2 1 0 2 s t n u o c c A d n a t r o p e R l a u n n A c l p t r o h o C C o h o r t p l c A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 2 Cohort plc is the parent company of three innovative, agile and responsive businesses operating in defence and related markets. We provide a range of services and products to customers both in the UK and internationally. visit us online at www.cohortplc.com © The Royal Navy Submarine Museum Financial and operational highlights XX Adjustedoperatingprofit*up47%to£6.5m(2011:£4.4m),arecord tradingprofit. XX Adjustedearningspershare*up62%at15.52pence(2011:9.60pence). XX Netfundsup110%to£14.1m(2011:£6.7m),alldebtrepaid. XX Proposedfinaldividendup19%at1.90pencepershare (2011:1.60pence). XX RecordprofitatMASS. XX ImprovedprofitatSCS. XX SEAprofitabilitymarkedlyimproved,moreworktodo. *Excludesexceptionalitems,amortisationofotherintangibleassetsandmarkingforwardexchangecontractstomarket valueattheyearend. Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements In this report Overview IFCAboutus 01 Highlights 02 Chairman’sstatement 04 Ourbusiness 06 Ourstrategy Business review 08 ChiefExecutive’sreview 12 Operationsreview:MASS 14 Operationsreview:SCS 16 Operationsreview:SEA 18 FinanceDirector’sreview 22 Riskmanagement Corporate governance 24 BoardofDirectors andExecutiveManagement 26 Corporategovernancereport 29 Directors’report 31 Remuneration&Appointments Committeereport 34 StatementofDirectors’ responsibilities Financial statements 36 Independentauditor’sreport 37 Consolidatedincomestatement 37 Consolidatedstatementof comprehensiveincome 38 Consolidatedstatementofchanges inequity 39 Companystatementofchanges inequity 40 ConsolidatedandCompany statementsoffinancialposition 41 ConsolidatedandCompany cashflowstatements 42 Notestothefinancialstatements 68 Accountingpolicies IBC Advisers IBC Shareholderinformation andfinancialcalendar Adjusted operating profit* (£m) Net funds (£m) £6.5m +47% 6.1 6.3 6.5 4.4 4.1 £14.1m +110% Order book (£m) £107.1m +4% 112.7 103.2 107.1 58.3 47.2 14.1 6.7 08 09 10 11 12 08 09 10 11 12 08 09 10 11 12 3.7 3.0 2.1 01 01 Cohort plc Annual Report and Accounts 2012 Overview Chairman’s statement The Cohort businesses have strong and relevant capabilities and established positions on some key long term UK MOD programmes. Nick Prest CBE Chairman Cohortcontinuedtoimproveitsperformance intheyear,achievingarecordtradingprofit andincreasingitsorderbookandnetfunds. AllofCohort’sbusinesseshaveimprovedtheir tradingperformancewithMASSachieving anotherrecordresult,SCSgrowingits profitabilityinatightmarketandSEAmaking goodprogress,althoughwithmoretodo. Key financials Intheyearended30April2012,Cohortposted revenueof£75.4m(2011:£65.1m),theincrease beinggeneratedbyorganicgrowth.This includedrevenueof£17.5m(2011:£18.4m) fromSystemsConsultantsServicesLimited (SCS),£26.1m(2011:£23.5m)fromMASS ConsultantsLimited(MASS)and£31.8m (2011:£23.2m)fromSEA(Group)Limited(SEA). TheGroup’sadjustedoperatingprofitwas £6.5m(2011:£4.4m).Thisincludedadjusted operatingprofitfromSCSof£1.3m(2011:£1.0m), fromMASSof£4.8m(2011:£4.2m)andfrom SEAof£1.7m(2011:£0.3m).CohortGroup overheadswere£1.3m(2011:£1.1m). Thebetterprofitabilityreflectedacombination ofimprovedoperationalefficiencyand revenuegrowth. TheGroupoperatingprofitof£4.2m (2011:£2.8m)wasafterrecognisingamortisation ofintangibleassets,exchangelossesonmarking forwardexchangecontractstomarketatthe yearendandexceptionalitems,althoughnone ofthelatterthisyear.Profitbeforetaxwas £4.2m(2011:£2.7m)andprofitaftertaxwas £4.6m(2011:£2.8m). Basicearningspersharewere11.30pence (2011:6.79pence).Adjustedearningsper sharewere15.52pence(2011:9.60pence). Theadjustedearningspersharewerebased uponprofitaftertax,excludingamortisation ofotherintangibleassets,markingforward exchangecontractstomarketattheyearend andexceptionalitems,allnetoftax.Thebasic andadjustedearningspersharefortheyear ended30April2012includeabenefitfroma prioryeartaxcreditof2.48pencepershare. Orderintakefortheyearwas£79.3m (2011:£55.6m).Thenetfundsattheyearend were£14.1m(2011:£6.7m),theGrouphaving paiddownallitsdebt(£3.4m)intheyear. AdrianScarbroughPhotography©2012 “ The combination of good order book, strong net funds and businesses with operational momentum provides a solid foundation for the coming year.” In summary TheBoardisrecommendingafinaldividendof1.9penceperordinaryshare (2011:1.6pence). Cohortachievedarecordtradingprofitfortheyearof£6.5m(2011:£4.4m). MASSachievedanotheryearofrecordprofit. SCSimproveditsprofitabilityinatightmarket. SEAreturnedtobetterlevelsofprofitability,butmoreworkistobedone. TheGrouppaidoffallitsdebtandendedtheyearwithrecordnetfunds of£14.1m(2011:£6.7m). 