upon the maturity date of the financial instrument.

None of the Group’s material financial assets fall into the held to maturity
category of IAS 39, which are non-derivative financial assets with fixed
maturity dates that the Group intends to hold to maturity.

Financial liabilities (note 13)
Financial liabilities are categorised as held for trading under IAS 39 and are
subsequently held at fair value through profit or loss, or other liabilities, which
are held at amortised cost using the effective interest method. Derivative
financial instruments are categorised as held for trading unless they are
designated as hedges.

Trade and other receivables (note 14)
Trade and other receivables are stated at their amortised cost, reduced 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
by reference to past default experience. The balance may be written off in full,
generally where receivables are in excess of 12 months old. Impairments are
charged to operating costs in the Income Statement.

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
Cash Flow Statement.

Bank borrowings (note 16)
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, are accounted for on an accruals basis and charged to the Income
Statement as incurred. Premiums payable on settlement or redemption and
direct issue costs are capitalised and amortised over the period of the facility.
Borrowing costs that are directly attributable to relevant property, plant and
equipment are capitalised as part of the cost of that asset.

Trade payables (note 17)
Trade payables do not carry any interest and are stated at their nominal value.

Derivative financial instruments and hedge accounting (note 19)
Interest rate swaps and a limited number of specific foreign exchange
contracts are designated as cash flow hedges and hedge accounting is applied.

1.6.14 Provisions (note 18)
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 estimate 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.

Provisions for claims made against the Group and commitments made under
performance guarantees are recognised at management’s best estimate of
the expenditure required to settle the Group’s liabilities.

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 are discounted at an appropriate risk free rate when the impact
is material.

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GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2017Notes to the Group Financial Statements continued

1.6.15 Retirement benefit schemes (note 20)
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 in the Income
Statement. The interest on net assets or liabilities is shown within finance
income and costs. Actuarial remeasurements are recognised in OCI.

Defined benefit schemes are funded, with the assets of the scheme held
separately from those of the Group, in separate trustee administered funds.
Pension scheme assets are measured at fair value and liabilities are measured
on an actuarial basis using the projected unit method and discounted at a rate
equivalent to the current rate of return on a high quality corporate bond of
equivalent currency and term to the scheme liabilities. The actuarial valuations
are obtained at least triennially and are updated at each balance sheet date.
The resulting net defined benefit asset or liability is presented separately
on the Balance Sheet.

For defined contribution schemes, contributions are charged to the Income
Statement as they fall due.

1.6.16 Treasury shares (note 22)
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.

1. 6.17 Share based payments (note 24)
For grants made under the Group’s equity settled share based payment
schemes, amounts which reflect the fair value of awards at the time of grant
are charged to the Income Statement over the relevant vesting periods, taking
into account management’s 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.

1.7 Current and future accounting developments
No new standards are required to be adopted from 1 January 2017.

In September 2017 the IFRS Interpretations Committee issued an agenda
decision on interest and penalties related to income taxes. This decision
clarified that entities do not have a policy choice between applying IAS 12,
‘Income taxes’ and applying IAS 37, ‘Provisions, contingent liabilities and
contingent assets’ to interest and penalties related to income taxes. As a
consequence the Group has reassessed its treatment of interest and penalties
related to its global uncertain tax positions as presented in the 2016 Annual
Report and Accounts. Details of the restatement arising from this change can
be found in note 6.

The following amendments have been adopted with effect from
1 January 2017:
− Amendments to IAS 7, Disclosure Initiative. These amendments require
disclosure of changes in liabilities arising from financing activities.
As a result, the reconciliation of movements in net debt in note 16
has been enhanced;

− Amendments to IAS 12, Recognition of Deferred Tax Assets for

Unrealised Losses. These amendments clarify how an entity should
evaluate whether there will be sufficient taxable profits against which it
can utilise a deductible temporary difference. The Group already assesses
the sufficiency of future taxable profits in a manner consistent with
these amendments and hence the adoption of this amendment has
had no impact; and

− Annual Improvements 2014-2016 cycle have been adopted with
effect from 1 January 2017. No changes to previously published
accounting policies or other adjustments were required on the
adoption of these amendments.

A number of new standards and amendments have been published that are
mandatory for future accounting periods:

IFRS 9, Financial Instruments
IFRS 9 is effective from 1 January 2018. In summary, it has an impact on
three areas:
− Classification and measurement – the rules based approach of IAS 39 is
replaced by a principles based approach which refers to the asset’s cash
flow characteristics and the business model in which it is held;

− Impairment of financial assets – this moves to a more forward looking

expected loss model; and

− Hedge accounting – the changes align the accounting treatment with the

Company’s risk management activities.

As a result of the adoption of this standard, the measurement basis for most
of the Group’s financial assets will be unchanged, although the classification
and corresponding disclosures of financial assets in the 2018 Annual Report and
Accounts will be impacted. The changes to impairment and hedge accounting
will not have a material impact on the results of the Group. The valuation of
the Parent Company’s minority shareholdings in two Air Tanker companies
(as detailed in note 13) will, however, be impacted.

Cobham holds 13.3% of the equity of AirTanker Holdings Limited and 5% of
AirTanker Services Limited. These shareholdings, together with the governance
structure of the entities, are not considered to provide significant influence and
hence the investments are currently accounted for as trade investments,
categorised as available for sale. They are held at a cost of £6.1m in accordance
with IAS 39, Financial Instruments. Under IFRS 9, these investments must be
held at fair value, using a present value methodology.

The provisional impact on the Balance Sheet as at 1 January 2018 is to increase
investments by £39m, with a potential increase in deferred tax liabilities of £7m,
and a corresponding increase to reserves.

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Cobham plcAnnual Report and Accounts 2017IFRS 15, Revenue from Contracts with Customers and clarifications
The Group will adopt IFRS 15, Revenue from Contracts with Customers,
from 1 January 2018. IFRS 15 introduces a five step model to be applied to
all contracts with customers when determining accounting for revenue. In
addition a number of new disclosures will be required. Upon adoption of IFRS
15 in 2018 comparatives will be restated using the fully retrospective approach.

Contracts related to the sale of short-cycle catalogue items, mostly seen in the
Communications and Connectivity Sector will not be significantly impacted by
IFRS 15 and revenue will typically continue to be recognised at a point in time
based on when control of the product passes to the customer.

IFRS 16, Leases
IFRS 16, effective from 1 January 2019, requires all leases to be recognised on
the Balance Sheet. Broadly the Group will recognise leases currently treated as
operating leases, disclosed in note 25, as a lease liability and a right-to-use asset,
after adjusting for extension periods that are reasonably certain to be taken
and discounting using the rate implicit in the lease or the incremental cost
of borrowing.

The total operating lease cost, currently expensed to the Income Statement
as incurred will be split into a financing element and an operating element.
The financing element will create a front loaded expense in finance costs.
Additional disclosures will be required to support the new accounting requirements.

Most of the revenue in Aviation Services is generated from providing services
to customers. Revenue is recognised over time as the services are enjoyed.
This is consistent with IFRS 15 and there will not be a significant impact on this
Sector on the adoption of the new standard.

Management are currently assessing the impact of adopting this standard,
and are also considering which transitional method will be most appropriate
for the Group.

Other changes
There are also a number of amendments to existing standards including Annual
Improvements and interpretations which, once endorsed by the EU, will be
effective from 1 January 2018 or later years.

None of these are expected to have an impact on the Group’s financial reporting.

Within the Mission Systems Sector there are currently a number of long-term
development programmes. For these contracts revenue is recognised based
upon the fair value of work performed to date assessed with reference to
completed contract milestones. Under IFRS 15, revenue for these contracts will
be recognised over time 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.

Mission Systems also generate revenue through the sale of products. Some of
these products are customer specific and therefore may have no alternate use.
For these contracts there is usually a right to payment and therefore revenue
will be recognised over time. Progress in completing performance obligations
will typically be measured based on cost incurred as a percentage of total
expected cost.

The Group has a number of contracts with government bodies, in particular
within the Advanced Electronic Solutions Sector, by which control is transferred
to the customer as the product is being manufactured or as the services are
being provided. For these contracts revenue will be recognised over time,
typically using cost as the basis of measuring progress. For ‘cost-plus’ contracts
(typically with government departments and agencies), revenue will continue
to be recognised to the extent of reimbursable costs incurred, plus a
proportionate amount of the estimated fee earned.

IFRS 15 will change revenue recognition methodologies for longer term
contracts in the Advanced Electronic Solutions Sector and for products
where there is no alternate use and an enforceable right to payment. Currently
revenue for some of these contracts is recognised on a contractual milestone
basis, or at a point in time on shipment or delivery to the customer.

A detailed review of contracts impacted by IFRS 15 has been undertaken
and the provisional impact on the Balance Sheet as at 31 December 2016 is
a decrease to working capital of £17m, a decrease in provisions of £21m, and
a decrease in other Balance Sheet items of £4m resulting in no net impact
on reserves.

The impact on 2017 revenue is an increase of approximately £41m, with an
increase in operating profit of approximately £3m.

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GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2017Notes to the Group Financial Statements continued

2. Underlying measures, EPS and specific adjusting items

Use of underlying measures
To assist with the understanding of earnings trends, the Group has included within its published financial statements non-GAAP alternative performance
measures including underlying operating profit and underlying profit.

The non-GAAP measures used are not defined terms under IFRS and therefore may not be comparable to similar measures used by other companies.
They are not intended to be a substitute for, or superior to, GAAP measures.

Management uses underlying measures to assess the operating performance of the Group, having adjusted for specific items as defined below. They form
the basis of internal management accounts and are used for decision making including capital allocation and a subset also forms the basis of internal incentive
arrangements. By using underlying measures in our segmental reporting, this further ensures readers of the financial statements can recognise how incentive
performance is targeted. Underlying measures are also presented in this report because the Directors believe they provide additional useful information to
shareholders on comparative trends over time. Finally, this presentation allows for separate disclosure and specific narrative to be included concerning the
adjusting items; this helps to ensure performance in any one year can be more clearly understood by users of the financial statements.

Definitions of underlying measures
All underlying measures include the operational results of all businesses including those held for sale until the point of sale. These definitions are applied
consistently on a year to year basis.

Underlying operating profit
Underlying operating profit is defined as operating profit from continuing operations excluding the impacts of business acquisition and divestment related
activity and prior periods’ business restructuring costs as detailed below. Also excluded are changes in the marking to market of non-hedge accounted derivative
financial instruments, gains and losses arising on dividend related foreign exchange contracts and other items deemed by the Directors to be of a non-operating
nature including the impairment of intangible assets.

Underlying profit
Underlying profit before taxation is defined as underlying operating profit less net underlying finance costs, which exclude business acquisition and divestment
related items and specific finance costs.

Income Statement including underlying results

£m
Revenue
Cost of sales
Gross profit
Operating costs
Operating profit/(loss)
Finance income
Finance costs
Profit/(loss) before taxation
Taxation
Profit/(loss) after taxation for the year

Earnings per ordinary share

£m
Profit/(loss) after taxation for the year
Less amount attributable to non-controlling interests
Earnings attributable to owners of the parent

Weighted average number of shares (million)
Basic EPS

Weighted average number of shares (million)
Effect of dilutive securities (million)
Diluted weighted average number of shares (million)
Diluted EPS

Specific
adjusting
items
–
–
–
(106.2)
(106.2)
–
–
(106.2)
51.7
(54.5)

Specific
adjusting
items
(54.5)
–
(54.5)

2017

Total
2,052.5
(1,457.9)
594.6
(490.5)
104.1
6.1
(43.3)
66.9
11.9
78.8

2017

Total
78.8
0.2
78.6

2,231.8
3.5p

2,231.8
3.5
2,235.3
3.5p

Underlying
1,943.9
(1,358.6)
585.3
(360.3)
225.0
4.1
(53.9)
175.2
(39.6)
135.6

Underlying
135.6
0.1
135.5

1,732.2
7.8p

1,732.2
2.0
1,734.2
7.8p

Specific
adjusting
items
–
(208.7)
(208.7)
(795.4)
(1,004.1)
–
(19.0)
(1,023.1)
92.4
(930.7)

Specific
adjusting
items
(930.7)
–
(930.7)

2016

Total
1,943.9
(1,567.3)
376.6
(1,155.7)
(779.1)
4.1
(72.9)
(847.9)
52.8
(795.1)

2016
(restated)

Total
(795.1)
0.1
(795.2)

1,732.2
(45.9)p

1,732.2
–
1,732.2
(45.9)p

Note Underlying
2,052.5
(1,457.9)
594.6
(384.3)
210.3
6.1
(43.3)
173.1
(39.8)
133.3

Underlying
133.3
0.2
133.1

2,231.8
6.0p

2,231.8
3.5
2,235.3
6.0p

Potentially dilutive securities are unvested awards under the Group’s share based payment schemes described in note 24. When losses are made, EPS is not
impacted by any potential dilution.

www.cobham.com

Cobham plcAnnual Report and Accounts 2017Basic and diluted EPS figures for the comparative period have been restated and adjusted by the bonus factor of 1.15 to reflect the bonus element of the May
2017 Rights Issue, in accordance with IAS 33, Earnings per Share. Amounts as originally stated were (52.8)p basic and diluted EPS, and 9.0p basic and diluted
underlying EPS.

Details of specific adjusting items
The specific adjusting items excluded from underlying profit can be analysed as follows:

£m
Cost of sales
Revisions of the carrying values of other assets
Estimates of fixed price contract profitability
Assessment of legal and other provisions

Operating costs
Amounts related to prior periods restructuring programmes
Derivative financial instruments
Business acquisition and divestment related items

Amortisation of intangible assets arising on business combinations
(Profit)/loss on divestments
Other M&A related costs
Impairment of goodwill and other intangible assets
Reversal of impairment of intangible assets

Other items provided at 31 December 2016

Adjustments to revisions of the carrying values of other assets
Adjustments to the assessment of legal and other provisions

Finance costs
Non-underlying finance costs – make whole payments

Taxation
Tax on specific adjusting items

Note

2017

–
–
–
–

4.7
(28.9)

138.9
(1.1)
0.3
33.5
(31.8)

(1.4)
(8.0)
106.2

–

(51.7)

2016

24.1
179.1
5.5
208.7

(8.7)
39.3

161.2
1.3
0.4
573.8
–

9.2
18.9
795.4

19.0

(92.4)

Explanation of specific adjusting items
Business acquisition and divestment related items
The Group has been acquisitive over time and also divests businesses in accordance with its strategy. Accounting adjustments that arise as a result of business
combinations and divestments are not considered to result from the underlying business activity and have therefore been excluded from underlying results.

These adjustments include the amortisation of intangible assets arising on business combinations, gains or losses arising on business divestments, adjustments
to businesses held for sale, the writing off of the pre-acquisition profit element of inventory written up on acquisition, revaluation gains and losses arising on the
original equity interests on stepped acquisitions, other direct costs associated with business combinations and terminated divestments, and adjustments to
contingent consideration related to previously acquired businesses.

Amortisation of intangible assets arising as a result of the purchase price allocation on business combinations, such as customer lists, technology based assets
and order book and trade names, is not included in underlying measures. Amortisation of internally generated intangible assets such as software and
development costs is included within underlying measures.

Likewise impairments of goodwill and other intangible assets arising on business combinations, together with any reversal of impairment of intangible assets,
are treated as specific adjusting items as these assets arose from business acquisitions in prior periods.

Other M&A related costs reflect the finalisation of costs related to acquisitions and divestments in prior years.

Amounts related to prior periods restructuring programmes
Amounts related to prior periods restructuring programmes were deemed as incremental to normal operations. These costs relate to the integration of the
Aeroflex businesses acquired in 2014, specifically in respect of the IT integration and remediation costs resulting from this acquisition. Where restructuring
costs are incurred as a result of the ongoing business activity, such costs are included within operating costs and are not excluded from underlying results.

Derivative financial instruments
The impact of derivative financial instruments excluded from underlying results includes changes in the marking to market of non-hedge accounted derivative
financial instruments. These amounts relate to foreign currency exchange contracts and would not impact operating results had the Group chosen to comply
with IAS 39 requirements to enable these contracts to be hedge accounted. Also included are gains and losses arising on dividend related foreign exchange
contracts. As dividend cash flows do not impact operating results, the movement in the fair value of foreign exchange contracts being used to manage the
currency risks arising are excluded from underlying results.

www.cobham.com

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2017

Notes to the Group Financial Statements continued

Other items
In 2016 additional items which were excluded from underlying results due to their unusual size and incidence arose out of the January 2017 Balance Sheet review.
The impact of these items was much larger than would normally be expected in any individual accounting period and they reflected commercial events that were
not expected to repeat. They included revisions to the carrying value of assets, changes in estimates of fixed price contract profitability and the assessment of
legal and other provisions.

Adjustments to revisions of the carrying value of other assets provided at 31 December 2016 relate to a provision against aged receivables which was considered
doubtful at 31 December 2016 but which has been recovered during the first half of the year ended 31 December 2017. The release of this provision has been
treated as an adjusting item consistent with the treatment of the original provision.

Adjustments to the assessment of legal and other provisions relate to provisions made at 31 December 2016 which have been reassessed during 2017.
These provision releases have been treated as an adjusting item consistent with the treatment of the original provisions.

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

2017
1,508.8
543.7
2,052.5

2016
1,445.0
498.9
1,943.9

Revenue from services includes service contracts in the Aviation Services Sector together with logistics support, maintenance and repairs in other Sectors.