02 Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements Dividend payment per share 2.90p +21% 2.90 2.40 2.05 1.75 1.45 08 09 10 11 12 03 Dividends TheBoardisrecommendingafinaldividendof 1.9penceperordinaryshare(2011:1.6pence), makingatotaldividendof2.9penceper ordinaryshare(2011:2.4pence)inrespectof theyearended30April2012,a21%increase. Thiswillbepayableon19September2012to shareholdersontheregisterat24August2012 subjecttoapprovalattheAnnualGeneral Meetingon11September2012. MASS MASSagaintradedstronglyintheyear andpostedrecordfiguresforsales,profit andcashgeneration,thisperformance benefitingfromthesuccessfulcompletionof anumberofprojects.DuringtheyearMASS commenceditsdeliveryofthenewelectronic warfaredatabasetotheUKMOD.Thisisan importantfoundationformaintainingMASS’s uniquecapabilityinthisareaandalsoprovides aspringboardforMASStoincreaseitsexport opportunities. SCS SCShascontinuedtoexperienceatight domesticmarketforitsservices,evidenced bythe5%fallinrevenueyearonyear. However,theactionSCShastakentoalignits costbasewithitsrevenuehasresultedinan improvedtradingprofitof£1.3m(2011:£1.0m), growthof29%.SCScontinuestowinnewand repeatbusinesswithitsprimaryUKcustomer andhasalsosecuredoverseasorders,where thestrongreputationofUKForcesprovides akeysellingpoint. SEA SEAimproveditsprofitabilityfollowing theorganisationalandmanagementchanges madeinthesecondhalfof2010/11,although ithascontinuedtobeaffectedbysomepoorly performingprojects.Theseareexpectedlargely tocompleteduringthecurrentfinancialyear. SEA’soperatingperformanceisexpectedto improvefurtherasthechangesmadearefully embeddedandprojectswithpoormargins cometocompletion.SEAunderlineditsstrong capabilitiesbysecuringover£38mofnew ordersintheyear. Management and staff TheGroup’simprovingperformancereflects theimpactofthemanagementchangesmade overthelasttwoyears.Theseniormanagement teamsatCohortandwithinthesubsidiarieshave steeredthebusinessthroughsomedifficult timesanddeservecreditformaintainingfocus andmorale.Mythanksalsogotoallthestaff withinthebusinesses,whosehardworkand abilitytodeliverwhatourcustomersneed, withintightbudgets,arewhatultimately driveourperformance. Outlook Theclosingorderbookof£107.1m (2011:£103.2m)representsalike-for-like improvementof12%ontheopening positionaftertakingaccountoftherun-off ofapproximately£8mofmulti-yearorders in2012.TheUKdefencemarketremains tight,althoughsomevisibilityappearsto bereturningaftertherecentgovernment spendingroundannouncements.TheCohort businesseshavestrongandrelevant capabilities,establishedpositionsonsome keylongtermUKMODprogrammes,and agoodpipelineofnewopportunities. TheGroupwillcontinuetopursuethe expansionofitsbusinessoutsidetheUKas wellasitsnon-defencebusiness.Thepipeline ofexportopportunitiesisstrengthening, thoughthetimingoftheseisalwaysuncertain. AsIstatedlastyearandreiteratedin December’sinterimreport,theBoard’s policyremainstoincreaseshareholder valuethroughoperationalimprovements andorganicgrowthandthroughcorporate activitywheresuitableopportunitiesarise. Cohortismakingprogressinallthese respects,andthecombinationofgoodorder book,strongnetfundsandbusinesseswith operationalmomentumprovideasolid foundationforthecomingyear. Nick Prest CBE Chairman Cohort plc Annual Report and Accounts 2012 Overview Our business Cohort is the parent company of three well established subsidiaries providing a wide range of services and products for UK and international customers. Cohort aims to add real value to its subsidiaries through the experience and contacts of its senior team while providing a light-touch but effective governance framework. MASSharnessestechnologytodeliver trustedservicesandsolutionsthatimprove thesecurity,efficiencyandeffectiveness ofoperationsingovernment,industryand educationalestablishments. SCSisanindependentconsultancywitha first-classreputationforprovidingawide rangeoftechnicalsupport,consultancyand managedservicestoadiversecustomerbase. SEAdeliverssystemsengineering,software andelectronicengineeringservicesand solutions,includingdesignandmanufacture togovernmentandindustry. 04 EWOS Managedservices Systemsdevelopment Complexsystems Informationand communicationservices Logistics Trainingsupportservices Aerospace Communicationsystems Sensorprocessingproducts Sensorand informationsystems s n o i s i v i d g n i t a r e p O s e i t i l a i c e p S Secure networks Electronic systems Design, implementation, configuration, management and consultation in relation to secure networking infrastructure. Design, prototyping, testing, manufacture and support of electronics-based equipment, including the development of embedded software, FPGAs etc. Development, support Provision of direct support Supply of training courses, Provision of expert Management/execution and upgrade of software packages. to active operations trainers, training materials individuals, to be part of scientific investigation including the processing