Operating segments

£m
Communications and Connectivity
Mission Systems
Advanced Electronic Solutions
Aviation Services
Head office, other activities and elimination of inter-segment items
Total Group
Interests in joint ventures and associates
Unallocated liabilities
Total net assets

Revenue

2016
690.2
386.4
511.6
357.2
(1.5)
1,943.9

2017
700.7
419.0
568.4
366.6
(2.2)
2,052.5

Underlying
operating profit
2016
(restated)
58.2
60.0
66.2
40.6
–
225.0

2017
69.0
55.2
63.3
22.8
–
210.3

Segment net assets
2016
(restated)
573.7
196.3
686.1
276.3
37.5
1,769.9
3.6
(1,283.6)
489.9

2017
523.0
206.2
583.4
222.2
13.8
1,548.6
3.6
(523.9)
1,028.3

The segmental analysis of underlying operating profit for 2016 as shown above has been restated with the effect of eliminating the net underlying operating
profit previously reported as head office and other activities. The Directors consider that the revised allocation, whereby all costs of the corporate head office
and Group functions are allocated across the operating segments, more fairly represents the underlying performance of the Group and its Sectors. Details of
the restatement of the 2016 segment net assets can be found in note 6.

Underlying operating profit is reconciled to the profit/(loss) before taxation as follows:

£m
Underlying operating profit
Specific adjusting items included within

Cost of sales
Operating costs
Net finance costs
Profit/(loss) before taxation

Note

2017
210.3

–
(106.2)
(37.2)
66.9

2016
225.0

(208.7)
(795.4)
(68.8)
(847.9)

www.cobham.com

Cobham plcAnnual Report and Accounts 2017

Depreciation of property, plant and equipment, investment properties and amortisation of internally generated intangibles included in the calculation
of underlying operating profit can be analysed by segment as follows:

£m
Communications and Connectivity
Mission Systems
Advanced Electronic Solutions
Aviation Services
Head office and other activities
Total Group

2017
15.2
6.8
16.0
37.6
9.4
85.0

2016
16.8
5.9
15.4
33.5
8.9
80.5

Details of employees analysed by operating segment can be found in note 4.

Geographical information
Revenue from external customers analysed by their geographic location, irrespective of the origin of the goods and services, is shown below; non-current assets
are analysed by the physical location of the assets and exclude financial instruments and deferred tax assets.

£m
USA
UK
Other EU
Australia
Rest of the world

2017
1,028.8
188.3
337.5
229.5
268.4
2,052.5

Revenue
2016
941.9
185.2
312.1
213.9
290.8
1,943.9

2017
647.3
172.1
294.8
146.2
20.3
1,280.7

Non-current assets
2016
862.0
269.6
289.6
151.4
23.4
1,596.0

The largest component of revenue from customers located in the rest of the world is £193.9m (2016: £195.1m) from customers in Asia including the Middle East.
The balance of this geographic location includes South America, Africa, and non EU European countries. Revenue from customers in individual countries within
the EU (except the UK) and the rest of the world is not considered to be individually material.

4. Other income statement disclosures

Costs include the following:

£m
Materials costs within cost of sales
Restructuring costs included within underlying profit
Amounts related to prior periods restructuring programmes excluded from underlying profit (note 2)
Company funded research and development

Employment costs and employee numbers
The aggregate employment costs are as follows:

£m
Wages and salaries
Social security costs
Pension costs
Share based payments

Employee numbers, analysed by segment, are as follows:

Communications and Connectivity
Mission Systems
Advanced Electronic Solutions
Aviation Services
Head office and other activities
Total Group

www.cobham.com

Note

20
24

Average number of employees
2016
3,561
1,588
3,103
2,316
330
10,898

2017
3,300
1,682
3,202
2,181
371
10,736

2017
645.4
7.5
4.7
121.9

2017
644.9
51.6
38.1
5.5
740.1

2017
3,197
1,774
3,393
2,072
377
10,813

2016
615.1
6.3
(8.7)
123.9

2016
614.2
44.9
35.1
3.8
698.0

As at 31 December
2016
3,429
1,618
3,068
2,240
337
10,692

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2017

Notes to the Group Financial Statements continued

Compensation of key management personnel
The remuneration of the Group Executive Committee (as referred to on page 51) during the year was as follows:

£m
Salaries and short term employee benefits
Post-employment benefits
Termination benefits
Share based payments

2017
7.9
0.3
1.8
1.1
11.1

Audit fees
During the year the Group obtained the following services from the Company’s auditors, PricewaterhouseCoopers LLP and its associates:

£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 assurance services
Fees payable for other services

Total fees payable to 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

2017
1.0
1.1
2.1

–
–
0.2
0.2

2.3

2017
3.9
2.2
6.1

(38.3)
(2.3)
(2.7)
(43.3)

(37.2)

Note

2016
6.3
0.1
1.5
0.5
8.4

2016
1.4
1.1
2.5

0.3
0.2
0.3
0.8

3.3

2016
0.9
3.2
4.1

(51.9)
(1.8)
(19.2)
(72.9)

(68.8)

Other finance expense for 2016 includes £19.0m of make-whole fees payable in connection with the early repayment of fixed term borrowings following the
June 2016 Rights Issue. These costs are excluded from underlying earnings.

6. Taxation

Tax included in Income Statement

£m
Charge for the year
Adjustments to tax charge in respect of prior years
Current tax

Credit for the year
Impact of change in tax rates
Adjustments to tax charge in respect of prior years
Deferred tax

Total tax credit for the year

2017
22.0
–
22.0

(39.9)
2.7
3.3
(33.9)

(11.9)

2016
45.1
4.5
49.6

(107.6)
5.0
0.2
(102.4)

(52.8)

www.cobham.com

Cobham plcAnnual Report and Accounts 2017

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 for the year
includes a credit of £8.6m (2016: credit £44.3m) for the UK.

The total tax credit for the year can be reconciled to the accounting result as follows:

£m
Profit/(loss) before tax
Tax thereon at the UK income tax rate of 19.25% (2016: 20%)
Goodwill impact
Effect of differences in overseas tax rates
Impact of tax treatment of divestments
Impact of change in tax rates
Expenditure qualifying for additional R&D tax relief
Adjustments to tax charge in respect of prior years
Impact of other items
Total tax credit for the year
Effective tax rate

Details of specific adjusting items can be found in note 2.

Specific
adjusting
items
(106.2)
(20.4)
2.7
(15.1)
(11.9)
–
–
–
(7.0)
(51.7)

Underlying
173.1
33.3
–
8.2
–
2.7
(1.9)
3.3
(5.8)
39.8
23.0%

2017

Total
66.9
12.9
2.7
(6.9)
(11.9)
2.7
(1.9)
3.3
(12.8)
(11.9)
(17.8%)

Underlying
175.2
35.0
–
4.0
–
5.0
(1.3)
4.7
(7.8)
39.6
22.6%

Specific
adjusting
items
(1,023.1)
(204.6)
106.1
(12.2)
5.6
–
–
–
12.7
(92.4)

2016

Total
(847.9)
(169.6)
106.1
(8.2)
5.6
5.0
(1.3)
4.7
4.9
(52.8)
6.2%

Impact of other items primarily relates to non-taxable interest and movements in tax risk provisions. Adjustments to tax charge in respect of prior years arise from
differences in the filed tax returns compared to the estimates made in December 2016.

Tax included in OCI

£m
Items that will not be reclassified subsequently to profit or loss
Actuarial gain/(loss) on retirement benefit obligations
Actuarial loss on other retirement benefit obligations

Items that may subsequently be reclassified to profit or loss
Hedge accounted derivative financial instruments

Tax included in equity

£m
Share based payments

2017

1.4
–
1.4

0.1

2017
–

2016

(8.5)
(0.4)
(8.9)

(0.4)

2016
1.2

The UK corporation tax rate reduced from 20% to 19% on 1 April 2017. It will reduce further to 17% from 1 April 2020. UK deferred taxes have been calculated
at 19%, or 17% where the liability is expected to crystallise after 1 April 2020.

The US corporation tax rate reduced from 35% to 21% on 1 January 2018, and US deferred taxes as at 31 December 2017 have been calculated at 21%. The
reduction in tax rate did not result in a material change due to deferred tax assets arising from timing differences being offset by deferred tax liabilities on
acquired intangible assets.

The Group is reviewing the implications of the US tax reform, including the Base Erosion and Anti-abuse Tax (BEAT) provisions, and resolving certain tax issues
arising from prior years. Given this, and the expected geographical mix of profit, the underlying tax rate is anticipated to remain at approximately the current level,
subject to any future changes in tax legislation.

Current tax assets and liabilities

£m
Current tax receivables
Current tax liabilities

2017
7.2
(135.8)
(128.6)

2016
(restated)
3.1
(141.6)
(138.5)

In September 2017 the IFRS Interpretations Committee issued an agenda decision on interest and penalties related to income taxes. This decision clarified that
entities do not have a policy choice between applying IAS 12 ‘Income taxes’ and applying IAS 37 ‘Provisions, contingent liabilities’ and contingent assets to interest
and penalties related to income taxes. As a consequence the Group has reassessed its treatment of interest and penalties related to its global uncertain tax
positions as presented in the 2016 Annual Report and Accounts. This resulted in other liabilities within trade and other payables increasing by £9.5m, current tax
liabilities decreasing by £7.9m, and deferred tax assets increasing by £1.6m and 2016 balances have been restated accordingly.

www.cobham.com

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2017

Notes to the Group Financial Statements continued

Current tax risks (key estimation uncertainty)
The Group is subject to corporate and other tax rules in the jurisdictions where it conducts its business operations. Changes in tax rates, tax reliefs and tax laws,
changes in practice or interpretation of the law by the relevant tax authorities, increasing challenges by relevant tax authorities on transfer pricing and other
matters, or any failure to manage tax risks adequately could result in increased charges, financial loss, penalties and reputational damage, which may materially
adversely affect the Group’s financial condition and results of operations.

In addition, tax enforcement has become a higher priority for many tax authorities in jurisdictions in which the Group operates, which has led to an increase in
tax audits, enquiries and challenges, or the testing through litigation of the boundaries of the correct interpretation of legislation. Tax authorities may also actively
pursue additional taxes based on retroactive changes to tax laws and the Group may have disagreements with tax authorities which could result in a material
restatement to the tax position. For example, the availability of certain interest deductions on one of the Group’s internal financing arrangements, principally as a
result of various US acquisitions, has been under challenge for some time. Over the life of this internal financing arrangement, the aggregate tax value of the interest
deductions amounted to approximately £130m. If decided adversely to the Group, this could lead to increased tax liabilities in excess of those provided in the
Group’s Balance Sheet, and result in a substantial tax payment becoming due. That payment may also be subject to an interest charge from the relevant authority.
The Group has taken external advice and considers that it has strong support for its position. However, the timing and resolution of this issue is uncertain.

The European Commission (EC) has opened an investigation into the UK’s controlled foreign company (CFC) rules. The CFC rules levy a charge on foreign
entities controlled by the UK that are subject to a lower rate of tax, however there is currently an exemption available for 75% of this charge if the activities
being undertaken by the CFC relate to financing. The EC are investigating whether this exemption is in breach of EU State Aid rules, but it is too early to assess
what the conclusions of this investigation might be.

On 22 December 2017 extensive changes to the US tax system were made. A number of risks to the Group arise as a result, including Anti-base erosion, the way
that interest deductions are made, foreign tax credits and tax of foreign earnings. These risks are currently being assessed as further clarity is provided by the US
tax authorities.

In respect of the above risks and other uncertain tax positions in the UK, US and other tax jurisdictions, amounts totalling £126.4m (2016: £138.7m) have been
accrued. Final resolutions will affect the amounts settled and the timing of any settlements. Whilst resolution remains uncertain, these amounts are included
in current liabilities.

Deferred tax assets and liabilities

£m
Deferred tax assets

Recoverable within one year
Recoverable after one year

Deferred tax liabilities

Falling due within one year
Falling due after one year

The following are the major deferred tax assets and liabilities recognised by the Group and the movements thereon:

£m
At 1 January 2016 (restated)
(Credit)/charge to Income Statement
Credit to OCI
Charge to reserves
Business divestments
Foreign exchange adjustments
At 31 December 2016 (restated)
(Credit)/charge to Income Statement
Charge to OCI
Charge to reserves
Reclassified as held for sale
Foreign exchange adjustments
At 31 December 2017

Intangible
assets
175.1
(37.7)
–
–
(0.2)
26.8
164.0
(71.5)
–
–
(10.7)
(9.5)
72.3

Property,
plant and
equipment
5.0
16.5
–
–
(2.4)
5.5
24.6
(5.1)
–
–
0.8
(1.0)
19.3

Retirement
benefit
obligations
(11.3)
2.4
(8.5)
–
–
–
(17.4)
2.6
1.4
–
–
0.3
(13.1)

2017

(53.5)
(4.0)
(57.5)

0.5
1.6
2.1

(55.4)

Tax losses
–
(28.9)
–
–
–
–
(28.9)
(18.1)
–
–
–
0.6
(46.4)

2016
(restated)

(26.5)
(17.4)
(43.9)

0.5
27.1
27.6

(16.3)

Total
89.0
(102.4)
(9.3)
1.6
(2.6)
7.4
(16.3)
(33.9)
1.5
0.1
(6.8)
–
(55.4)

Other
(79.8)
(54.7)
(0.8)
1.6
–
(24.9)
(158.6)
58.2
0.1
0.1
3.1
9.6
(87.5)

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.

100

www.cobham.com

Cobham plcAnnual Report and Accounts 2017

Tax losses (key estimation uncertainty)
Tax losses of £29.6m (2016: £28.9m) arising in the UK during the year have been recognised on the basis of UK forecasted future taxable profits, using projections
prepared by management and reviewed by the Board. The recognition of these tax losses is sensitive to movement in these forecasted profits. A 33% reduction
in the estimated profits would not impact the recognition of these tax losses. In addition capital losses in the US are expected to be used on completion of the
divestment of the AvComm business and therefore £10.9m has been recognised as a deferred tax asset.

At the balance sheet date, the Group has further unused capital losses of £85.9m (2016: £144.4m) 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.

Unremitted earnings
The unprovided tax on unremitted earnings as at 31 December 2017 is considered to be immaterial.

7. Dividends

No dividends have been paid or approved by Cobham plc during the year ended 31 December 2017. The following dividends were paid in the prior year:

£m
Final dividend of 7.07p per share for 2015 (restated)
Interim dividend of 1.77p per share for 2016 (restated)

2016
91.6
34.5
126.1

Further details of Cobham plc’s dividend policy can be found on page 31. Dividend per share figures above have been restated to reflect the bonus element of the
May 2017 Rights Issue.

A dividend of £0.1m (2016: £nil) was paid to the holders of non-controlling interests in TEAM SA, a subsidiary of Cobham plc.

8. Cash flow from operations

£m
Operating profit/(loss)
Non-cash items

Share of post-tax results of joint ventures and associates
Depreciation and amortisation
Impairment of goodwill and intangible assets
Reversal of impairment provision
(Profit)/loss on sale of property, plant and equipment
Business acquisition and divestment related items
Derivative financial instruments
Adjustments to revisions of the carrying values of other assets
Adjustments to the assessment of legal and other provisions
Pension contributions in excess of pension charges
Share based payments
Operating cash movements

(Increase)/decrease in inventories
Decrease in trade and other receivables
Increase/(decrease) in trade and other payables
(Decrease)/increase in provisions
Cash generated from operations
Tax paid
Interest paid
Interest received
Net cash from operating activities

www.cobham.com

Note

19
2
2

2017
104.1

0.2
223.9
33.5
(31.8)
(0.2)
(0.8)
(28.9)
(1.4)
(8.0)
(17.3)
5.5

(26.7)
24.1
71.1
(65.0)
282.3
(32.2)
(41.6)
6.7
215.2

2016
(779.1)

(0.2)
248.1
573.8
–
4.4
1.7
39.3
–
–
(16.7)
3.8

50.8
21.9
(9.7)
87.9
226.0
(20.1)
(74.7)
3.5
134.7

101

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2017

Notes to the Group Financial Statements continued

Use of alternative cash flow performance measures
Free cash flow and operating cash flow are considered to provide a consistent measure of the operating cash flow of the Group’s business. These alternative
performance measures are used in internal management accounts and for decision making including capital allocation. In addition to underlying profit measures,
underlying cash conversion is also used for internal incentive arrangements, and presenting this information allows users of the financial statements to better
understand the way in which performance is targeted.

Definitions of operating cash flow measures
Free cash flow
Free cash flow is defined as net cash from operating activities plus dividends received from joint ventures, less cash flows related to the purchase or disposal
of property, plant, equipment and intangible assets but excluding payments relating to business acquisition and divestment related activities.

Operating cash flow
Operating cash flow is free cash flow before payment of tax, interest and restructuring costs.

Reconciliation of operating cash flow measures
The Cash Flow Statement subtotal of net cash from operating activities is reconciled to alternative measures of cash flow, free cash flow and operating cash flow
as follows:

£m
Net cash from operating activities per Cash Flow Statement
Purchase of property, plant and equipment
Purchase of intangible assets
Capitalised expenditure on intangible assets
Proceeds on disposal of property, plant and equipment
Business acquisition and divestment related costs paid
Free cash flow
Amounts related to prior periods restructuring programmes
Tax paid
Underlying net finance costs paid
Operating cash flow

2017
215.2
(69.0)
(10.8)
–
5.1
0.1
140.6
9.9
32.2
34.9
217.6

2016
134.7
(82.8)
(9.1)
(0.3)
6.1
2.1
50.7
39.8
20.1
71.2
181.8

The underlying cash conversion ratio is operating cash flow divided by underlying operating profit, excluding the share of results of joint ventures and associates:

£m
Underlying operating profit excluding the share of post-tax results of joint ventures
Operating cash flow
Underlying cash conversion

2017
210.5
217.6
103%

2016
224.8
181.8
81%

102

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Cobham plcAnnual Report and Accounts 2017

9. Intangible assets

£m
Cost
At 1 January 2016
Additions
Additions – internally generated
Business divestments
Derecognitions and disposals
Foreign exchange adjustments
Reclassifications
At 31 December 2016
Additions
Reclassified as held for sale
Derecognitions and disposals
Foreign exchange adjustments
Reclassifications
At 31 December 2017

Accumulated amortisation and impairment
At 1 January 2016
Amortisation charge for the year
Eliminated on business divestments
Impairment provision
Derecognitions
Foreign exchange adjustments
Reclassifications
At 31 December 2016
Amortisation charge for the year
Impairment provision
Reversal of impairment provision
Reclassified as held for sale
Derecognitions and disposals
Foreign exchange adjustments
Reclassifications
At 31 December 2017

Carrying amount
At 31 December 2017
At 31 December 2016
At 1 January 2016

Goodwill

1,200.6
–
–
(32.3)
–
150.1
–
1,318.4
–
(186.0)
–
(57.5)
–
1,074.9

53.4
–
(32.3)
530.6
–
41.5
–
593.2
–
33.5
–
(152.9)
–
(35.9)
–
437.9

637.0
725.2
1,147.2

Arising on business combinations
Order book
and trade
names

Technology
based assets

Customer
relationships

545.2
–
–
(1.0)
–
79.7
–
623.9
–
(93.5)
(20.3)
(31.7)
–
478.4

193.3
105.2
(0.8)
23.0
–
34.2
–
354.9
101.5
–
(19.7)
(61.3)
(20.3)
(18.6)
–
336.5

141.9
269.0
351.9

278.5
–
–
(19.1)
(13.1)
32.8
–
279.1
–
(94.9)
(24.6)
(15.5)
–
144.1

108.3
50.0
(18.3)
20.2
(13.1)
13.4
–
160.5
36.7
–
(12.1)
(72.3)
(24.6)
(7.5)
–
80.7

63.4
118.6
170.2

48.2
–
–
–
(43.9)
0.8
–
5.1
–
–
(0.3)
(0.4)
–
4.4

40.5
6.0
–
–
(43.9)
0.4
–
3.0
0.7
–
–
–
(0.3)
(0.2)
–
3.2

1.2
2.1
7.7

Software
and other

Total

79.8
8.2
0.3
(0.5)
(1.0)
8.1
5.0
99.9
10.6
(1.3)
(1.7)
(3.7)
0.8
104.6

27.3
14.0
(0.5)
–
(0.8)
5.9
3.0
48.9
10.8
–
–
(1.1)
(1.7)
(2.8)
0.2
54.3

50.3
51.0
52.5

2,152.3
8.2
0.3
(52.9)
(58.0)
271.5
5.0
2,326.4
10.6
(375.7)
(46.9)
(108.8)
0.8
1,806.4

422.8
175.2
(51.9)
573.8
(57.8)
95.4
3.0
1,160.5
149.7
33.5
(31.8)
(287.6)
(46.9)
(65.0)
0.2
912.6

893.8
1,165.9
1,729.5

Customer relationships represent 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. Software and other
intangible assets include both internally generated and purchased software together with purchased patents, licences, trademarks and also includes capitalised
development costs with a carrying amount of £0.1m (2016: £0.4m).

Intangible assets recognised on business combinations are derecognised when they are fully amortised.

Amortisation charged during the year relating to intangible assets recognised on business combinations was £138.9m (2016: £161.2m). This amortisation, together
with the impairment provision of £33.5m (2016: £573.8m plus £3.9m of amortisation of software) and reversal of impairment of £31.8m, has been excluded from
underlying profit as described in note 2. All amortisation charges are included within operating costs in the Income Statement.

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103

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2017Notes to the Group Financial Statements continued

Goodwill
Goodwill represents the premium paid on acquisitions 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.

Goodwill must be allocated to CGUs for the purposes of reporting and accounting. Cobham has previously defined CGUs in line with business units. However, during
the year, the Group determined that following completion of all historic integration activities, the strategic review undertaken in 2017 and increasing numbers of
new customer platforms using multiple Cobham products, CGUs are now more appropriately defined at the Sector level. This avoids the need to allocate goodwill
on an increasingly arbitrary basis and represents the lowest level at which goodwill is now monitored by management. Prior to making the assessment of impairment
at this new level, impairment reviews were performed at the business unit level. Where relevant any impairments arising are discussed below.

The carrying value of goodwill is allocated to the following Sectors:

£m
Communications and Connectivity
Mission Systems
Advanced Electronic Solutions
Aviation Services
Total

2017
278.8
89.8
225.1
43.3
637.0

2016
310.0
92.4
244.1
78.7
725.2

Annual impairment review (key estimation uncertainty)
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 recoverable amounts
of the CGUs to which the goodwill is allocated. This is determined from value in use calculations unless specific conditions at a CGU dictate otherwise. As the
Wireless and AvComm businesses are treated as held for sale then the expected sales proceeds, less costs to sell, have been used for the purposes of the
impairment review.

Impairment tests on other intangible assets are undertaken if events occur which may indicate that these assets may be impaired. The carrying value of intangible
assets is considered annually as part of the goodwill impairment exercise with reference to the value in use calculation of each CGU.

Estimating 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. This is considered to be a source of estimation uncertainty at the balance sheet date, which may have
a significant risk of causing a material adjustment to the carrying amount of intangible assets within the next financial year.

Key assumptions
The calculation of recoverable value for CGUs based on value in use includes the following key assumptions:
− Cash flow forecasts prepared by management and reviewed by the Board covering a three year period, updated where appropriate for more recent forecasts.
These forecasts take into account the current and expected economic environment including factors such as continued uncertainty within some markets
in which we operate. They also make assumptions about the demand for our products in our primary geographical markets, based on historic experience,
available government spending and key current and future programme platforms. These cash flow projections do not include benefits or costs expected
to arise from future restructuring or initiatives to enhance performance which have not yet commenced;

− Growth rates assumed after this period are based on long-term GDP projections of the primary market for each business. The long-term projections used

are in the range 1.5% to 2.5% (2016: 1.2% to 2.5%);

− Cash flows are discounted using the Group’s WACC, adjusted for country, cash flow and currency risks in the principal territories in which the CGU operates.

These pre-tax discount rates are within the range 8.6% to 10.5% (2016: 8.3% to 10.1%);

− Cash flows include the impact of working capital and fixed asset requirements; and
− Cash flows include management charges which allocate central overheads to the CGUs.

In 2017 and 2016 the following impairments were made:

£m
Wireless (Communications and Connectivity)
Helicopter Services (Aviation Services)
Integrated Electronic Solutions
(Advanced Electronic Solutions)
Semiconductor Solutions
(Advanced Electronic Solutions)
Total

Goodwill
–
33.5

2017
Other intangible assets
(31.8)
–

–

–
33.5

–

–
(31.8)

Goodwill
152.9
–

185.7

192.0
530.6

2016
Other intangible assets
43.2
–

–

–
43.2

Helicopter Services goodwill arose on the acquisition of the FB Group in 2013. Projected cash flows for the next three years, with subsequent growth assumed at
a rate of 2.3% were discounted at a pre-tax rate of 9.7%. The previously announced loss of the UK Defence Helicopter Flying School contract, which expires at the
end of March 2018, meant this business has been more sensitive to its ability to secure extensions on its remaining portfolio of contracts and to secure new
business. In 2017 the business was not able to win extensions with two key non-UK customers where local governments were reconsidering whether or not, and
how, they fund training activities. Reflecting the lower level of secured income into future projections an impairment provision of £33.5m has been expensed,
leaving a balance of £17.3m.

£31.8m of a previous impairment of intangible assets held in the Wireless business was reversed with reference to the expected sale proceeds less costs to sell
for the AvComm and Wireless businesses, which were subsequently reclassified as held for sale in the Balance Sheet.

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Cobham plcAnnual Report and Accounts 2017
Sensitivity analysis
Sensitivity analysis has been performed on the CGUs, as described below:

The largest elements of goodwill in Communications and Connectivity arose on the acquisition of Thrane & Thrane in 2012 and a number of Aerospace
Communications businesses. Cash flow projections assume growth in the satellite communications market for maritime products driven by availability of satellite
capacity and aerospace products from regulatory changes and passenger connectivity demands. Projected cash flows for the next three years, with subsequent
growth assumed at a rate of 1.8% were discounted at a pre-tax rate of 9.7%. If cash flows reduced by 20%, the discount rate was 11.7% or if the growth rate was
zero, then no impairment losses would arise.

Mission Systems goodwill primarily arose on the acquisition of Carleton Technologies in 1987, Conax in 1998 and Koch in 2005. Projected cash flows for the next
three years, with subsequent growth assumed at a rate of 2.1% were discounted at a pre-tax rate of 10.3%. If cash flows reduced by 20%, the discount rate was
12.4% or if the growth rate was zero, then no impairment losses would arise.

Advanced Electronic Solutions goodwill includes part of the Aeroflex business acquired in 2014, the Trivec business acquired in 2011, the Lansdale business and
the former M/A-COM businesses acquired in 2008 and the REMEC business acquired in 2005. In prior years this CGU has been impacted by the end of production
on some long term programmes. Projected cash flows for the next three years, with subsequent growth assumed at a rate of 2.0% were discounted at a pre-tax
rate of 10.5%. If cash flows reduced by 20%, the discount rate was 12.6% or if the growth rate was zero, then no impairment losses would arise.

Aviation Services goodwill includes that arising on the acquisition of FR Aviation together with the remaining goodwill, after the impairment charge made in the
year, that arose on the acquisition of the FB Group in 2013. Projected cash flows for the next three years, with subsequent growth assumed at a rate of 2.5% were
discounted at a pre-tax rate of 10.2%. If cash flows reduced by 20%, the discount rate was 12.2% or if the growth rate was zero, then impairment losses of between
£5m and £8m would arise.

www.cobham.com

105

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2017Notes to the Group Financial Statements continued

10. Property, plant and equipment

£m
Cost
At 1 January 2016
Additions
Business divestments
Disposals
Foreign exchange adjustments
Reclassifications
At 31 December 2016
Additions
Disposals
Reclassified as held for sale
Foreign exchange adjustments
Reclassifications
At 31 December 2017

Accumulated depreciation
At 1 January 2016
Depreciation charge for the year
Eliminated on business divestments
Eliminated on disposals
Foreign exchange adjustments
Reclassifications
At 31 December 2016
Depreciation charge for the year
Eliminated on disposals
Reclassified as held for sale
Foreign exchange adjustments
Reclassifications
At 31 December 2017

Carrying amount
At 31 December 2017
At 31 December 2016
At 1 January 2016

Land and buildings
Short
leases

Long
leases

Freehold

Plant and
machinery
(including
aircraft and
vehicles)

Fixtures,
fittings
tools and
equipment

Payments on
account and
assets under
construction

93.7
1.8
–
(3.6)
14.2
3.4
109.5
3.9
(0.6)
(7.1)
(6.0)
2.0
101.7

30.6
5.6
–
(3.4)
5.0
(0.1)
37.7
4.5
(0.5)
(0.9)
(2.0)
–
38.8

62.9
71.8
63.1

32.1
1.3
–
(2.3)
2.8
–
33.9
2.6
–
–
(1.6)
(0.3)
34.6

18.1
1.5
–
(0.7)
2.3
–
21.2
1.4
–
0.1
(1.2)
–
21.5

13.1
12.7
14.0

3.9
0.1
–
(0.4)
0.7
–
4.3
0.1
–
–
(0.2)
–
4.2

2.6
0.5
–
(0.3)
0.5
–
3.3
0.4
–
–
(0.2)
–
3.5

0.7
1.0
1.3

645.9
50.3
–
(43.5)
69.3
12.5
734.5
43.3
(24.5)
(33.4)
(19.8)
49.3
749.4

430.8
54.4
–
(36.4)
45.7
4.7
499.2
58.0
(20.8)
(22.7)
(12.5)
–
501.2

248.2
235.3
249.4

84.2
10.7
(2.5)
(4.9)
12.2
4.7
104.4
5.3
(5.0)
(2.8)
(3.6)
0.9
99.2

59.8
10.2
(1.6)
(3.6)
7.8
(0.2)
72.4
9.7
(4.9)
(1.7)
(2.2)
(0.2)
73.1

26.1
32.0
24.4

Total

921.8
81.5
(2.5)
(54.9)
108.7
2.1
1,056.7
69.4
(30.7)
(43.5)
(32.1)
(0.8)
1,019.0

541.9
72.2
(1.6)
(44.4)
61.3
4.4
633.8
74.0
(26.2)
(25.2)
(18.1)
(0.2)
638.1

62.0
17.3
–
(0.2)
9.5
(18.5)
70.1
14.2
(0.6)
(0.2)
(0.9)
(52.7)
29.9

–
–
–
–
–
–
–
–
–
–
–
–
–

29.9
70.1
27.7

380.9
422.9
379.9

At 31 December 2017 the Group had commitments for the acquisition of property, plant and equipment of £13.8m (2016: £14.3m).

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Cobham plcAnnual Report and Accounts 201711. Investment properties

£m
Carrying amount at 1 January
Depreciation
Disposals
Reclassified as held for sale
Carrying amount at 31 December

2017
3.6
(0.2)
(0.4)
(0.6)
2.4

2016
4.3
(0.7)
–
–
3.6

The fair value of the Group’s investment properties has been assessed to be £5.0m (2016: £6.2m). These values are based on management estimates using
observable market data, taking into account current lease terms.

Property rental income earned by the Group from its investment properties amounted to £0.7m (2016: £0.7m), 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 10 and 25 years which commenced
in 2013 and 1998 respectively.

12. Inventories

£m
Raw materials and consumables
Work in progress
Finished goods and goods for resale
Allowance for obsolescence

2017
179.9
247.0
38.5
(76.0)
389.4

2016
210.7
238.2
42.5
(86.1)
405.3

Work in progress includes £45.5m (2016: £58.4m) which relates to customer funded engineering development contracts. These amounts will be utilised or
amortised as deliveries are made against customers’ contractual schedules. Those schedules are subject to change and do not all fall due within 12 months.

Within the Mission Systems segment, inventory expected to be realised after more than 12 months amounts to £17.7m (2016: £29.2m). Otherwise, all inventory
is expected to be realised within the normal operating cycle of the businesses.

Obsolescence provision (key estimation uncertainty)
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. Assessing the level of provision required for obsolete, slow moving and defective items of inventory is an area
of estimation uncertainty which may have a significant effect on the carrying amount of inventory within the next financial year.

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 reflecting assumptions concerning future orders and revenue streams. Subsequent events
may give rise to these estimates being revised and, consequently, to the reversal of amounts previously provided.

During the year £21.2m (2016: £36.3m) was provided, £4.5m (2016: £5.2m) was utilised and £6.2m (2016: £6.4m) of the allowance for obsolescence was reversed.

The amount provided in the year represents the outcome of the key sensitivity, being changes in forecast customer demand against which production has been
planned or undertaken. A 10% deterioration in the assumed immediate forecast demand would lead to an increased provision in the order of £4m (2016: £4m).

www.cobham.com

107

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2017
Notes to the Group Financial Statements continued

13. 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 2017

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 2016

Note

Loans and
receivables

Fair value
through
profit or loss

Amortised
cost

Derivatives
used for
hedging

Total carrying
amount

Fair value

235.9
129.3
451.9
–
–

–
–
–
–
–

–
–

307.5
129.0
236.2
–
–

–
–
–
–
–

–
–

–
–
–
13.2
–

–
–
–
–
(17.4)

–
–

–
–
–
9.3
–

–
–
–
–
(54.0)

–
–

–
–
–
–
6.1

(835.4)
(140.7)
(140.9)
(55.2)
–

–
–

–
–
–
–
6.1

(1,264.4)
(155.8)
(129.5)
(43.3)
–

–
–
–
–
–

22.2
(22.0)

–
–
–
–
–

–
–

18.9
(20.4)

235.9
129.3
451.9
13.2
6.1

(835.4)
(140.7)
(140.9)
(55.2)
(17.4)

22.2
(22.0)
(353.0)

307.5
129.0
236.2
9.3
6.1

(1,264.4)
(155.8)
(129.5)
(43.3)
(54.0)

18.9
(20.4)
(960.4)

235.9
129.3
451.9
13.2
6.1

(893.1)
(140.7)
(140.9)
(55.2)
(17.4)

22.2
(22.0)
(410.7)

307.5
129.0
236.2
9.3
6.1

(1,348.3)
(155.8)
(129.5)
(43.3)
(54.0)

18.9
(20.4)
(1,044.3)

Borrowings are held at amortised cost which equates to fair value except for the Group’s fixed rate borrowings. At 31 December 2017 the fair value of those
borrowings was £743.7m (2016: £932.8m) compared to their book value of £687.4m (2016: £848.9m). The fair value of the fixed rate borrowings and derivative
financial instruments have been determined by reference to observable market prices and rates.