and facilities. of a team managed by work aimed at specific the customer. objectives. and provision of operational data and field support of operational equipment. Self-contained studies, consultancy and analytical work, excluding scientific research with a defined output (report, recommendations etc.). MASSisdelivering securenetworksto schoolsintheUK SEAhasdeveloped asuiteofproducts andusersoftware tohelpourtransport customersmanage civilenforcement Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements Application software Operational support Training Specialist expertise Applied research Studies and analysis Design, implementation, Design, prototyping, testing, configuration, management manufacture and support and consultation in relation of electronics-based to secure networking infrastructure. equipment, including the development of embedded software, FPGAs etc. Development, support and upgrade of software packages. Provision of direct support to active operations including the processing and provision of operational data and field support of operational equipment. Supply of training courses, trainers, training materials and facilities. Provision of expert individuals, to be part of a team managed by the customer. Management/execution of scientific investigation work aimed at specific objectives. Self-contained studies, consultancy and analytical work, excluding scientific research with a defined output (report, recommendations etc.). SEAprovides scientificspace missionswithhigh integrityelectronic hardware SEAhasdeepknowledge ofunderwatersystems andisprovidingthe externalcommunications systemfortheUK’s Astutesubmarines SCSprovides contractorsto supportdeployed operations SCSprovidesa substantialtraining contracttosupport theUK’sPermanent Joint Headquarters TheTHURBON™ product,developed byMASS,isa powerfulEW databasesystem MASSprovides operationalsupport tocustomers’EW capability ©ESA/LFI&HFIConsortia Planck image of a region in the Orion Nebula ©Crowncopyright/ RoyalNavy2009 ©Crowncopyright/RAF2010 ©MinistryofDefence ©Crowncopyright/ MOD2010 05 EWOS Managedservices Systemsdevelopment Complexsystems Informationand communicationservices Logistics Trainingsupportservices Aerospace Communicationsystems Sensorprocessingproducts Sensorand informationsystems Cohort plc Annual Report and Accounts 2012 Overview Our strategy We are actively preserving the high-growth potential of innovative, independent businesses. Our mission Creating valueforourshareholdersandcustomersinourmarkets,including defence,securityandrelatedareaswherewecanapplyourhightechnologyskillstodeliver growththroughtheinnovation,agilityandresponsivenessofsmallerindependentbusinessesinaframeworkof stabilityandthebenefitsofknowledge,accessandcooperationprovidedbythewiderGroup. Our strategy Maintain investor confidence and ensure good corporate governance Consistently grow profits and cash generation organically Increase the diversity and profitability of the Group through selective acquisitions Delivered by… Good governance and control 1. Aframeworkoffinancialcontrol,strategy review,performancemanagementand leadershipdevelopment 2. Clearandconsistentcommunication 3. Abilitytoactfastifproblemsarise Strong performance of subsidiary businesses 4. Afocusontrusteddeliverytoourcustomers 5. Encouraginginnovationandresponsivenesswithalowcostbase 6. Identifyingandpursuinggrowthopportunities 7. Developinghighqualityleadershipteamsandahighperformanceculture Growth through acquisition 8. ProactiveengagementwithbusinessesthatcanaddvaluetotheGroup 9. Maintainingastrongacquisitionteam 10.Demonstratingastructureandculturethatisattractivetopotentialsellers 06 Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements Group revenue by Market 2012 Group revenue by Market 2011 52.2 £65.1m A Defence(includingsecurity) A Transport A Space A Othercommercial Space 21.2 18.4 2.3 MASS SCS 12.6 2.1 7.8 0.7 SEA 2.1 7.8 3.0 TOTAL £75.4m A Defence(includingsecurity) A Transport A Space A Othercommercial 22.5 17.5 3.6 MASS SCS 21.0 2.8 7.6 0.4 SEA 61.0 2.8 7.6 4.0 TOTAL The markets we serve Defence Allofourbusinessesoperatetoa largeextentinthedefencemarket, includingsecurity.Customersinclude UKMOD,NATOandarangeofother nationalcustomersinEuropeand therestoftheworld. Transport SEAprovidesinformationsystem solutionstobothrailandroad infrastructurecustomersand develops,suppliesandsupports cameraenforcementsystems. Defence revenue £61.0m (2011: £52.2m) SEAhasastrongcapabilityinsatellite sensorsandoperatingsystems,from researchanddevelopmentthroughto productdesign,deliveryandsupport. Space revenue £7.6m (2011: £7.8m) Transport revenue £2.8m (2011: £2.1m) Other commercial Includeseducationinformation systemsandsupportprovidedby MASS,aswellasothertechnical solutionsandsupporttovarious commercialcustomersbyallof ourbusinesses. Other commercial revenue £4.0m (2011: £3.0m) 14.1 14 .1 18.5 18 .5 3.4 9.1 3 .4 9 .1 5.5 5 .5 5.0 5 .0 12.2 12 .2 7.6 7 .6 11.3 11 .3 15.7 15 .7 2.0 4.6 2 .0 4 .6 3.2 3 .2 5.9 5 .9 14.9 14 .9 7.5 7 .5 5 . 