Other financial assets relate to Cobham plc’s investments in Air Tanker Holdings Limited and Air Tanker Services Limited in connection with the Voyager (FSTA)
project which are held at cost, totalling £6.1m (2016: £6.1m).

Gains and losses on derivative financial assets and liabilities held at fair value through profit or loss are shown in note 19. The total interest income and expense
for financial assets and liabilities not held at fair value through profit or loss is shown in note 5.

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 21. 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.

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Cobham plcAnnual Report and Accounts 2017

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 2017

Financial assets

Cash and cash equivalents
Derivative financial assets

Financial liabilities
Bank overdrafts
Derivative financial liabilities

At 31 December 2016

14. Trade and other receivables

Current
£m
Trade receivables (net of provision for impairment)
Accrued income
Loans and other receivables
Prepayments

Non-current
£m
Trade receivables (net of provision for impairment)
Accrued income
Loans and other receivables

Impairment of trade receivables
£m
Trade receivables
Provision for impairment of trade receivables
Net trade receivables

Movements in the provision for impairment of trade receivables during the year are as follows:

£m
At 1 January
Additional provisions
Utilisation of provisions
Unused amounts reversed
Unused amounts reversed (specific adjusting item, see note 2)
Business divestments
Reclassified as held for sale
Foreign exchange adjustments
At 31 December

Gross
amounts
before
set off

Amounts
set off
in the
Balance
Sheet

Amounts as
presented
in the
Balance
Sheet

Amounts
not set
off in the
Balance
Sheet

Net amount

943.7
35.4

(491.8)
–

451.9
35.4

(491.8)
(39.4)
447.9

491.8
–
–

826.8
28.2

(590.6)
(74.4)
190.0

(590.6)
–

590.6
–
–

–
(39.4)
447.9

236.2
28.2

–
(74.4)
190.0

2017
235.7
36.6
28.4
28.3
329.0

2017
0.2
39.4
24.9
64.5

2017
240.7
(4.8)
235.9

2017
10.5
4.5
(2.8)
(5.2)
(1.4)
–
(0.4)
(0.4)
4.8

(3.1)
(30.6)

–
33.3
(0.4)

(3.9)
(25.7)

–
29.6
–

448.8
4.8

–
(6.1)
447.5

232.3
2.5

–
(44.8)
190.0

2016
307.5
41.8
21.2
39.3
409.8

2016
–
38.0
28.0
66.0

2016
318.0
(10.5)
307.5

2016
3.3
9.2
(0.8)
(1.4)
–
(0.4)
–
0.6
10.5

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 21.

www.cobham.com

109

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2017

Notes to the Group Financial Statements continued

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

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

2017
183.1
49.4
8.2
240.7

2017
34.0
8.1
3.6
3.7
49.4

2016
242.4
59.2
16.4
318.0

2016
42.2
10.6
2.9
3.5
59.2

Other classes of financial assets within trade and other receivables do not include any overdue or impaired assets.

15. Non-current assets and disposal groups held for sale

On 2 February 2018, the divestment of the Group’s AvComm and Wireless test and measurement businesses, part of the Communications and Connectivity
Sector was announced. The following assets and liabilities have been classified as held for sale in the Balance Sheet as at 31 December 2017, and are measured on
a non-recurring basis at fair value, taking into account the agreed selling price of US$455m. The divestment is expected to complete within the first half of 2018,
subject to regulatory approval.

£m
Property, plant and equipment
Investment property
Intangible assets
Deferred tax
Inventories
Trade and other receivables
Total assets classified as held for sale

Trade payables and other liabilities
Deferred tax
Provisions
Total liabilities associated with assets classified as held for sale

Total non-current assets and disposal groups held for sale

There were no non-current assets or disposal groups held for sale at 31 December 2016.

16. Borrowings

£m
Current borrowings

Senior notes
Finance leases

Non-current borrowings

Bank loans
Senior notes
Finance leases

Total borrowings

110

2017
18.3
0.6
88.1
3.8
20.3
40.6
171.7

(37.5)
(10.6)
(1.0)
(49.1)

122.6

2016

60.7
0.2
60.9

475.7
727.5
0.3
1,203.5

1,264.4

www.cobham.com

2017

–
0.1
0.1

204.3
630.8
0.2
835.3

835.4

Cobham plcAnnual Report and Accounts 2017

Bank loans
Bank loans comprise the following:

£m
Fixed rates

Agreement date

Maturity date

Amount drawn
2016

2017

Undrawn facilities
2016

2017

US$75m credit agreement

December 2008

December 2019

55.2

60.7

–

Floating rates

€131m and US$40m loan agreements
€4m loan agreement
US$450m multi-currency revolving facility
US$45m multi-currency revolving facility
DKK320m multi-currency revolving facility
US$270m multi-currency revolving facility
€70m multi-currency revolving facility
DKK525m multi-currency revolving facility
AUS$90m multi-currency revolving facility

May 2015
May 2015
December 2017
December 2017
December 2017
October 2011
June 2012
June 2012
February 2014

May 2020
May 2022
December 2022
December 2022
December 2022
October 2018*
October 2018*
October 2018*
October 2018*

145.5
3.6
–
–
–
–
–
–
–
204.3

144.2
3.4
–
–
–
190.5
48.4
–
28.5
475.7

–
–
332.6
33.3
38.2
–
–
–
–
404.1

Floating rate bank loans accrue interest at LIBOR or other appropriate benchmark plus margin.

In December 2017 three new multi-currency floating rate borrowing agreements were signed and the four existing multi-currency agreements expiring in
October 2018 (marked * in the table above) were cancelled. The US$75m credit agreement was repaid and cancelled in January 2018.

Senior notes
At 31 December 2017, senior notes with a total principal value of US$855.0m (£630.8m) (2016: US$974.0m; £788.2m) were outstanding as set out below:

£m
US$44m fixed rate
US$930m fixed rate comprising:

Issue date
October 2012
October 2014

US$75m
US$180m
US$250m
US$425m

Maturity date
October 2020**

October 2017
October 2019
October 2021
October 2024

Senior notes with a principal value of US$44.0m (marked ** above) were repaid in May 2017.

Reconciliation of movements in net debt
Net debt is defined as the net of borrowings less cash and cash equivalents at the balance sheet date.

2017
–

–
132.9
184.4
313.5
630.8

–
–
–
–
–
28.0
11.4
60.3
24.2
123.9

2016
35.6

60.7
145.7
202.3
343.9
788.2

Liabilities from financing activities
Senior notes Finance leases
(0.5)
–
–
0.1
(0.1)
(0.5)
–
0.2
–
(0.3)

(927.8)
–
–
297.7
(158.1)
(788.2)
–
92.9
64.5
(630.8)

Bank loans
(572.5)
–
(9.9)
199.2
(92.5)
(475.7)
–
266.5
4.9
(204.3)

Cash and cash
equivalents
294.7
(72.8)
–
–
14.3
236.2
277.2
–
(61.5)
451.9

Bank
overdrafts
(0.7)
0.7
–
–
–
–
–
–
–
–

£m
At 1 January 2016
Cash flows
New borrowings
Repayment of borrowings
Foreign exchange adjustments
At 31 December 2016
Cash flows
Repayment of borrowings
Foreign exchange adjustments
At 31 December 2017

www.cobham.com

Net debt
(1,206.8)
(72.1)
(9.9)
497.0
(236.4)
(1,028.2)
277.2
359.6
7.9
(383.5)

111

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2017

Notes to the Group Financial Statements continued

Financial covenants
The various borrowing agreements include both financial and non-financial covenants but do not contain any provisions for charges over Group assets. Terms
of the financial covenants are based on adjusted IFRS results, as defined in the agreements. The financial covenant calculations as presented below are as defined
in the senior note borrowing agreements and are included here to allow readers of these financial statements to better understand their interpretation:

Net debt to EBITDA

£m
Net debt per Balance Sheet
Adjust to average exchange rate
Net debt for covenant purposes

Operating profit/(loss) per Income Statement
Specific adjusting items as disclosed in note 2
Depreciation and amortisation not included within specific adjusting items
Other adjustments
EBITDA for covenant purposes

Net debt to EBITDA ratio as calculated for financial covenants
Covenant condition – not more than

Interest cover

£m
Operating profit/(loss) per Income Statement
Specific adjusting items as disclosed in note 2
Amortisation not included within specific adjusting items
Other adjustments
EBITA for covenant purposes

Net finance costs per Income Statement
Specific adjusting items as disclosed in note 2
Other adjustments
Net finance costs for covenant purposes

Interest cover as calculated for financial covenants
Covenant condition – not less than

There have been no breaches of the terms of the borrowing agreements or defaults during the current or prior year.

17. Trade and other payables

Current liabilities

£m
Payments received on account
Trade payables
Other taxes and social security
Deferred income
Accruals
Other liabilities

2017
(383.5)
(21.8)
(405.3)

104.1
106.2
85.0
13.2
308.5

1.3
3.5

2017
104.1
106.2
10.8
13.2
234.3

(37.2)
–
2.5
(34.7)

6.8
3.0

2017
89.4
140.7
25.4
8.2
134.5
50.0
448.2

2016
(1,028.2)
(90.3)
(937.9)

(779.1)
1,004.1
80.5
11.0
316.5

3.0
3.5

2016
(779.1)
1,004.1
10.1
10.1
245.2

(68.8)
19.0
1.8
(48.0)

5.1
3.0

2016
(restated)
67.0
155.3
28.2
19.2
123.5
47.1
440.3

Details of the restatement of the 2016 Balance Sheet can be found in note 6. Included in other liabilities is £10.6m (2016: £9.5m) related to interest on uncertain
tax positions also disclosed in note 6.

112

www.cobham.com

Cobham plcAnnual Report and Accounts 2017
Non-current liabilities

£m
Payments received on account
Trade payables
Deferred income
Accruals
Other liabilities

18. Provisions

£m
Current liabilities
Non-current liabilities

2017
4.1
–
20.4
6.4
5.2
36.1

2017
125.1
30.7
155.8

Movements in provisions during the year are as follows:

£m
At 1 January 2017
Additional provisions in the year
Utilisation of provisions
Provisions released
Reclassified as held for sale
Other reclassifications
Foreign exchange adjustments
At 31 December 2017

Contract loss
provisions
147.0
8.3
(66.5)
(1.2)
–
5.5
(3.4)
89.7

Provisions
related to
businesses
divested
6.6
–
(0.7)
–
–
–
–
5.9

Restructuring
provisions
23.4
–
(2.1)
(1.5)
–
(1.5)
(0.7)
17.6

Warranty
claims
17.0
6.0
(3.5)
(6.0)
(0.7)
2.2
(0.2)
14.8

Aircraft
maintenance
provisions
3.3
1.0
(1.0)
(0.6)
–
–
–
2.7

Other
40.6
7.2
(6.5)
(4.2)
(0.3)
(8.5)
(3.2)
25.1

2016
2.7
0.5
16.6
6.0
5.7
31.5

2016
180.6
57.3
237.9

Total
237.9
22.5
(80.3)
(13.5)
(1.0)
(2.3)
(7.5)
155.8

Provisions released in the year include the release of £4.3m of provisions for warranty claims and £3.7m of other provisions which have been excluded from
underlying earnings as shown in note 2.

Contract loss provisions (key estimation uncertainty)
Contract loss provisions are recognised for onerous contracts when the expected benefits to be derived by the Group are lower than the forecasted unavoidable
cost of meeting the related contractual obligations. The assessment of the amount provided is a source of estimation uncertainty which may have a significant
effect on the carrying amount of these provisions within the next financial year. The estimated costs to complete, the outcome of negotiations with customers,
the amounts recoverable under these contracts and the risk of incurring penalties for not meeting challenging delivery schedules are all areas requiring
management judgement and the Group may 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 provisions are expected to be utilised within three years although where there are uncertainties surrounding the timing of
utilisation, they have been disclosed as current liabilities.

There are multiple sensitivities to be considered in assessing contract loss provisions, in particular the ability to achieve development milestone dates, the
accuracy of cost estimates to complete contractual work and the ability to successfully invoice and collect cash from the customer. It is not considered practical
to provide sensitivities for each of these items, and potentially misleading to suggest each one can be considered separately, so this risk is disclosed as part of
our contingent liabilities in note 26.

Other categories of provisions
Provisions related to businesses divested relate to longer term warranties given on the 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 onerous lease provisions arising from the restructuring of the Aeroflex businesses, which is now complete. Amounts carried
forward are not expected to be fully settled until 2025.

Provisions for warranty claims are expected to be utilised within three years.

Aircraft maintenance provisions relate to significant periodic maintenance costs as well as return conditions for leased aircraft and are anticipated to crystallise
within five years.

Other provisions include amounts provided in respect of legal claims and environmental obligations and are mostly expected to be settled within one year.

www.cobham.com

113

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2017

Notes to the Group Financial Statements continued

19. 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 2017

Non-current assets
Current assets
Current liabilities
Non-current liabilities
Fair value at 31 December 2016

Interest
rate swaps
–
–
–
–
–

–
–
(0.6)
(1.2)
(1.8)

Foreign exchange
derivatives
25.0
10.4
(11.8)
(27.2)
(3.6)

19.7
8.5
(40.2)
(30.6)
(42.6)

The movements in the fair values of derivative financial instruments during the year are as follows:

£m
At 1 January 2016
(Loss)/gain through Income Statement – not hedged
Gain reclassified to Income Statement
Loss through OCI – hedged items
Foreign exchange adjustments
At 31 December 2016
Gain through Income Statement – not hedged
Gain/(loss) reclassified to Income Statement
Ineffectiveness of net investment hedge through
Income Statement
Gain/(loss) through OCI – hedged items
At 31 December 2017

Interest
rate swaps
(2.3)
–
1.1
(0.2)
(0.4)
(1.8)
–
0.7

–
1.1
–

Foreign exchange
derivatives
(24.2)
(16.7)
0.5
(2.2)
–
(42.6)
39.2
(0.2)

0.2
(0.2)
(3.6)

Inflation swap
–
–
(0.4)
–
(0.4)

–
–
(1.4)
(0.4)
(1.8)

Inflation swap
(2.4)
1.0
–
–
(0.4)
(1.8)
1.4
–

–
–
(0.4)

Total
25.0
10.4
(12.2)
(27.2)
(4.0)

19.7
8.5
(42.2)
(32.2)
(46.2)

Total
(28.9)
(15.7)
1.6
(2.4)
(0.8)
(46.2)
40.6
0.5

0.2
0.9
(4.0)

Floating to fixed interest rate swaps were cancelled in the year ended 31 December 2017 following the repayment of the associated floating rate borrowings.
These interest rate swaps were previously designated as cash flow hedging instruments and hedge accounting was applied. In addition, a small number of specific
foreign exchange derivatives with a fair value at 31 December 2017 of £0.2m (2016: £0.3m) are designated as cash flow hedging instruments or as hedging
instruments for net investment hedging purposes, and hedge accounting is applied. In 2016, there was 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. Movements in fair values are recorded in the Income
Statement within operating costs but are excluded from underlying profit as described in note 2. Also excluded from underlying profit are losses of £11.7m
(2016: loss £23.6m) arising from the movement in fair values of currency swaps which offset movements in currency balances held, and gains and losses arising
on foreign exchange derivatives related to dividend flows within the Group.

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 21, financial risk management.

20. Retirement benefit schemes

£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

114

2017
816.3
(879.5)
(63.2)

2017
0.7
37.4
38.1

2016
790.0
(877.0)
(87.0)

2016
1.6
33.5
35.1

www.cobham.com

Cobham plcAnnual Report and Accounts 2017

£1.4m (2016: £0.7m) was outstanding in respect of defined benefit schemes but not due for payment at 31 December 2017. £1.1m (2016: £0.4m) was outstanding
in respect of defined contribution schemes but not due for payment at 31 December 2017.

Defined contribution schemes
The Group operates a number of defined contribution pension arrangements. Under a defined contribution pension arrangement the Group’s contribution is
fixed at a set percentage of employees’ pay. The contributions are recognised as an employee benefit expense as the employee provides service to the Group.
There is no legal or constructive obligation to pay any additional amounts into the funds.

Defined benefit schemes
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. However, the Group is responsible for funding any shortfall in the obligations of the schemes to their members. All defined benefit schemes have been
closed to new members since 2003 and the UK schemes were closed to future accrual from 1 April 2016.

The defined benefit schemes expose the Group to a number of risks, as described below:
− Volatility of investment returns. If the investment return is lower than the discount rate set with reference to corporate bond yields then the scheme deficit

will increase;

− Inflation risk. Pensionable salaries, deferred pensions and pensions in payment are subject to inflationary increases. A higher inflation rate will lead to higher

defined benefit obligations;

− Changes in bond yields. Volatility in the financial markets can have a significant impact on corporate bond yields which are used to generate a discount rate

assumption. Lower corporate bond yields will lead to higher defined benefit obligations; and

− Life expectancy risk. The schemes’ obligations are to provide benefits for the life of the member and therefore increases in life expectancy will lead to higher

defined benefit obligations.