8 1 5 . 5 1 . 4 1 4 . 3 1 . 9 0 . 5 6 . 7 2 . 2 1 7 . 5 1 2 . 3 9 . 5 5 . 7 3 . 1 1 0 . 62 . 4 9 . 4 1 1 8 . 5 1 4 . 1 3 . 4 9 . 1 1 2 . 2 5 . 5 5 . 0 7 . 6 1 1 . 3 2 . 0 4 . 6 1 5 . 7 07 1 4 . 9 3 . 2 5 . 9 7 . 5 Cohort plc Annual Report and Accounts 2012 Business review Chief Executive’s review The Group has consolidated the improvements made last year, achieving continued profits and laying further foundation for future growth. Andrew Thomis ChiefExecutive 2011/12hasbeenayearofcontinuedprogress forCohortinwhichwehaveconsolidatedthe improvementsmadein2010/11andlaidthe foundationsforfuturegrowth.Iampleased tosaythatindoingsowehavealsodelivered amuchbetterlevelofprofitandcash.Work stillneedstobedonetoimproveperformance insomeareas,butwehaveachievedmuch ofwhatwesetouttodoatthebeginning oftheyear. SEA AttheGrouplevel,alotofourfocushasbeen onrestoringprofitabilityatSEA.SimonWalther andIhaveworkedcloselywithSteveHill,the ManagingDirectorofthebusiness,tomonitor progressonSEA’schangeprogramme.Ihave beenverypleasedwithprogressinanumber ofdeliveryareas,whereSEAhasbeenableto improveitsbusinessperformancewithoutlosing thestrongtechnologyfocusthatitscustomers relyon.Notablywehaveseenrealpositive changeontheExternalCommunicationsSystem (ECS)thatSEAisdevelopingfortheUK’sAstute Classofnuclearsubmarines,thescientific researchworkwehavebeendoingforthe DefenceScienceandTechnologyLaboratory, andsomeofoursensorprocessingproducts suchastheRoadflowtrafficenforcement system.Inotherareasthereisstillworkto dotoreachSEA’struepotential,andthese willcontinuetoseeaGroupfocusin2012/13. SCS SCShasperformedwellagainstthebackground ofachallengingmarket.WiththeUKMOD makingsignificantcivilianandarmedforces redundancies,therehasbeenanunderstandable cautionaboutmakinguseofexternalsupport services,andthescrutinyregimethathasbeen introducedhasmadewinningnewcontracts, orrenewingexistingones,increasinglydifficult. SCShastakenactiontodealwiththissituation ontwofronts.Firstlyithasadjustedits managementstructuretoimproveeffectiveness andreducecosts,improvingprofitability. Secondlyithassystematicallysoughttowiden itscustomerbase.Thishasalreadyshown positiveresults,withservicesprovidedtothe AdrianScarbroughPhotography©2012 “ Cohort has a very good position on a number of UK MOD’s long term key programmes.” In summary SEAsecuredtheexternalcommunicationsystemsforfurtherAstuteplatforms. MASS’skeypositionontheEWDataManagementSystem(SHEPHERD)forthe UKprovidesitwithalaunchpadforsecuringexportopportunities. SCShasmadegoodprogressinexpandingitsrangeofwork,especiallyinthe airdomain. FurtherworktobedoneatSEAtoenableittoachieveitsfullpotential. 08 Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements OlympicDeliveryAuthorityandtheDefence AirworthinessTeam.Ouraimistobuildon theseandaddfurthernewcustomersthisyear. MASS MASS’suniquecapabilitieshavebeenstrongly indemand,andithasagaindeliveredarecord year.StronggrowthinMASS’sworkonsecure networks,notablyinitsnewEducationmarket, andagoodstarttothestrategicallyimportant EWdatamanagementsystemSHEPHERD (whereMASSisteamedwithLogica),have morethancompensatedforsomedelaysto certainexportcontracts.Thesearealways hardtopredict,althoughtherewardsinsuch marketscanbehighasthereisbothareal customerneedandtheresourcestodowhat isrequired. Acombinationofinvestmentinnew technologies,accesstouniqueskillsand carefulhusbandingofresourceshasonce againenabledMASStodeliveraverystrong operatingmargin,enhancedevenfurtherthis yearbysomeone-offfactors.MASSisnow wellplacedtogrowitsexportactivities. Onceagain,though,asalways,thisissubject totiminguncertainties. Operating strategy Cohort’sstrategyistoallowitsmedium-sized subsidiarybusinessesasignificantdegreeof operationalautonomyinordertofullydevelop theirpotential,whileprovidinglight-touchbut rigorousfinancialandstrategiccontrolsatGroup level.Ourexperienceisthatourcustomers prefertoworkwithbusinesseswhere decision-makingisstreamlinedandfocused onsolvingtheirimmediateproblems.This modelprovidesuswithadegreeofcompetitive advantageoversomelargerrivalswhereevery decisionissubjecttoacarefulandoftenlengthy evaluationofwhetheritimpactsonsomeother aspectoftheirbusiness.Itisalsocost-effective asitavoidstheneedforadditionallayersof managementinvolvedincoordinationactivities andforalargeheadquartersteam.Itisalso attractivetohighcalibreemployeeswhofind itmorerewardingtobeinvolvedindecisions affectingthebusiness,evenatarelatively juniorlevel,ratherthanbeingconstrained toanarroworpurelytechnicalrole. Thisapproachisnotnecessarilyoptimised forverylargeprimecontractswhere co-ordinationoflargeteamsthrough repeatableandenforceableprocessescan bemoreimportantthanspeedorinnovation. But,itpositionsuswelltosupplysystems andservicesintoourcustomerswhere theseattributesarehighlyvalued. Theinternationaldefencemarkethas seensweepingtechnologicalandorganisational changeoverthelasttwentyyears.Important factorsinthishavebeenthegeopolitical changesfollowingtheendoftheColdWar, theemergenceofnewthreatswithavery differentcharacterand,notably,the proliferationofadvancedinformation technology,bothintheformofmilitary systems(“network-enabledcapabilities”) andinthewidercommunity.Insomeareas thishasledtogreaterstandardisationand theintroductionofverylargesystems–for instancetheUK’sDefenceInformation Infrastructure.Buttherehasalsobeenan increasingrealisationthatmodernthreats, whetherintheformofimprovisedexplosive devicesorcomputerviruses,evolvemuch tooquicklyfortraditionalcommandand controlstructurestoadapt.Thereistherefore acontinuingneedforsmaller,innovative organisationsthatcanreactquicklytochange, andthisisaneedthatCohortaimstofulfil. Ourstrengthsincludetherapiddevelopment ofspecialisttechnology,cybersecurityand operationalsupport,oftenindemanding andfast-pacedenvironments.Allofthese capabilitiesseestrongdemand,andincreasingly wefindthattheyarevaluedinmarketsbeyond UKdefence. Theseinclude: XX Securenetworks:theprovisionofadvice andsystemimplementationtoprotect againstcyberattackandotherthreats. BothMASSandSCSprovidetheseservices forarangeofclients. XX Electronicsystems:thedesignandsupply ofsuchequipmentanditsassociated embeddedsoftware,aswellasthe integrationofcommercial“offtheshelf” equipmentforspecialistapplications. XX Applicationsoftware:thedesignand supplyofspecialistsoftwaresystemssuch asMASS’sworkonProjectSHEPHERDand SEA’sworkforitstransportcustomers. XX Operationalsupport:theprovision ofdirectsupporttoactiveoperations whichtakesplaceatbothMASS(including itsElectronicWarfareOperationalSupport activities)andSCS. XX Training:thisincludesformal,on-the-job andscenario-basedtrainingservices.An exampleisSCS’sprovisionofexercise-based trainingfortheUK’sPermanent JointHeadquarters. XX Specialistexpertise:theprovision ofexpertindividualsaspartofacustomer’s team.Allthreeofourbusinessesare activeinthisarea,mostnotablySCS. XX Appliedresearch:themanagementand executionofscientificinvestigationwork aimedatspecificobjectives,suchasSEA’s leadershipoftheExpeditionaryLogistic SupportresearchprogrammeforMOD. XX Studiesandanalysis:otherself-contained studies,consultancyandanalyticalwork suchasSCS’sHazardAnalysisworkonthe JointCombatAircraft. Segmental analysis by capability Wehaveprovidedanewbreakdownofthe Group’sactivitiesthisyear(seepage10) andIbelievethisprovidesaclearerpicture ofthebreadthandnatureofourcapabilities. ThelargestareaoftheGroup’sactivityin 2011/12waselectronicsystems,whichgrew stronglydrivenbySEA’sworkontheAstute ECS.AlsoveryimportantfortheGroupand growingfastwerethesecurenetworksarea, 09 Cohort plc Annual Report and Accounts 2012 Business review Chief Executive’s review continued 14.1 18.5 3.4 9.1 5.5 5.0 12.2 7.6 Group revenue by Capability 2012 (£m) Group revenue by Capability 2011 (£m) A Securenetworks A Electronicsystems A Applicationsoftware A Operationalsupport A Training A Specialistexpertise A Appliedresearch A Studiesandanalysis 14.1 18.5 3.4 9.1 £75.4m 5.5 5.0 12.2 7.6 11.3 15.7 2.0 A Securenetworks A Electronicsystems A Applicationsoftware A Operationalsupport A Training A Specialistexpertise A Appliedresearch A Studiesandanalysis 11.3 15.7 2.0 4.6 £65.1m 14.9 7.5 3.2 5.9 14.9 Segmental analysis by capability (continued) 4.6 whereMASS’seducationworkincreasedin pace,appliedresearch,whereSEAhadavery strongyear,andapplicationsoftware,driven byMASS’sworkonSHEPHERD.Thestudies andanalysisareaalsoincreasedsignificantly, withbothSCSandSEAmakinggoodprogress. Incontrast,thespecialistexpertisearea, althoughstillsignificant,showedasharpdrop comparedto2010/11astheUKMOD’stightened contractingprocessesaffectedSCS’sability towinthiskindofwork.Ouroperationalsupport activitiesalsosawwhatweexpecttobea temporaryreductionasoneofMASS’sexport contractsreachedasuccessfulconclusion. Robust financial position Cohorthasbeenstronglycashgenerative thisyearandwehavetakentheopportunity toretirealloftheGroup’soutstandingdebt. Thisfinancialstrengthenablesustoinvestin internalR&Dorothervaluableprojectsona carefullytargetedbasisaswellastoreward shareholdersbycontinuingtooperateour progressivedividendpolicy. Acquisition strategy Weneedtoconsideralloftheoptionsfor employingourcashresources,notleastas thecurrentreturnoncashisverylow.One suchoptionistomakefurtheracquisitions, eitherofsmallbusinessesthatcanbe“boltedin” tooneofourexistingsubsidiaries,orofmore 10 7.5 5.9 3.2 maturebusinessesthatcouldbecomeGroup