The trustees seek to mitigate these risks and have entered into a number of buy-in arrangements where assets are transferred to an insurance company in return
for a qualifying insurance policy which provides an income stream equivalent to the obligations to pensioners covered by the arrangement. The most significant
buy-in arrangement relates to pensioners of the CPP as at 1 July 2013. This eliminates all of the above risks in relation to these liabilities except for the credit risk
related to the insurance provider. In addition the trustees have invested in liability driven investments that mitigate approximately 85% of the remaining bond
yield and inflation risks, on a technical provision basis. This is achieved by using a portfolio of gilts and swaps supported with investment grade credit instruments.
These investments introduce the risk that a call for further investment may be made if inflation decreases or the bond yield increases, which is managed by
maintaining sufficient liquid investments. Leverage and counterparty risks are managed by the fund investment managers. The remaining assets include
significant investment in diversified growth funds which seek to manage investment risks.

Triennial actuarial valuations
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 2015. 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 2017. 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 valuation of the Plan liabilities for this triennial valuation is on a more prudent basis than that required by IAS 19 and therefore the
schedule of contributions will address a higher deficit than that recorded on an IAS 19 basis. The Group expects to contribute £18.1m to its defined benefit
pension schemes in 2018 and, under the current schedule of contributions, £10.7m in 2019. Thereafter the current schedules of contributions require £8.8m of
contributions each year through to 2022. A new schedule of contributions is likely to be agreed prior to 1 April 2019 based on a triennial valuation as at 1 April
2018, which may change the Group’s commitments after 2018.

Assumptions (source of estimation uncertainty)
A number of assumptions are made in assessing the costs and present value of the pension assets and liabilities, which include the discount rate, inflation and
mortality rates. These are considered to be major sources of estimation uncertainty as comparatively small changes in the assumptions used may have a
significant effect on the Group’s financial statements within the next financial year. The Group uses published indices and independent actuarial advice to select
the values of critical assumptions.

The principal financial assumptions used for the purpose of the actuarial valuations were as follows:

RPI inflation assumption
(rate of increase in pensions in payment unless overridden by specific scheme rules)
CPI inflation assumption (rate of increase in deferred pensions)
Discount rate

2017
UK schemes US scheme

UK schemes

2016
US scheme

3.35%
2.35%
2.35%

3.35%
2.35%
3.47%

3.45%
2.45%
2.65%

3.45%
2.45%
3.95%

www.cobham.com

115

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2017Notes to the Group Financial Statements continued

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 16’ (2016: SAPS CMI 15). In practical terms, this is demonstrated
in the table below:

Male
Female
Male
Female

Year of birth
1952
1952
1980
1980

Year age 65
2017
2017
2045
2045

Life expectancy
88 years
89 years
90 years
91 years

At 31 December 2017 it has been assumed that members will commute on average 25% (2016: 25%) of their pension for cash at retirement.

Sensitivity analysis
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 (both RPI and CPI)
Life expectancy

Change in assumption
Increase by 1.0%
Increase by 0.5%
Increase by one year

Change in liabilities
-9%
+3%
+2%

If the change in assumptions were in the opposite direction to that shown above, the impact would be approximately symmetrical.

Movements in scheme assets and scheme liabilities
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
Experience gains and losses arising on scheme liabilities
Actuarial gains and losses arising from changes in financial assumptions
Actuarial gains arising from changes in demographic assumptions
Amounts recognised in OCI

Employer contributions
Member contributions
Benefits paid
Amounts included in Cash Flow Statement

Scheme
assets

Defined
benefit
obligations

–
(0.2)
(0.2)

20.8
20.8

31.0
–
–
–
31.0

18.2
–
(41.8)
(23.6)

(0.7)
–
(0.7)

(23.1)
(23.1)

–
(0.1)
(34.8)
11.3
(23.6)

–
–
41.8
41.8

2017

Total

(0.7)
(0.2)
(0.9)

(2.3)
(2.3)

31.0
(0.1)
(34.8)
11.3
7.4

18.2
–
–
18.2

Scheme
assets

Defined
benefit
obligations

–
(0.2)
(0.2)

25.1
25.1

112.3
–
–
–
112.3

18.5
0.4
(33.0)
(14.1)

(1.6)
–
(1.6)

(26.9)
(26.9)

–
(1.0)
(163.6)
9.7
(154.9)

–
(0.4)
33.0
32.6

2016

Total

(1.6)
(0.2)
(1.8)

(1.8)
(1.8)

112.3
(1.0)
(163.6)
9.7
(42.6)

18.5
–
–
18.5

Exchange differences

(1.7)

3.1

1.4

3.0

(5.6)

(2.6)

Net movement in the year
Net liability at start of year
Net liability at end of year

UK schemes
US scheme
Net liability at end of year

26.3
790.0
816.3

796.3
20.0
816.3

(2.5)
(877.0)
(879.5)

(844.6)
(34.9)
(879.5)

23.8
(87.0)
(63.2)

(48.3)
(14.9)
(63.2)

126.1
663.9
790.0

770.9
19.1
790.0

(156.4)
(720.6)
(877.0)

(842.2)
(34.8)
(877.0)

(30.3)
(56.7)
(87.0)

(71.3)
(15.7)
(87.0)

The cumulative amount of actuarial losses recognised in OCI since transition to IFRS is £241.4m (2016: £248.8m).

Of the net actuarial gain recognised in the year, the loss from changes in financial assumptions is primarily driven by the movements in the discount rate, while
the gain from changes in demographic assumptions arises from the use of the latest mortality tables.

The actual return on scheme assets was £51.8m (2016: £137.4m). The weighted average duration of the scheme liabilities is estimated to be 16 years.

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Scheme assets
The fair value of major categories of scheme assets, and as a percentage of total scheme assets, is as follows:

UK equity instruments
Overseas equities
Emerging markets equities
Global equities
Liability driven investments
Corporate bonds
Private credit
Diversified growth funds
Insurance contracts
Other assets including cash

£m
14.4
–
–
92.3
149.5
87.0
27.8
127.8
313.7
3.7
816.2

2017
%
1.8%
–
–
11.3%
18.3%
10.7%
3.4%
15.6%
38.4%
0.5%
100.0%

£m
66.9
31.2
21.2
–
79.0
85.6
14.7
146.1
318.4
26.9
790.0

2016
%
8.5%
3.9%
2.7%
–
10.0%
10.8%
1.9%
18.5%
40.3%
3.4%
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. None of the scheme
assets are quoted in an active market. The above, except for the insurance contracts assets, are pooled investment vehicles and are valued based on bid price for
funds with bid/offer spreads, or single price where there are no bid/offer spreads based on valuations provided by the investment manager. Insurance contracts
are valued based on the valuation of the liabilities insured.

Other retirement benefit schemes
The assets and liabilities of other immaterial retirement benefit schemes are as follows:

£m
French indemnity schemes
German based schemes

Assets
–
1.0
1.0

2017
Liabilities
(5.8)
(1.5)
(7.3)

Assets
–
1.0
1.0

2016
Liabilities
(5.6)
(1.5)
(7.1)

The actuarial loss for these schemes in the year to 31 December 2017, recognised in OCI, was £nil (2016: £1.2m). The net liabilities are included in other liabilities
in note 17. The German based scheme assets relate to insurance policies.

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117

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2017

Notes to the Group Financial Statements continued

21. 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 exposures such as inflation risk. 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, including the net debt position, 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 £12.1m (2016: £26.1m). The Group undertakes to manage the currency mix of debt and EBITDA so that they are
broadly in line to mitigate the impact of currency fluctuations on the net debt to EBITDA financial covenant. 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:

£m
US dollars
Euros
Australian dollars
Danish kroner
Other currencies

Sterling denominated monetary assets and liabilities

Monetary
assets
488.3
95.2
48.7
9.3
36.2
677.7
167.7
845.4

2017
Monetary
liabilities
(932.6)
(166.5)
(11.6)
(8.7)
(7.0)
(1,126.4)
(129.2)
(1,255.6)

Monetary
assets
377.8
116.4
40.3
24.1
42.6
601.2
110.8
712.0

2016
Monetary
liabilities
(1,290.8)
(163.2)
(43.8)
(68.2)
(8.2)
(1,574.2)
(186.7)
(1,760.9)

Foreign currency borrowings also mitigate the impact of foreign currency exchange differences arising from the Group’s overseas net assets. Monetary liabilities in
the table above include US dollar borrowings of £717.1m (2016: £1,061.8m) which match exposures arising from currency denominated net assets. Foreign
currency derivative 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 table above) are translated at closing
exchange rates and exchange differences arising are accounted for in OCI through the translation reserve (note 23).

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.

Group policy is that at least 80% of the next 12 months’ forecast cash flows in non-functional currencies are covered by forward foreign exchange contracts. For
shorter cycle businesses, the profile of hedging is based on customer commitments which are subject to approval by the Group CFO. Where forecasted currency
cash flows do not arise this will result in increased income statement exposure to foreign currency exchange differences. These are however managed at a Group
level and mitigating action is taken where possible.

The sterling/US dollar and Danish krone/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

US$m amount
2016
141.8
40.2
34.7
216.7

2017
119.4
85.3
29.5
234.2

US$m amount
2016
95.1
–
1.7
96.8

2017
85.5
0.5
1.2
87.2

Average
US$:£ exchange rate
2016
2017
1.42
1.37
1.43
1.36
1.52
1.50
1.43
1.38

Average
US$:DKK exchange rate
2016
6.16
–
6.07
6.15

2017
6.34
6.20
6.01
6.34

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
subsidiaries will exceed the level of the outstanding commitments.

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Sensitivity analysis
Financial instruments denominated in a currency other than the functional currency in which they are measured create exposure to foreign currency exchange
rate risk. These financial instruments include the monetary assets and liabilities and the forward foreign currency contracts shown in the tables above. The
sensitivity arising on these financial instruments from a weakening in sterling against the respective foreign currency at the balance sheet date is set out below,
with a negative number indicating a reduction in profit after taxation or total equity.

£m
US dollars to sterling
US dollars to Danish kroner
Euros to sterling

Sensitivity
12%
12%
12%

Profit
or loss
(23.1)
(6.1)
(10.6)

2017
Total
equity
(23.1)
(6.1)
(10.6)

Sensitivity
11%
11%
11%

Profit
or loss
(20.7)
(7.0)
(7.4)

2016
Total
equity
(20.7)
(7.0)
(7.4)

The sensitivities used represent management’s assessment of the possible changes in foreign exchange rates, based on experience over the previous five years.
However these potential changes are hypothetical and actual rates in future may differ significantly as a result of developments in global financial markets. This
sensitivity analysis has been based on the assumption that all other variables, including interest rates, remain constant.

Interest rate risk
The Group has borrowings with a range of maturities 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. At 31
December 2017, the Group does not have any interest rate swaps outstanding.

All floating rate borrowings have regular repricing dates.

£m
Senior notes
Bank loans at fixed rate
Bank loans swapped to fixed rate
Fixed rate borrowings

Bank loans
Finance leases
Floating rate borrowings

Total borrowings

2017
630.8
55.2
–
686.0

149.1
0.3
149.4

835.4

2016
788.2
60.7
22.7
871.6

392.3
0.5
392.8

1,264.4

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.

Floating to fixed interest rate swaps, designated as cash flow hedges, have previously been used to mitigate the interest rate exposure arising on selected floating
rate debt. As the borrowings were repaid during the year, the associated interest rate swaps were cancelled and there were no interest rate swaps outstanding at
31 December 2017. Interest rate swaps outstanding at the prior year end were as follows:

Hedged item
Australian dollar loans

Fixed rate
6.3%
6.4%

from
May 2006
January 2007

Period of swap contract
to
January 2020
January 2020

Currency value
AUS$33.3m
AUS$5.5m

www.cobham.com

2016
£m
19.5
3.2
22.7

119

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2017

Notes to the Group Financial Statements continued

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 16, at 31 December 2017 undrawn committed borrowing facilities of £404.1m (2016: £123.9m) 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 USA, most business units utilise local banking 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. 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 2017

Derivative liabilities
Foreign exchange derivatives

Gross cash outflows
Gross cash inflows

Inflation swap
At 31 December 2017

Non-derivative financial liabilities
Borrowings
Trade and other payables (restated, see notes 17 and 6)
At 31 December 2016

Derivative liabilities
Interest rate swaps
Foreign exchange derivatives

Gross cash outflows
Gross cash inflows

Inflation swap
At 31 December 2016

Within
one year

35.0
320.9
355.9

381.6
(370.2)
0.4
11.8

102.6
319.5
422.1

1-2 years

2-5 years

Over 5 years

Total

85.6
2.5
88.1

521.5
3.7
525.2

338.7
5.4
344.1

980.8
332.5
1,313.3

31.5
(29.0)
–
2.5

301.6
3.0
304.6

31.0
(28.4)
–
2.6

667.4
3.2
670.6

–
–
–
–

444.1
(427.6)
0.4
16.9

388.8
6.0
394.8

1,460.4
331.7
1,792.1

0.9

0.6

0.3

–

1.8

724.9
(683.8)
1.4
43.4

66.1
(58.5)
0.4
8.6

41.5
(36.9)
–
4.9

6.1
(4.8)
–
1.3

838.6
(784.0)
1.8
58.2

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 having a large customer base. 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 and any requests for extended credit are approved by senior management. Existing customer accounts are monitored on an
ongoing basis and appropriate action is taken where necessary to minimise any credit risk. At 31 December 2016, additional provisions were made following the
Balance Sheet review exercise as described in note 2. No further credit risk provision is required in excess of the provision for impaired receivables shown in note 13.

Bank term balances totalling £7.0m (2016: £7.1m) have been pledged against the residual value of leased assets under an agreement which expires in 2020.

Group management monitor debtor days and the ageing of receivables which are more than one month overdue on a regular basis. At 31 December 2017,
8.7% (2016: 9.5%) of gross trade receivables were overdue by one month or more.

The maximum exposure to credit risk at 31 December 2017 is the fair value of each class of receivable as disclosed in note 13.

120

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Cobham plcAnnual Report and Accounts 2017The Group has master netting arrangements in respect of bank balances in the UK. 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 13. In the event of an automatic enforcement event, the bank
balances are 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 also shown in note 13.

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 19.

Capital risk management
Group policy continues to be 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 £1,027.0m at 31 December 2017 (2016: £488.8m). Within its 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, forecast trading
requirements, the availability and maturity of banking facilities, future funding needs and proposed dividend levels. Group banking arrangements include financial
covenants which are based on adjusted IFRS results as outlined in note 16.

As a result of these considerations it was announced in January 2017 that no dividend would be paid in respect of the year ended 31 December 2017. The Board
set a net debt/EBITDA threshold of 1.5x in response to the immediate need to strengthen the Balance Sheet, and in May 2017 a Rights Issue was completed as
detailed in note 22. This raised net proceeds of £496.7m which were applied to existing debt and held as bank deposits. The Board continues to review the
position on a regular basis and intends to take a conservative approach to the capital structure in 2018 before setting out a revised capital allocation policy.

22. Share capital

At 1 January 2016
Issued in the year
At 31 December 2016
Issued in the year
At 31 December 2017

Number of
2.5p shares
1,214,527,625
569,287,950
1,783,815,575
683,145,540
2,466,961,115

Share capital
£m
30.4
14.2
44.6
17.1
61.7

Share premium
£m
301.9
476.4
778.3
479.6
1,257.9

Shares were issued on 4 May 2017 as a result of a 2 for 5 fully underwritten Rights Issue at an issue price of 75p per share. Net proceeds of £496.7m were realised
after costs of £15.7m. In the prior year, shares were issued following a 1 for 2 fully underwritten Rights Issue which raised net proceeds of £490.6m after costs of
£16.1m.

As at 31 December 2017 88,427,023 (2016: 88,587,855) ordinary shares were held in treasury including 12,475,299 (2016: 12,636,131) shares held in the Cobham
Employee Benefit Trust. At 31 December 2017 the market value of treasury shares was £111.7m (2016: £145.0m), including shares with a market value of £15.8m
(2016: £20.7m) held by the Cobham Employee Benefit Trust.

During the year ended 31 December 2017 treasury shares were used to satisfy awards and options under the Group’s share based payment schemes. Receipts
from option exercises are included in retained earnings and total equity.

Further details of the share capital of Cobham plc can be found in the Directors’ Report on page 72.

www.cobham.com

121

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2017Notes to the Group Financial Statements continued

23. Other reserves

£m
At 1 January 2016
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
Share based payments recognised in reserves
Transfer of share based payment reserve on exercise
Tax effects
Foreign exchange adjustments
At 31 December 2016
Foreign exchange differences on translation of overseas operations
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 reserves on settlement of cash flow hedge contracts
Share based payments recognised in reserves
Transfer of share based payment reserve on exercise
Tax effects
At 31 December 2017

Note

Translation
reserve
(24.4)
34.6
6.7
(0.4)
0.1
–
–
–
(0.1)
–
16.5
(50.4)
–
0.5
–
0.1
–
–
–
(33.3)

Hedge
reserve
(0.1)
–
–
(0.2)
(2.3)
1.6
–
–
0.5
0.2
(0.3)
–
1.1
(0.7)
0.5
(0.1)
–
–
(0.1)
0.4

Share based
payment
reserve
24.2
–
–
–
–
–
3.8
(5.1)
(1.2)
–
21.7
–
–
–
–
–
5.5
(2.9)
–
24.3

Total other
reserves
(0.3)
34.6
6.7
(0.6)
(2.2)
1.6
3.8
(5.1)
(0.8)
0.2
37.9
(50.4)
1.1
(0.2)
0.5
–
5.5
(2.9)
(0.1)
(8.6)

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 together with foreign exchange movements arising on interest rate swaps and foreign exchange derivatives designated as
hedge instruments.

The hedge reserve reflects movements in fair values on cash flow hedging derivatives as detailed in notes 19 and 21.

The share based payment reserve includes the cost of awards as assessed under IFRS 2 and detailed in note 24, together with related deferred tax provided under
IAS 12. The appropriate proportion of this reserve is transferred to retained earnings following vesting or exercise.

24. Share based payments
The Group offers a number of long term incentive schemes which provide a mix of performance based incentive and retention based awards as described below
and in the Directors’ Remuneration Report on pages 62 to 71. All schemes are equity settled and the total amount included in the Income Statement arising from
share based payment schemes is as follows:

£m
PSP
RSP
Other schemes

The number of awards outstanding at 31 December under each scheme are as follows:

Number of awards (thousands of shares)
PSP
RSP
ESOS
BCP
ShareSave
At 31 December

2017
1.4
3.4
0.7
5.5

2017
13,597
5,052
3,484
–
8,372
30,505

2016
1.7
1.3
0.8
3.8

2016
9,998
3,618
3,794
17
7,612
25,039

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Cobham plcAnnual Report and Accounts 2017

PSP
The PSP scheme is offered to senior executives across the Group and allows for annual grants of conditional shares and nil-cost options 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. The scheme includes retention awards granted from time to time to specific personnel and buy-out awards granted to key new
starters, both vesting after a maximum of three years conditional only upon continued employment within the Group.

Number of awards (thousands of shares)
At 1 January
Awards granted
Effect of Rights Issue
Awards forfeited or cancelled
Exercised
Expired
At 31 December

Weighted average remaining contractual life of PSP awards outstanding
Number of PSP awards exercisable at 31 December (thousands)

2017
9,998
8,405
853
(5,487)
(143)
(29)
13,597

1.7 years
26

2016
10,026
4,100
1,314
(3,909)
(1,489)
(44)
9,998

1.1 years
23

Awards granted in the year under the PSP scheme were mainly granted in May 2017 with an average fair value of £1.319 (2016 awards: £1.602). Fair values are
calculated using the Black-Scholes option pricing model and, where market related performance conditions apply, a Monte Carlo simulation is also used. There
is no exercise price for these awards. The weighted average inputs into the models were as follows:

Weighted average share price
Expected life
Expected employee cancellation rate
Risk free rate

2017
£1.381
2.9 years
3.1%
0.3%

2016
£1.646
2.2 years
4.0%
0.6%

The 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.
Dividend yields were nil or were not relevant to the valuation model where participants of the vested awards receive the benefit of dividend equivalent payments.

RSP
RSP awards provide conditional shares based solely on continued employment within the Group over a maximum of four years.

Number of awards (thousands of shares)
At 1 January
Awards granted
Effect of Rights Issue
Awards forfeited or cancelled
Exercised
Expired
At 31 December

2017
3,618
3,200
524
(455)
(1,823)
(12)
5,052

2016
1,317
2,660
172
(213)
(304)
(14)
3,618

Weighted average remaining contractual life of RSP awards outstanding
Number of RSP awards exercisable at 31 December (thousands)

1.5 years
4

1.3 years
–

Awards granted in the year under the RSP scheme were mainly granted in May 2017 with an average fair value of £1.375 (2016 awards: £1.617) which is then
adjusted for non-vesting conditions such as expected employee cancellation using a weighted average rate of 5.1% (2016: 6.1%). Fair values are calculated using
the Black-Scholes option pricing model and equate to the market price on the date of grant.

Other schemes
Charges for other schemes relate to share options granted under the Group’s ShareSave scheme, which is open to all UK employees. The fair values of ShareSave
awards granted in the year are significantly lower than for PSP and RSP 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.

In 2016, the charges for other schemes also included the final amounts charged for ESOS and BCP schemes which were last awarded in 2013 and
2014 respectively.

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123

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2017Notes to the Group Financial Statements continued

25. 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

2017
28.3
24.7
17.5
16.0
13.7
66.9
167.1

2016
30.3
27.7
25.1
16.6
14.0
45.5
159.2

Operating lease commitments include £17.6m (2016: £23.8m) related to onerous leases which have been provided for at the balance sheet date.

Operating lease payments during the year totalled £35.7m (2016: £32.3m) including rental costs of £8.6m (2016: £7.8m) relating to operational aircraft used
in the Group’s service businesses; the remainder primarily relates to the rental of office and operating facilities.

26. Contingent liabilities

At 31 December 2017, 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 Financial Statements.

As announced in June 2017, Cobham was notified by the Financial Conduct Authority that it had appointed investigators to ascertain whether the Company had
breached the Listing Rules and the Disclosure and Transparency Rules between April 2016 and February 2017 and the Market Abuse Regulation between July 2016
and February 2017. It is currently not possible to predict what the outcome of this investigation will be.

The Company and various of its subsidiaries are, from time to time, parties to various legal proceedings and claims and management does not anticipate that the
outcome of these, either individually or in aggregate, will have a material adverse effect upon the Group’s financial position.

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 as a result of material enhancements to the specifications
originally agreed under the contracts. Judgement is therefore required as regards estimated costs to complete, the outcome of negotiations with customers and
the amounts recoverable under these contracts. The amount recoverable may be subject to direct damages due to the customer and damages or penalties they
incur from their own end users. In particular there are onerous contract terms and challenging delivery schedules on air to air refuelling development contracts.
The Group may take account of the advice of experts as required in making these judgements and whether the outcome of negotiations will result in an
appropriate recovery of costs.

In the case where the Group is undertaking development activity at its own cost, but has given performance undertakings to prospective customers, then a
liability for losses consequent upon the failure to meet such undertakings could exist.

The Group is subject to corporate and other tax rules in the jurisdictions where it conducts its business operations. Changes in tax rates, tax reliefs and tax laws,
changes in practice or interpretation of the law by the relevant tax authorities, increasing challenges by relevant tax authorities on transfer pricing and other
matters, or any failure to manage tax risks adequately could result in increased charges, financial loss, penalties and reputational damage, which may materially
adversely affect the Group’s financial condition and results of operations.

In addition, tax enforcement has become a higher priority for many tax authorities in jurisdictions in which the Group operates, which has led to an increase in
tax audits, enquiries and challenges, or the testing through litigation of the boundaries of the correct interpretation of legislation. Tax authorities may also actively
pursue additional taxes based on retroactive changes to tax laws and the Group may have disagreements with tax authorities which could result in a material
restatement to the tax position. For example, the availability of certain interest deductions on one of the Group’s internal financing arrangements, principally
as a result of various US acquisitions, has been under challenge for some time. Over the life of this internal financing arrangement, the aggregate tax value of the
interest deductions amounted to approximately £130m. If decided adversely to the Group, this could lead to increased tax liabilities in excess of those provided
in the Group’s Balance Sheet, and result in a substantial tax payment becoming due. That payment may also be subject to an interest charge from the relevant
authority. The Group has taken external advice and considers that it has strong support for its position. However, the timing and resolution of this issue is
uncertain.

The European Commission (EC) has opened an investigation into the UK’s controlled foreign company (CFC) rules. The CFC rules levy a charge on foreign
entities controlled by the UK that are subject to a lower rate of tax, however there is currently an exemption available for 75% of this charge if the activities being
undertaken by the CFC relate to financing. The EC is investigating whether this exemption is in breach of EU State Aid rules, but it is too early to assess what
the conclusions of this investigation might be.

On 22 December 2017 extensive changes to the US tax system were made. A number of risks to the Group arise as a result, including anti-base erosion, the way
that interest deductions are made, foreign tax credits and tax of foreign earnings. These risks are currently being assessed as further clarity is provided by the US
tax authorities.

124

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Cobham plcAnnual Report and Accounts 2017
27. Related party transactions

During the year, £0.4m (2016: £0.9m) of goods were purchased from and £nil (2016: £0.6m) of goods were sold to joint ventures and associates. There were no
other material transactions between Group entities and related parties during the current or previous year. Group policy is for all transactions with related parties
to be made on an arm’s length basis and no guarantees have been given to, or received from, related parties.

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 62 to 71.

28. Events after the balance sheet date

As shown in note 16, the US$75m credit agreement was repaid in January 2018 following the refinancing activity completed in December 2017.

The divestment of the AvComm and Wireless test and measurement businesses was announced on 2 February 2018, as disclosed in note 15.

29. Subsidiaries and other related undertakings

The Group operates through a number of subsidiary undertakings and a full listing of these as at 31 December 2017 is provided below. The Group owns 100%
of the share capital of all subsidiaries with the exception of TEAM SA (98.7% owned).

The Group also has interests in a small number of joint ventures and one associated undertaking which are included in the list below. The 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. No further disclosures are provided concerning the assets and results of the joint ventures or associated undertaking on the basis
of materiality.

Name of undertaking
Aedion Investments Unit Trust
Aeroflex Asia Ltd.
Aeroflex Colorado Springs, Inc.
Aeroflex Control Components, Inc.
Aeroflex France SAS
Aeroflex GmbH
Aeroflex Holding Corp.
Aeroflex Incorporated
Aeroflex Innovations (Shanghai) Co. Ltd.
Aeroflex Ireland Limited
Aeroflex Japan KK
Aeroflex Limited
Aeroflex Microelectronic Solutions, Inc.
Aeroflex Plainview, Inc.
Aeroflex RAD Europe Limited
Aeroflex RAD, Inc.
Aeroflex Singapore Pte. Ltd.
Aeroflex Systems Private Limited
Aeroflex Technology Service (Beijing) Co. Ltd.
Aeroflex Test Solutions Limited
Aeroflex Wichita, Inc.
AFI Flight Inspection GmbH
AFI Holdings GmbH
Air Précision SAS
Asia Pacific Airlines (Papua New Guinea) Pty Limited

Asia Pacific Airlines Pty Limited
Atlantic Microwave Corporation
Avenue 64 Limited
Aviation Défense Service SA (45% joint venture)1
A-xell Wireless AB
Axell Wireless Asia Pte Limited
Axell Wireless Israel Limited
Axell Wireless Limited
Axell Wireless, Inc.
Carleton Life Support Systems, Inc

www.cobham.com

Address of registered office or equivalent
26 New Street, St Helier, Jersey JE2 3RA
Unit 7-8, 13/F, Progress Commerical Building, 9 Irving Street, Causeway Bay, Hong Kong
Wilmington, USA
CSC-Lawyers Incorporating Service (Company), 601 Abbot Road, East Lansing, MI 48823, USA
31 avenue de la Baltique, 91140 Villebon sur Yvette, France
Gutenbergstr. 2–4, 85737 Ismaning, Germany
Wilmington, USA
Wilmington, USA
1008-1009, No 76, Pujian Road, 10F, You You International Plaza, Shanghai 200127, PRC
Adelphi Plaza (Ground Floor) George’s Street Upper, Dún Laoghaire, Co. Dublin, Ireland
16F Fukoku Seimei Bldg., 2-2-2 Uchisaiwai-cho, Chiyoda-ku, Tokyo 100-0011, Japan
Stevenage, England
CSC-Lawyers Incorporating Service (Company), 601 Abbot Road, East Lansing, MI 48823, USA
Wilmington, USA
Stevenage, England
Corporation Service Company, 80 State Street, Albany, New York 12207-2543, USA
21 Media Circle, Infinite Studios, #06-04 & #05-01, Singapore 138562, Singapore
602, 6th Floor, Raheja Paramount, Residency Road, Bangalore – 560025, Karnataka, India
CircleNo. 38 Taikang Building Block 1, Unit 1501-03, & 1507, Chaoyang District, Beijing, PRC
Wimborne, England
Wilmington, USA
Hermann-Blenk-Straße 8a, 38108 Braunschweig, Germany
Hermann-Blenk-Straße 8a, 38108 Braunschweig, Germany
5 avenue Denis Papin, BP 36, 92353 Le Plessis Robinson, France
Blake Dawson, 4th Floor, Mogoru Motor Building, Champion Parade, Port Moresby, National Capital District,
Papua New Guinea
Adelaide, Australia
Wilmington, USA
Wimborne, England
Zone Aéroportuaire Nîmes Arles Camargue, 30800 Saint Gilles, France
Torhamnsgatan 30F, 164 40 Kista, Sweden
21 Media Circle, Infinite Studios, #06-04 & #05-01, Singapore 138562, Singapore
6 Bareket St., Petah-Tikva 49002, Israel
Wimborne, England
Wilmington, USA
Wilmington, USA

125

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2017Notes to the Group Financial Statements continued

Name of undertaking
Carleton Technologies, Inc
Chelton Antennas SA
Chelton Avionics, Inc
Chelton Limited
Chelton Technologies Canada Limited
Chelton Telecom and Microwave SAS
Chelton, Inc
Cob Finance LLC
Cobham Advanced Electronic Solutions Mexico,
S.A. de C.V.
Cobham Advanced Electronic Solutions, Inc.
Cobham AES Holdings Inc.
Cobham Aviation Services Engineering Pty Limited
Cobham Aviation Services International Limited
Cobham CTS Limited
Cobham Defence Communications Limited
Cobham Defense Products, Inc.
Cobham Flight Inspection Limited
Cobham Gaisler AB
Cobham Holdings (US) Inc.
Cobham Holdings Inc.
Cobham India Private Limited
Cobham Leasing Limited
Cobham Management Services Inc.
Cobham Mission Equipment Inc.
Cobham Properties Inc.
Cobham SAR Services Pty Limited
Cobham Slip Rings Naples Inc.
Comant Industries, Incorporated
Continental Microwave and Tool Co, Inc.
FB Heliservices Kenya Limited
FB Heliservices Limited
FB Leasing Limited
FBH Cyprus Limited
FBS Limited
Fleet Support Pty Limited
Flight Refuelling Limited2
FR Aviation Group Limited
FR Aviation Limited
FR Aviation Services Limited
FR Investments Inc.
Glyndale Pty Limited
Groupement Troyen d’Electronique
Hyper-Technologies SAS
IFR Finance Inc.
IFR Finance Limited Partnership3
IFR Systems, Inc.
Jet Systems Pty Limited
Label SAS
Lock Financing Limited
Lockman Denmark Financing S.à r.l
Lockman Denmark Holdings A/S
Lockman Electronic Holdings Limited
Lockman Financing S.à r.l
Lockman Investments Limited
Lockman Properties Limited
Lockwash Investments LLC

126

Address of registered office or equivalent
Wilmington, USA
7 chemin de Vaubesnard, 91410 Dourdan, France
Wilmington, USA
Wimborne, England
PO Box 10424, Pacific Centre, 1300-777 Dunsmuir Street, Vancouver V7Y 1K2, Canada
31 avenue de la Baltique, 91140 Villebon sur Yvette, France
Corporation Service Company d/b/a CSC-Lawyers Inco, 211 E. 7th Street, Suite 620, Austin, TX 78701, USA
Wilmington, USA
Baker & McKenzie Abogados, S.C., Pedregal 24, Lomas Virreyes, 11040 Ciudad de México, D.F., Mexico

Wilmington, USA
Wilmington, USA
Adelaide, Australia
Wimborne, England
Wimborne, England
Wimborne, England
Wilmington, USA
Wimborne, England
Kungsgatan 12, SE-411, 19 Göteborg, Sweden
Wilmington, USA
Wilmington, USA
4th Floor, Statesman House, Barakhamba Road, New Delhi – 110001, India
Wimborne, England
Wilmington, USA
Wilmington, USA
Wilmington, USA
Adelaide, Australia
Wilmington, USA
CSC Lawyers Incorporating Service, 2710 Gateway Oaks Drive, Suite 150N, Sacramento, CA 95833, USA
Corporation Service Company, 84 State Street, Boston, MA 02109, USA
PO Box 764, 00606, Nairobi, Kenya
Wimborne, England
Wimborne, England
12 Kennedy Avenue, Kennedy Business Centre, 2nd Floor, Office 203, P.C. 1087, Nicosia, Cyprus
Wimborne, England
Adelaide, Australia
Wimborne, England
Wimborne, England
Wimborne, England
Wimborne, England
Wilmington, USA
Adelaide, Australia
Rue Catherine et William Booth, 10000 Troyes, France
28 rue des Dames, 78340 Les Clayes sous Bois, France
10200 West York Street, Wichita, KS 67215-8999, USA
Stevenage, England
Wilmington, USA
Adelaide, Australia
10 allée de Montréal, 74108 Annemasse, France
Suite 6, Rineanna House, Shannon Free Zone, Co. Clare, Ireland
20 rue des Peupliers, L-2328, Luxembourg
Lundtoftegårdsvej 93 D, DK-2800 Kongens Lyngby, Denmark
Wimborne, England
20 rue des Peupliers, L-2328, Luxembourg
Wimborne, England
Wimborne, England
Wilmington, USA

www.cobham.com

Cobham plcAnnual Report and Accounts 2017Name of undertaking
Lockwash US Limited
Manlock Investments Limited
Mastsystem International Oy
Micro-Mesh SARL
NAS Services Pty Limited
NAT Seattle Inc.
National Air Support Pty Limited
National Investments Asia Pacific Pty Limited
National Jet Express Pty Limited
National Jet Operations Services Pty Limited
National Jet Systems Ground Handling Pty Limited
National Jet Systems Pty Limited
Northern Airborne Technology Limited
Northrop Grumman Cobham Intercoms LLC
(50% joint venture)
Omnipless Manufacturing (Pty) Limited
Philtech Co., Ltd (associate owned 30%)
Precision Aviation Industries SARL
Sargent Fletcher Inc.
Satori Air Services Inc
Sea Tel, Inc
Sivers Lab AB
Société de Marquage et Signalisation SAS
Surveillance Australia Pty Limited
TEAM SA
Thrane & Thrane A/S
Thrane & Thrane Aalborg A/S
Thrane & Thrane Inc.
Thrane & Thrane Norge A/S
Trivec-Avant Corporation
Vector Fields Incorporated