membersintheirownright.TheAbacus acquisitionin2010provedsuccessfulbothin termsofitsimmediatefinancialreturnand theaccessithasprovidedforMASSintonew markets.Wewillcontinuetoinvestigatethese andwewillbepreparedtoactwherewe believethatanacquisitionprovidesagood opportunityforacceleratedgrowthatan acceptablelevelofrisk. Our people Iwouldliketoaddmythankstothoseof NickPresttothemanagementandemployees oftheCohortGroupthisyear.Wearevery muchapeoplebusinessandsuchsuccessas weachieveisentirelyduetothetechnical excellence,managerialskillsandbusiness acumenofourpeople.Iamverygrateful forthemanyexamplesofhardworkand dedicationIhaveseen,fromthesenior managementgrouptoindividualsandteams deliveringwhatourcustomersneed. Outlook ThelargemajorityofCohort’srevenuederives, eitherdirectlyorindirectly,frompublicsector spending,primarilyintheUK.Theshapeof theUK’splanneddefenceacquisitionreforms isnotyetclear.Againstabackdropofsluggish economicgrowth,instabilityintheEurozone andalargepublicsectordeficit,ourmarket undoubtedlyfaceschallenges. Thatsaid,thereareindicationsthattheUK defencemarkethasstabilised.TheSecretary ofStateforDefencehasannouncedthatthe defenceequipmentprogrammehasnowbeen matchedtotheresourcesavailable,andthe reductionsinthesizeoftheMODandthearmed forcesarewellunderway.Asignificantpart ofCohort’srevenuederivesfromwell-funded defencecapabilitiesthathaveemergedfrom thegovernment’sStrategicDefenceandSecurity Review,andthesubsequentadjustments, withtheirstrategicrationalemaintainedor enhanced.Submarines,thenucleardeterrent andcombataircraftaregoodexamples.We arealsoincreasinglyactiveinexportmarkets wheretheneedfordefenceequipmentismuch moreacute,andtheresourcesavailablemuch greater,thaninEurope.Wehavesucceeded ingrowingourorderbookin2011/12.That andtheimmediatepipelineofopportunities giveadegreeofconfidencethatwecan continuetomakeprogressin2012/13. Andy Thomis ChiefExecutive Business review Operations reviews Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements ©Crowncopyright/RAF2009 11 Cohort plc Annual Report and Accounts 2012 Business review Operations review: MASS MASShasconcludedanotherstrongyear withtradingprofitgrowthof14%to£4.83m andsalesrevenueincreasedby11%to£26.1m. AllthreeoftheCompany’sdivisions,Managed Services,SystemsDevelopmentandElectronic WarfareOperationalSupport(EWOS),performed well.Thisperformancewasourbestyear ever,whichisespeciallypleasinggiventhe economicclimateintheUKandreduced publicsectorspending. Anincreasingproportionofsalesrevenue (14%)(2011:9%)originatedfromnon-defence relatedactivities,while17%oftotalrevenue camefromexportmarketseitherdirectly orviaprimecontractorsduringtheyear. Anumberofprojectsreachedasuccessful conclusioninthecourseoftheyear,allowing areleaseofcontingenciesthatcontributed toanespeciallystrongmarginperformance. TheManagedServicesDivisionoperates acrossthedefence,securityandeducation marketsprovidinginformationtechnology andspecialisttechnicalservices.Indefence, wehaveretainedorexpandedourin-service supportcontracts,whichprovidecritical supporttofrontlineforcesandUKstrategic operations.Asanillustrationofthis,forthe SentryWholeLifeSupportprogrammeat RAFWaddington,wehavebeenawardeda five-yearextensiontothemanagedITservice contract,andthescopeofthesupporthas beenextendedtocoverthesoftwareteam. Ineducation,wehavecontinuedtogrow theprovisionofinformationcommunications technology(ICT)servicesandsolutionsto schoolsandcolleges,whicharetransforming thewaythateducationisdelivered.Our collaborationtoequipschoolsinNorth Lincolnshirecontinueswell,withthe successfulcompletionoftwoadditional schools.Wehavealsosuccessfullydelivered thesolutionatLondon’sKensingtonand Chelseacollegeand,morerecently,been selectedbyAstonUniversityEngineering Academy,theUK’sfirstUniversityTechnical College,astheirICTpartner.Thisfurther consolidatesourpositionasaleadingsystem integratorofICTsolutionsforeducational establishments.Lookingforward,cyber securityisbecomingincreasinglyimportant andthecapabilitytodesignandsupport securenetworksatthehighestlevelshave beenacorecompetenceofMASSforover 15years.Buildingonthispedigree,weare developingcyberconsultancyandtraining servicesandsecurecloudsolutionstosatisfy thegrowingdemandinboththeprivate andpublicsectors. InourSystemsDevelopmentDivision, projectSHEPHERD,theUKMOD’supgrade ofamajorinformationsystemattheDefence EWCentre,isprogressingwell.Thisimportant programme,forwhichMASSisteamedwith Logica,hasMASStechnologyatitsheartinthe formoftheTHURBON™EWdatamanagement system.ThisapplicationaffirmsTHURBON™’s positionasaworld-leadingnext-generation systemwithsubstantialexportpotential. Elsewhereourstrongrelationshipwith Thalescontinues,withourfocusonintegrated testsolutionsinsupportofprogrammes includingAirTanker,theChinookMk6and newcommunicationproductdevelopments. ForUKMODandothercustomers,wehave continuedtoprovidesolutionsandsupport forminehunting,counterIED,wireless technologiesandotherspecialprojects. Throughouttheyearwehaveinvested inresearchandtechnologydevelopment topositionMASSforfutureopportunities, particularlyintheareasofsecure communicationsandEW.Wealsocontinue toinvestinthedevelopmentofTHURBON™. TheElectronicWarfareOperationalSupport DivisionhascontinuedtodeliverEWtraining coursesandspecialistEWtechnicalservices tocustomersinAsia,Europe,andtheMiddle Eastthroughouttheyear.Wehaveprovided operationalandtechnicaltrainingcovering theair,land,maritimeandcyberdomains aswellasprovidedadvancedEWtraining supportforequipmentsupplierssuchasSelex GalileoandThales.Ouruniqueexpertiseis increasinglyimportantasadiscriminatorfor combataircraftprimecontractors,suchas BAESystemsandSaab,intheirplatformsales activities.In2011/12webroughtonemajor contracttoasuccessfulconclusion,andwe areindiscussionstoagreethescopeand timingoffollow-onworkforthesame customer.Withthisandotheropportunities, thedivisionhasastrongorderintakepipeline, althoughthenatureofthesemakestheir timinghardtopredict.Wecontinuetodevelop newtechniquesandtechnologyforthefuture, andwillsoonbeopeninganewadvancedEW trainingfacilityinLincoln.Thecapabilities andcustomerrelationshipstakenonthrough theacquisitionofAbacusEWin2010have beenfullyintegratedintothedivisionand havecontinuedtomakeapositive contributiontothebusiness. Customerrelationshipsareveryimportant toMASSandwecontinuetoreceivevery positivecustomerreferencesacrossall ouractivities,reflectingthehighcalibre ofourpeople,strongtechnicalcapability andpositiveattitude.Weenter2012/13with anorderbookof£70mandastrongpipeline ofprospects.Althoughthetighteningof governmentspendingbothdomestically andinsomeexportmarketscontributes toanuncertainenvironment,wecontinueto seethepotentialforgrowthacrossallthree divisions.Insupportofthiswehavebeen investinginourfacilities,withtherecent expansionofourofficesinLincolnandthe openingofanewdedicatedEWtraining facilityinthenearfuture.Inthelongerterm, continueddemandforourofferingsand strongcustomerrelationshipssuggestthat theoutlookispositive. “ Following another strong year MASS enters 2013 with an order book of £70m and a strong pipeline of prospects.” 12 AdrianScarbroughPhotography©2012 Ashley Lane ManagingDirector,MASS MASS Revenue by Market Defence and security Transport Space Other commercial Revenue by Division EWOS Managed Services Systems Development Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements 2012 £m 22.5 — — 3.6 26.1 4.3 14.3 7.5 26.1 2011 £m 21.2 — — 2.3 23.5 6.1 11.7 5.7 23.5 Northrop Grumman extends MASS partnership on Sentry Whole Life Support Programme MASS has been awarded a five-year extension to its managed IT service contract for the Sentry Whole Life Support Programme (WLSP) at RAF Waddington. The scope of the support contract has also been extended to cover the Sentry Software Team. The WLSP programme is a unique partnership between the UK Ministry of Defence (MOD) and industry partners forming the Joint Sentry Support Team (JSST). The team is led by Northrop Grumman with MASS, AAR, BAE Systems and Cobham Aviation services working together as partners to support and maintain the availability of the UK’s fleet of Airborne Warning and Control System (AWACS) aircraft. MASS is trusted to provide and manage all aspects of the IT systems and secure shared data environment, and is responsible for ensuring that Northrop Grumman and its JSST partners can each work within their own corporate guidelines, whilst still being able to share classified information. MASS revenue (£m) £26.1m +11% 20.6 21.5 18.0 MASS adjusted trading profit (£m) £4.8m +14% 26.1 23.5 4.8 4.2 3.5 2.8 2.3 08 09 10 11 12 08 09 10 11 12 ©Crowncopyright/RAF2003 13 Cohort plc Annual Report and Accounts 2012 Business review Operations review: SCS Inthefaceofcontinuingausterityin itstraditionalUKdefencemarkets,SCS preserveditsexistingbusiness,increased itsprofitability,andbegantomakeinroads intosomekeyadjacentmarkets. Despiterevenueof£17.5mbeing5%down onthepreviousyear,operatingprofitat£1.3m was30%higher.Insomerespects,thiswas theresultofefficienciesintroducedatthe startoftheyear,andtheearlierreduction inoperatingdivisionsfromeighttofour. Effortstoincreaseprofitscontinuedthroughout theyear,though,withafocusonwinning businesswithhigherprofitmargins,and deliveringprojectswithmaximumefficiency. Alongsidethis,financialmanagementwasvery strong,resultinginverylowwork-in-progress anddebtorbalancesthroughouttheyear, whichenabledthebusinesstogeneratestrong cashflow.Duringtheyear,asmallerbutmore effectivemanagementboardwasestablished, resultinginaleadershipteamthatishighly motivatedandwellequippedtotakethe businessforward. Threeimportantcontractwinswere particularlywelcomethisyear.Inopen