Dormant entities
Aeroflex Asia Pacific Limited
Aeroflex Bloomingdale, Inc.
Aeroflex Burnham Limited
Aeroflex Cambridge Limited
Aeroflex Milan SRL
Aeroflex Tech., SA
Aeroflex Test Solutions India Pvt Limited
Chelton Aviation Corporation
Chelton Satcom, Inc.
Cobham Aviation SDN BHD

Cobham Comms Limited (formerly Cobham
Communications and Connectivity Limited)
Cobham Communications and Connectivity Limited
(formerly Wallop Holdings Limited)
Cobham Group Limited
Cobham Helicopter Services Trinidad
Cobham Mission Systems Limited
Cobham Whiteley Limited
Credowan Limited
CTS Patents Limited
European Antennas Limited
Falcon Special Air Services SDN BHD

FB Heliservices Curacao N.V.
Grenedere Limited

www.cobham.com

Address of registered office or equivalent
Wimborne, England
Wimborne, England
Muovilaaksontie 8, 82110 Heinävaara, Joensuu, Finland
35 rue de Montlhéry, BP 20191, 94563 Rungis, France
Adelaide, Australia
Wilmington, USA
Adelaide, Australia
Adelaide, Australia
Adelaide, Australia
Adelaide, Australia
Adelaide, Australia
Adelaide, Australia
PO Box 10424, Pacific Centre, 1300-777 Dunsmuir Street, Vancouver V7Y 1K2, Canada
CT Corporation System, 1209 Orange Street, Wilmington, DE 19801, USA

Westlake Drive, Westlake Business Park, Westlake 7945, South Africa
Sujeong-gu, Seongnam-si, Gyeonggi-do, South Korea
5 avenue Denis Papin, BP 36, 92353 Le Plessis Robinson, France
Wilmington, USA
4105 Cousens Street, Saint-Laurent, Quebec H4S 1V6, Canada
CSC Lawyers Incorporating Service, 2710 Gateway Oaks Drive, Suite 150N, Sacramento, CA 95833, USA
Torhamnsgatan 30F, 164 40 Kista, Sweden
174-178 Quai de Jemmapes, 75010 Paris, France
Adelaide, Australia
35 rue de Montlhéry, BP 20191, 94563 Rungis, France
Lundtoftegårdsvej 93 D, DK-2800 Kongens Lyngby, Denmark
Industrivej 30, DK-9490 Pandrup, Denmark
CT Corporation System, 4701 Cox Road, Suite 285, Glen Allen, VA 23060, USA
Cort Adelers gate 16, 0254 Oslo, Norway
CSC Lawyers Incorporating Service, 2710 Gateway Oaks Drive, Suite 150N, Sacramento, CA 95833, USA
Wilmington, USA

Stevenage, England
Corporation Service Company, 80 State Street, Albany, New York 12207-2543, USA
Stevenage, England
Stevenage, England
Via Comaggia 10, c/o Studio Legale Tributario, Milan 20123, Italy
Europa Empresarial, Calle Rozabella 6, Edificio Paris, 28230 Laz Rosas, Madrid, Spain
602, 6th Floor, Raheja Paramount, 138 Residency Road, Bangalore, Karnataka-560025, India
Corporation Service Company d/b/a CSC-Lawyers INCO, 211 E. 7th Street, Suite 620, Austin, TX 78701, USA
Wilmington, USA
Level 8 Symphony House, Block D13 Pusat Dagangan Dana 1, Jalan PJU 1A/46, 47301 Petaling Jaya,
Selangor, Malaysia
Wimborne, England

Wimborne, England

Wimborne, England
5-7 Sweet Briar Road, St Clair, Port of Spain, Trinidad and Tobago
Wimborne, England
Wimborne, England
Wimborne, England
Wimborne, England
Wimborne, England
Level 8 Symphony House, Block D13 Pusat Dagangan Dana 1, Jalan PJU 1A/46, 47301 Petaling Jaya,
Selangor, Malaysia
Kaya W.F.G. (Jombi), Mensing 36, Curacao
Wimborne, England

127

GROUP FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2017Notes to the Group Financial Statements continued

Name of undertaking
Lockman Finance Limited
Lockman Financing Limited
ML Aviation Limited
Multiphase Pumping Systems Limited
National Jet Regional Services Pty Limited
Racal Antennas Limited
Strabor (Aircraft) Limited
Strabor Investments Limited
W.E.S. (Manufacturing) Limited
W.E.S. Investments Limited

Full registered office addresses are:
Wimborne, England
Stevenage, England
Wilmington, USA
Adelaide, Australia

Address of registered office or equivalent
Wimborne, England
Wimborne, England
Wimborne, England
Wimborne, England
Adelaide, Australia
Wimborne, England
Wimborne, England
Wimborne, England
Wimborne, England
Wimborne, England

Brook Road, Wimborne, Dorset BH21 2BJ, England
Longacres House, Six Hills Way, Stevenage, Hertfordshire SG1 2AN, England
Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington, DE 19808, USA
National Drive, Adelaide Airport SA 5950, Australia

1 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.
2 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.
3 Advantage has been taken of the exemption conferred by regulation 7 of the Partnership Accounts Regulations 2008 from the requirements to prepare and publish audited accounts for

IFR Finance Limited Partnership.

128

www.cobham.com

Cobham plcAnnual Report and Accounts 2017Parent Company Balance Sheet
As at 31 December 2017

£m
Assets
Non-current assets
Investments in Group and other undertakings
Other investments
Derivative financial instruments
Other receivables

Current assets
Derivative financial instruments
Trade and other receivables
Cash and cash equivalents

Liabilities
Current liabilities
Borrowings
Trade and other payables
Provisions
Derivative financial instruments

Non-current liabilities
Borrowings
Derivative financial instruments
Retirement benefit obligations

Net assets

Equity
Share capital
Share premium
Other reserves
Retained earnings
Total equity

Note

2017

2016

1,013.5
6.1
33.1
18.7
1,071.4

15.6
2,474.3
409.1
2,899.0

–
(511.4)
(6.3)
(18.5)
(536.2)

(835.1)
(29.7)
(25.8)
(890.6)

2,543.6

61.7
1,257.9
17.2
1,206.8
2,543.6

787.3
6.1
35.0
18.3
846.7

35.2
2,645.8
204.7
2,885.7

(60.7)
(510.5)
(8.0)
(46.4)
(625.6)

(1,203.2)
(33.3)
(36.8)
(1,273.3)

1,833.5

44.6
778.3
13.5
997.1
1,833.5

Profit for the financial year
In accordance with the concession granted under Section 408 of the Companies Act 2006, the Income Statement of Cobham plc has not been separately
presented in these financial statements. The Company’s profit for the year ended 31 December 2017 was £203.8m (2016: £304.6m).

The financial statements on pages 129 to 135 were approved by a duly appointed and authorised committee of the Board on 1 March 2018 and signed on its
behalf by:

David Lockwood
Directors

David Mellors

www.cobham.com

129

PARENT COMPANY FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2017

Parent Company Statement of Changes in Equity
For the year ended 31 December 2017

£m
Total equity at 1 January 2016

Profit for the year
Other comprehensive income/(expense)

Items that will not be reclassified subsequently to profit or loss
Items that may subsequently be reclassified to profit or loss

Issue of shares, net of costs (note 13)
Proceeds on allocation of treasury shares
Dividends (note 2)
Share based payments (note 5)
Transfer of share based payment reserve
Total equity at 31 December 2016

Profit for the year
Other comprehensive income

Items that will not be reclassified subsequently to profit or loss
Items that may subsequently be reclassified to profit or loss

Issue of shares, net of costs (note 13)
Proceeds on allocation of treasury shares
Share based payments (note 5)
Transfer of share based payment reserve
Total equity at 31 December 2017

Share capital
30.4

Share
premium
301.9

Other reserves
Share based
payment
reserve
15.6

Hedge
reserve
(2.3)

Retained
earnings
829.1

Total
equity
1,174.7

–

–
–
14.2
–
–
–
–
44.6

–

–
–
17.1
–
–
–
61.7

–

–
–
476.4
–
–
–
–
778.3

–

–
–
479.6
–
–
–
1,257.9

–

–
1.5
–
–
–
–
–
(0.8)

–

–
1.1
–
–
–
–
0.3

–

304.6

–
–
–
–
–
3.8
(5.1)
14.3

(17.9)
–
–
2.3
(126.1)
–
5.1
997.1

(17.9)
1.5
490.6
2.3
(126.1)
3.8
–
1,833.5

–

203.8

–
–
–
–
5.5
(2.9)
16.9

2.5
–
–
0.5
–
2.9
1,206.8

2.5
1.1
496.7
0.5
5.5
–
2,543.6

The share based payment reserve includes the cost of awards granted to employees of the Company and Group as assessed under IFRS 2. Where awards which
gave rise to charges under IFRS 2 have vested or been exercised, the appropriate proportion of the reserve is transferred to retained earnings.

Distributable reserves at 31 December 2017 amounted to £1,180.1m (2016: £967.8m).

130

www.cobham.com

Cobham plcAnnual Report and Accounts 2017Notes to the Parent Company Financial Statements

1. Parent Company accounting policies

These financial statements are the financial statements for Cobham plc,
the Parent Company of the Cobham plc Group, which operates as a group
holding company.

Accounting convention
The financial statements have been prepared in accordance with Financial
Reporting Standard 101, Reduced Disclosure Framework (FRS 101).

The financial statements have been prepared on the going concern basis,
under the historical cost convention as modified to include the revaluation of
derivative financial assets and liabilities measured at fair value through profit
or loss and in accordance with the Companies Act 2006.

The Company has taken advantage of the following disclosure exemptions
under FRS 101:
− A cash flow statement and related notes (IAS 7, Statement of Cash Flows
and paragraph 10(d) of IAS 1, Presentation of Financial Statements);
− Comparative period reconciliations of the number of shares outstanding
(Paragraph 38 of IAS 1, Presentation of Financial Statements in respect of
paragraph 79(a)(iv) of IAS 1);

− Capital management disclosures required by paragraphs 134 to 136 of IAS 1;
− The requirements of paragraphs 30 and 31 of IAS 8, Accounting Policies,

Changes in Accounting Estimates and Errors concerning the effects of new
but not yet effective IFRSs;

− Details of compensation of key management personnel required by

paragraph 17 of IAS 24, Related Party Disclosures; and

− The requirements in IAS 24 to disclose related party transactions entered

into between two or more members of a group.

In addition, as the consolidated financial statements of Cobham plc include
the equivalent disclosures, the following exemptions under FRS 101 have also
been taken:
− Share based payment disclosures under paragraphs 45(b) and 46-52 of
IFRS 2, Share Based Payment in respect of group settled share based
payments; and

− Financial instrument information required by IFRS 7, Financial Instruments:
Disclosures and paragraphs 91 to 99 of IFRS 13, Fair Value Measurement.

Management judgement and estimation uncertainty
The preparation of financial statements in conformity with Financial Reporting
Standards requires the use of judgements and estimates that affect the
application of accounting policies and reported amounts of assets, liabilities,
revenue and expenses.

These judgements and estimates 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
judgements and estimates, 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.

Significant judgements in applying accounting policies
There were no significant judgements, apart from those involving estimations,
that the Directors made in the process of applying the Group’s accounting
policies which require separate disclosure in these financial statements.

Assumptions and estimation uncertainties
Management consider that there are a number of assumptions concerning the
future and other major sources of estimation uncertainty at the balance sheet
date, which have a significant risk of resulting in a material adjustment to the
carrying amounts of assets and liabilities within the next financial year.

Information concerning these assumptions and estimation uncertainties is
provided as follows:

a. Carrying value of investments (note 6)
A review of the carrying value of investments is completed as required to
ensure that it is not impaired. This requires an estimate of the expected
future cash flows from subsidiary undertakings and also a suitable discount
rate in order to calculate the present value of those cash flows. This is
considered to be a source of estimation uncertainty at the balance sheet
date, which may have a significant risk of causing a material adjustment to
the carrying amount of investments within the next financial year.

b. Pension assets and liabilities (note 12)
Assumptions are made in assessing the costs and present value of the

pension assets and liabilities, which include the discount rate, inflation and
mortality rates.

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.

Retirement benefit obligations
The Company operates and participates in the Cobham Pension Plan (CPP) and
the Cobham Executive Pension Plan (CEPP). The plans are funded defined
benefit schemes and assets are held in separate trustee administered funds.
The assets and liabilities of the CPP have been allocated to the contributing
companies based on the proportional number of members. The Company
also operates and contributes to a defined contribution scheme.

For the defined benefit schemes, current service costs and costs related to
the administration of the schemes are charged to operating profit. Past service
costs are recognised in the Income Statement. The interest on net assets or
liabilities is shown within finance income and costs. Actuarial remeasurements
are recognised in Other Comprehensive Income (OCI).

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 Balance Sheet.

For the defined contribution scheme, the amount 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.

www.cobham.com

131

PARENT COMPANY FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2017Notes to the Parent Company Financial Statements

Current and deferred taxation
Current tax is provided at the amounts expected to be paid 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 amounts in the financial statements. It is calculated
at the tax rates that are expected to apply in the periods in which the asset is
realised or liability is settled, based on tax rates and laws that have been
enacted or substantively enacted by the balance sheet date. Deferred tax is
measured on an undiscounted basis and deferred tax assets are only recognised
to the extent that it is probable that future taxable profits will be available
against which deductible temporary differences can be utilised.

Tax is charged or credited to the Income Statement except when it relates
to items recognised in OCI or directly in equity respectively, in which case the
tax is also recognised in OCI or directly in equity respectively. 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.

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 to employees of subsidiary undertakings, net of
amounts recovered as management charges.

Share based payments
For grants made to employees of Cobham plc under the Group’s equity 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 vesting period,
taking into account management’s best estimate of the number of awards
expected to vest. The vesting estimate, which includes progress against
non-market related performance conditions, is reviewed and updated at each
balance sheet date. The fair value of awards made to employees of subsidiary
undertakings, net of amounts recovered as management charges, is recognised
as a capital contribution and recorded in investments.

2. Dividends

No dividends were paid or approved during the year ended 31 December 2017.
The following dividends were paid in the prior year:

£m
Final dividend of 7.07p per share for 2015 (restated)
Interim dividend of 1.77p per share for 2016 (restated)

2016
91.6
34.5
126.1

Dividend per share figures above have been restated to reflect the bonus
element of the May 2017 Rights Issue.

Other investments are stated at cost less any provision for impairment in value.

3. Employees

Provisions
A provision is recognised when the Company has a present legal or constructive
obligation as a result of a past event and it is probable that settlement will be
required of an amount that can be reliably estimated.

Share capital
Ordinary share capital is classified as equity.

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 interest expense.

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. Non-monetary items (such as
investments) that are measured in terms of historical cost in a foreign
currency are translated using the exchange rates as at the dates of the initial
transactions. Non-monetary items measured at fair value in a foreign
currency (such as some derivative financial instruments) are translated using
the exchange rates at the date when the fair value was determined.

All exchange differences arising are taken to the Income Statement.

Financial instruments
The policies disclosed in note 1 to the Group Financial Statements on page 88
for the recognition, measurement and presentation of financial instruments are
applicable to the Parent Company Financial Statements.

Amounts receivable from and owed to subsidiaries are recognised at amortised
cost using the effective interest method and are reduced by appropriate
allowances for estimated irrecoverable amounts.

Interest bearing bank loans and overdrafts are recorded at the proceeds
received, net of direct issue costs and subsequently held at amortised cost.
Interest is accounted for on an accruals basis in the Income Statement.
Premiums payable on settlement or redemption and direct issue costs are
capitalised and amortised over the period to which the facility relates.

132

The average number of employees, including Directors, during the year was 162
(2016: 162). All staff were employed in administrative functions. Costs for these
employees were as follows:

£m
Wages and salaries
Social security costs
Pension costs
Share based payments

2017
13.2
1.1
9.4
1.3
25.0

2016
12.9
1.0
9.6
0.7
24.2

Disclosures in respect of the emoluments of Directors and key management
personnel can be found in the Directors’ Remuneration Report on pages 62 to
71 and in note 4 to the Group Financial Statements respectively.

4. Audit fees

The audit fee in respect of the Parent Company Financial Statements was
£44,000 (2016: £47,000).

5. Share based payments

Employees of Cobham plc participate in equity settled share based payment
schemes which are operated by the Group for senior executives and also in the
Group’s ShareSave scheme which is open to all UK employees.

At 31 December, the following awards were outstanding under each scheme:

Number of awards (thousands of shares)
PSP
RSP
ESOS
BCP
ShareSave

2017
3,942
1,082
84
–
818
5,926

2016
3,242
388
180
17
696
4,523

www.cobham.com

Cobham plcAnnual Report and Accounts 2017

Options outstanding under the ESOS scheme had a weighted average
remaining contractual life of 1.3 years (2016: 1.7 years) and exercise prices
which range from £1.36 to £1.72 (2016: £1.36 to £1.71 as adjusted for the bonus
impact of the 2017 Rights Issue). Options outstanding under the ShareSave
scheme had a weighted average remaining contractual life of 3.0 years
(2016: 3.1 years) and exercise prices which range from £1.10 to £1.78
(2016: £1.09 to £1.78 as adjusted).

Exercises of awards under the ESOS and ShareSave schemes were made at
various times throughout the year. The average share price in that period was
£1.241 (2016: £1.842).

Further details of these schemes can be found in the Directors’ Remuneration
Report on pages 62 to 71 and in note 24 to the Group Financial Statements.

6. Investments in Group and other undertakings

Movements in the net deferred tax asset are as follows:

£m
At 1 January 2017
Charge to reserves
Charge to Income Statement
At 31 December 2017

Non-current assets

£m
Loan notes

2017
15.2
(0.8)
(7.0)
7.4

2017
18.7

2016
18.3

The loan notes relate to the FSTA programme, are interest bearing and due for
repayment in 2035.

2017
–

2016
60.7

2017
204.3
630.8
835.1

2016
475.7
727.5
1,203.2

£m
Cost and net book amount
At 1 January 2017
Additions in the year
Share based payment awards granted
to employees of Group undertakings
net of recoveries
At 31 December 2017

Share based
payments

Total

8. Borrowings

Current liabilities

773.3
225.0

–
998.3

14.0
–

1.2
15.2

787.3
225.0

£m
Senior notes

1.2
1,013.5

Non-current liabilities

£m
Bank loans
Senior notes

During the year, the Company subscribed for additional shares in two of its
subsidiary undertakings at a total cost of £225.0m with no changes to the
proportion of shares held.

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 all subsidiaries is provided in note 29 to the Group Financial Statements.
The market capitalisation of the Group as a whole is given in the Group
Financial Record on page 136.

The Company has minority shareholdings in two companies in connection with
the FSTA programme. The total amount invested is £6.1m (2016: £6.1m) and this
is held as a trade investment.

7. Trade and other receivables

Current assets

£m
Amounts owed by Group undertakings
Deferred tax
Prepayments and accrued income

2017
2,456.1
7.4
10.8
2,474.3

2016
2,621.4
15.2
9.2
2,645.8

Amounts owed by Group undertakings are unsecured and repayable on
demand. All such balances, excluding trading balances, are interest bearing.

The net deferred tax asset can be analysed as follows:

£m
Derivative financial instruments
Retirement benefit obligations
Share based payments
Accelerated capital allowances

2017
1.9
5.3
0.2
–
7.4

2016
7.5
7.4
0.2
0.1
15.2

Further details of the Company’s principal borrowing facilities are disclosed in
notes 13 and 16 to the Group Financial Statements.

The loans falling due after more than one year are due for repayment
as follows:

£m
Between one and two years
Between two and five years
After five years

2017
55.4
148.9
–
204.3

Senior notes falling due after more than one year mature as follows:

£m
Between two and five years
After five years, maturing in 2024
(2016: between 2021 and 2024)

9. Trade and other payables

£m
Trade payables
Amounts owed to Group undertakings
Corporation tax payable
Other tax and social security
Accruals and deferred income

2017
317.3

313.5
630.8

2017
2.6
484.5
6.5
1.0
16.9
511.4

2016
267.4
204.9
3.4
475.7

2016
383.6

343.9
727.5

2016
2.4
488.2
3.3
1.3
15.3
510.5

Amounts owed to Group undertakings include £86.8m (2016: £85.6m) on which
interest is charged at rates of between 0.4% and 9% (2016: 0.25% and 9%).
The remaining amount owed by Group undertakings is interest free.
All amounts are unsecured and are repayable on demand.

www.cobham.com

133

PARENT COMPANY FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2017

Notes to the Parent Company Financial Statements continued

10. Provisions

£m
At 1 January 2017
Additional provisions in the year
Utilisation of provisions
Provisions released
At 31 December 2017

Legal claims
1.4
0.8
(1.0)
(0.8)
0.4

Other
provisions
6.6
–
(0.7)
–
5.9

Total
8.0
0.8
(1.7)
(0.8)
6.3

Other provisions of £5.9m (2016: £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 remains uncertain.

11. Derivative financial instruments

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 manage exposures such as inflation risk.

The fair values of derivative financial instruments are as follows, these are
financial assets measured at fair value through profit or loss, or financial
liabilities categorised as held for trading:

£m
Non-current assets
Current assets
Current liabilities
Non-current liabilities
At 31 December 2017

Non-current assets
Current assets
Current liabilities
Non-current liabilities
At 31 December 2016

Interest
rate swaps
–
–
–
–
–

Foreign
exchange
derivatives
33.1
15.2
(18.1)
(29.7)
0.5

–
–
(0.6)
(1.2)
(1.8)

34.6
33.8
(44.4)
(31.7)
(7.7)

Inflation
swap
–
0.4
(0.4)
–
–

0.4
1.4
(1.4)
(0.4)
–

Total
33.1
15.6
(18.5)
(29.7)
0.5

35.0
35.2
(46.4)
(33.3)
(9.5)

The movements in the fair values of derivative financial instruments during the
year are as follows:

£m
At 1 January 2016
Gain through Income
Statement – not hedged
Gain reclassified to Income
Statement
(Loss)/gain through OCI
– hedged items
Foreign exchange
adjustments
At 31 December 2016
Gain through Income
Statement – not hedged
Gain/(loss) reclassified to
Income Statement
Ineffectiveness of net
investment hedge through
Income Statement
Gain through OCI –
hedged items
At 31 December 2017

Interest
rate swaps
(2.3)

Foreign
exchange
derivatives
(15.8)

Inflation
swap
–

–

1.1

(0.2)

(0.4)
(1.8)

–

0.7

–

1.1
–

7.1

0.4

0.6

–
(7.7)

8.0

(0.1)

0.2

0.1
0.5

–

–
–

–

–
–

Total
(18.1)

7.1

1.5

0.4

(0.4)
(9.5)

8.0

0.6

0.2

1.2
0.5

Floating to fixed interest rate swaps were cancelled in the year ended
31 December 2017 following the repayment of the associated floating rate
borrowings. These interest rate swaps were previously designated as cash
flow hedging instruments and hedge accounting was applied. In addition, a
small number of specific foreign exchange derivatives with a fair value at
31 December 2017 of £0.1m (2016: £18.5m) are designated as cash flow hedging
instruments and hedge accounting is applied. In 2016, there was 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.

The most significant assumptions in valuing the derivatives are the exchange
rates for GBP: US$, GBP: DKK and GBP: EUR.

12. Retirement benefit obligations

Retirement benefit obligations in the Balance Sheet comprise:

£m
Defined benefit scheme assets
Defined benefit obligations

2017
431.4
(457.2)
(25.8)

2016
415.7
(452.5)
(36.8)

Defined benefit pension schemes
The Company operates and participates in the Cobham Pension Plan (CPP) and
the Cobham Executive Pension Plan (CEPP). The plans are funded defined
benefit schemes (where benefits are based on employees’ length of service
and average final salary) and assets are held in separate trustee administered
funds. The plans have been closed to new members since 2003 and have been
closed to future accrual from 1 April 2016.

Details of actuarial valuation processes and risks, assumptions and sensitivities
relating to the CPP and CEPP are not significantly different to those disclosed
in note 20 to the Group Financial Statements.

The Company expects to contribute £8.5m to its defined benefit pension
schemes in 2018 and £4.8m in 2019. At 31 December 2017, £0.7m (2016: £nil)
of contributions were outstanding.

134

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Cobham plcAnnual Report and Accounts 2017
Changes in the fair value of scheme assets are as follows:

13. Share capital

£m
At 1 January
Interest
Actuarial gains
Employer contributions
Benefits paid
At 31 December

2017
415.7
10.9
18.0
8.7
(21.9)
431.4

2016
349.0
13.1
62.3
8.7
(17.4)
415.7

£m
Allotted, issued and fully paid
Equity
2,466,961,115 (2016: 1,783,815,575)
2.5p ordinary shares
Non-equity
19,700 (2016: 19,700) 6% second cumulative
preference shares of £1

2017

2016

61.7

44.6

–

Changes in the present value of the defined benefit obligations are as follows:

£m
At 1 January
Interest cost
Actuarial losses arising from changes in financial
assumptions
Actuarial gains arising from changes in demographic
assumptions
Benefits paid
At 31 December

2017
452.5
11.7

20.7

(5.8)
(21.9)
457.2

2016
371.4
13.8

89.7

(5.0)
(17.4)
452.5

The actual return on scheme assets was £28.9m (2016: £75.4m). The weighted
average duration of the scheme liabilities is estimated to be 16 years.

The fair value of major categories of scheme assets, and as a percentage of
total scheme assets, is as follows:

UK equity instruments
Overseas equities
Emerging markets equities
Global equities
Liability driven investments
Corporate bonds
Private credit
Insurance contracts
Diversified growth funds
Other assets

£m
–
–
–
48.1
77.9
42.5
14.5
180.8
66.5
1.1
431.4

2017
%
–
–
–
11.1%
18.1%
9.9%
3.3%
41.9%
15.4%
0.3%
100.0%

£m
27.7
16.1
11.0
–
40.8
41.3
7.6
181.9
75.4
13.9
415.7

2016
%
6.7%
3.9%
2.6%
–
9.8%
9.9%
1.8%
43.8%
18.2%
3.3%
100.0%

Scheme assets do not include any of the Company’s own financial instruments,
nor any property occupied by, or other assets used by, the Company.

Defined contribution pension schemes
The Company also operates and participates in the Cobham Personal Pension
Plan, a defined contribution scheme. The assets of the scheme 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 £0.8m (2016: £1.0m). No contributions were
outstanding at the end of 2017 or 2016.

Preference shares with a value of £19,700 are classified as borrowings.

Following a 2 for 5 fully underwritten Rights Issue, 683,145,540 ordinary shares
of 2.5p each were issued on 4 May 2017 at an issue price of 75p per share. Net
proceeds of £496.7m were realised, net of costs of £15.7m.

Further details of the share capital of Cobham plc, including changes resulting
from treasury shares, can be found on page 72 and in note 22 to the Group
Financial Statements.

14. 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.

Further details of contingent liabilities related to the Company, including risks
related to uncertain tax positions and the nature of contract risks supported
by performance guarantees, can be found in note 26 to the Group
Financial Statements.

The Company had no capital commitments at 31 December 2017 (2016: £nil).

15. Related party transactions

During the year the Company entered into transactions, in the ordinary course
of business, with related parties that are part of the Cobham plc Group or
investees of the Group. The Company has taken advantage of the exemption
under paragraph 8(k) of FRS 101 from disclosing related party transactions
with its wholly owned subsidiary undertakings. The only transactions with
non-wholly owned subsidiaries relate to the receipt of management and brand
charges totalling £1.4m (2016: £1.3m) from TEAM SA which is 98.7% owned.
No amounts were outstanding at the current or prior year end.

There were no material transactions with the Directors, their close family
members or other connected parties to be reported during the year other than
arising from Directors’ service agreements. Details of Directors’ remuneration
are disclosed in the Directors’ Remuneration Report on pages 62 to 71.

www.cobham.com

135

PARENT COMPANY FINANCIAL STATEMENTSCobham plcAnnual Report and Accounts 2017

Group Financial Record

£m
Revenue

Underlying operating profit
Underlying profit before taxation
Underlying earnings attributable to owners of the parent

Profit/(loss) before taxation
Taxation
Profit/(loss) after taxation for the year

Working capital
Net debt
Retirement benefit obligations
Net assets

Operating cash flow
Operating cash conversion
Free cash flow

2013
1,789.7

2014
1,851.7

2015
2,072.0

2016
1,943.9

2017
2,052.5

316.7
288.0
230.8

126.6
(12.1)
114.5

247.5
(453.4)
(87.3)
1,044.2

268.5
85%
155.0

286.7
257.0
204.8

24.3
4.7
29.0

374.2
(1,222.7)
(102.0)
1,112.3

207.9
73%
114.4

332.2
280.4
220.1

(39.8)
2.1
(37.7)

424.8
(1,206.8)
(56.7)
909.7

234.6
71%
105.5

225.0
175.2
135.5

(847.9)
52.8
(795.1)

210.3
173.1
133.1

66.9
11.9
78.8

409.3
(1,028.2)
(87.0)
489.9

298.6
(383.5)
(63.2)
1,028.3

181.8
81%
50.7

217.6
103%
140.6

Net debt/EBITDA (for covenant purposes)

1.2

2.6

2.9

3.0

1.3

Average number of employees

10,090

10,941

12,527

10,898

10,736

pence
Dividend paid per ordinary share
Earnings per ordinary share – underlying
Earnings per ordinary share – basic
Earnings per ordinary share – diluted

6.66
15.9
7.9
7.9

7.33
13.7
1.9
1.9

7.96
14.3
(2.4)
(2.4)

7.76
7.8
(45.9)
(45.9)

–
6.0
3.5
3.5

EPS figures for prior years have been restated to reflect the bonus element of the Rights Issues, in accordance with IAS 33, Earnings per Share. The dividend paid
per ordinary share has also been restated for all comparative periods presented above.

£m
Market capitalisation as at 31 December

3,169

3,934

3,440

2,920

3,116

136

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Cobham plcAnnual Report and Accounts 2017

Shareholder Information

Analysis of shareholders
Analysis of ordinary shareholders on the register at 31 December 2017:

OTHER INFORMATION

Size of holding (number of ordinary shares held)
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 Group plc

Number of
registered holders
1,201
2,189
722
251
126
122
4,611

Percentage of
registered holders
26.05%
47.47%
15.66%
5.44%
2.73%
2.65%
100.00%

Number of
ordinary shares held
547,309
8,182,546
14,807,130
31,914,524
65.494.311
2,346,015,295
2,466,961,115

Percentage of
ordinary shares
0.02%
0.33%
0.60%
1.29%
2.66%
95.10%
100.00%

At 31 December 2017, there were 4,611 ordinary shareholders on the register, compared with 4,803 at 31 December 2016. The total includes 75,951,724 shares
held in treasury.

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: 0371 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 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 0345 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 0345 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 86.02p.

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) 20 7930 3737.

Shareholder Security
Shareholders are advised to be wary of any unsolicited advice, offers to buy
shares, or offers of free reports about the Company. Details of any share
dealing facilities that the Company endorses will be included in Company
mailings or on our website. If you receive any unsolicited advice, make sure you
get the correct name of the person and organisation and check that they are
appropriately authorised by the FCA by visiting www.fca.org.uk. You can also
call the FCA Consumer Helpline on 0800 111 6768 (or +44 (0) 20 7066 1000 if
calling from outside the UK).

* Lines are open Monday to Friday 8:30am to 5:30pm; excluding Public Holidays in England

Financial calendar
AGM
Interim results

26 April 2018
1 August 2018

Registered Office
Brook Road,
Wimborne,
Dorset,
England
BH21 2BJ
Tel: +44 (0) 1202 882020
Fax: +44 (0) 1202 840523

Internet: www.cobham.com
Registered Number in England: 00030470

Cautionary Statements
This publication contains ‘forward looking statements’ with respect to the
financial condition, results of operations and business of the Cobham Group
and to certain of Cobham’s objectives with respect to these items.

Forward looking statements are sometimes but not always identified by the
use of a date in the future or such words as ‘anticipates’, ‘aims’, ‘due’, ‘could’,
‘may’, ‘should’, ‘expects’, ‘believes’, ‘intends’, ‘plans’, ‘targets’, ‘goal’, or
‘estimates’ (or the negative thereof). By their very nature forward looking
statements are inherently unpredictable, speculative and involve risk and
uncertainty because they relate to events and depend on circumstances
that may or will occur in the future.

There are various factors that could cause actual results and developments
to differ materially from those expressed or implied by these forward
looking statements. These factors include, but are not limited to, changes
in economies, political situations and markets in which the Group operates;
changes in government priorities due to programme reviews or revisions to
strategic objectives; changes in regulatory or competition frameworks in
which the Group operates; the impact of legal or other proceedings against
or which affect the Group; changes to or delays in programmes in which the
Group is involved; the completion of acquisitions and divestitures and
changes in commodity prices, inflation or exchange rates.

All written or verbal forward looking statements, made in this publication
or made subsequently, which are attributable to Cobham or any other
member of the Group or persons acting on their behalf, are expressly
qualified in their entirety by the factors referred to above. Neither Cobham
nor any other person intends to update these forward looking statements.

No statement in this publication is intended as a profit forecast or should be
interpreted to mean that underlying operating profit for the current or
future financial years would necessarily be above a minimum level, or match
or exceed the historical published operating profits or set a minimum level
of operating profit.

and Wales.

www.cobham.com

Cobham plc
Annual Report and Accounts 2017

137

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products and services, corporate responsibility and
sustainability, and more at:

Products and service offerings
www.cobham.com

Investor information and share price performance
www.cobhaminvestors.com

Corporate responsibility and sustainability
www.cobhamsustainability.com

Cobham plc

Brook Road, Wimborne, Dorset, BH21 2BJ, UK
T: +44 (0)1202 882020
F: +44 (0)1202 840523