competitionatthestartoftheperiod, SCSwonthecontracttoexerciseandtest securitygovernancefortheLondonOlympic Games.Thiswascompletedonschedule,and wonministerialpraise.Intheautumn,and againagainstfiercecompetitionfrommuch biggercontenders,SCSwasawardedthe contracttoperformtheHazardAnalysisfor theJointCombatAircraft.Finally,inMarch 2012,SCSsuccessfullyexpandeditspresence ontheMOD’sFrameworkAgreementfor TechnicalServices(FATS)to40%of itscapabilitycategories,upfrom30%inthe previousiteration.Thiswasaparticularly notableachievement,inthatmanylarger companiesfailedtomaintaintheirpositioning onthisimportantframework.SCStraded some£8mthroughFATSduringtheyear. Turningtodivisionalactivities,theLogistics andEngineeringbusinesswasperhapsthe hardestpressed,asaresultofefficiencies andcutsintheMOD’sDefenceEquipment& Support(DE&S)organisation.Thefirsthalf oftheyearwasverygood,withexcellent businesscaptureanddeliveryperformance. Ordersperformanceinthesecondhalf, however,wasmuchweakerbecauseof embargoesonmanpowersubstitutionandan emphasisoncompetition,evenforcontract renewals.Littlebusinesswaslosttoothers, andthereissomeindicationthatdemand mighttentativelyreturninthecomingyear. Neverthelessweseethebestroutetogrowth inthisdivisionaslonger-termcontractswith newbusinesspartnersfromthedefence industryandtheconsultancysector,and weareactivelyseekingthese. TheTrainingSupportbusinessbenefited fromtheOlympicsSecuritywork,which wasdeliveredontimeandtobudget,inan extremelycomplexstakeholderenvironment. ThisnowgivesSCSanimportantnewcredential forsupporttomajorcivilevents.Thiscontract wasdeliveredbythesameteamthatsupports thelongtermcommitmenttotheMOD’s PermanentJointHeadquarterstodelivermajor exercisesupport,andthismeantthatgood economiesofscalewererealised,withgood utilisationofalltheteammembers.Webelieve thesecapabilitiesarehighlyexportable. TheComplexSystemsbusinesswasvery successful,maintainingitspositioningon allofitsmajorcontracts.Theseinclude theLandEnvironmentAirPictureProvision (LEAPP)programme,theDefenceTargeting Toolset(DTT),andsupporttotheAutomated Sense&Warn(AS&W)equipmentinAfghanistan. LEAPP,DTTandAS&Wareallcontractedto theMODviamajorprimecontractors,forwhom SCS’sexpertise,whichisbothpracticaland highlytechnical,hasbecomeindispensable. Inaddition,revenuethroughSCS’sframework contractwithNATO’sConsultation, Command&ControlAgencyincreased steadilythroughouttheyear,andthis isexpectedtocontinue. Finally,theInformationandCommunications Servicesbusinesshadaverygoodyear.Its legacybusiness,supportingprogrammes suchastheDefenceInformationInfrastructure andtheLandSystemsReferenceCentre,was steadyifunspectacular.Theinitiativetowin businessintheMOD’sAirsector,however,was verysuccessful.TheJointCombatAircraft contractmentionedearlierwasfollowedby afurthercontract,worthnearly£1.0m,to supporttheAirworthinessTeaminDE&S. Thisplacesthedivisiononanexcellent growthprofileforthecomingyear. HomemarketsforSCS’sservicescontinueto bedifficult.Wewillaimtodefendourmarket sharewhilepursuingselectedopportunities withnewMODcustomersandinotheradjacent markets.Someheadwayhasalreadybeen madewithinternationalclients,andinitial contractshavebeenwonintheMiddleEast. Goodrelationshipsarebeingdevelopedwith majorprimecontractors,andthesewill greatlyfacilitate–andde-risk–SCS’s internationalaspirations. SCShascontinuedthegrowthinprofitsthat wasestablishedinthepreviousyear.Margins havebeenprotecteddespitethetoughmarket, andoverheadsareunderfirmcontrol,reducing by13%duringtheyear.TheCompanyisnow ledbyanableandeffectivemanagement team,withafocusonbusinessdevelopment. MuchoftheCompany’sbusinessstillhasa shortorder-to-deliverycycle,whichmakes performancedifficulttoforecast,butthe initiativetopursuelarger,longer-termbusiness isbeginningtoproduceresults.This,alongwith agradualreductioninrelianceontheUKMOD, willsecureamuchmorerobustfutureforSCS. Ourobjectiveistodelivergrowthinboth revenueandprofitin2012/13. “ SCS preserved its existing business, increased its profitability and began to make inroads into some key adjacent markets.” 14 AdrianScarbroughPhotography©2012 Bill Bird ManagingDirector,SCS SCS Revenue by Market Defence and security Transport Space Other commercial Revenue by Division Complex Systems Information & Communication Services Logistics Training Support Services Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements 2012 £m 17.5 — — — 17.5 4.0 4.8 4.4 4.3 17.5 2011 £m 18.4 — — — 18.4 5.3 3.3 7.0 2.8 18.4 SCS in support of MOD Air At the start of the year, SCS delivered recommendations regarding future structure to the Combat Air Group within the MOD’s Defence Equipment & Support (DE&S) organisation. This positioned the Company well to successfully compete for a contract to support the Hazard Analysis for the Joint Combat Aircraft, and the work is now nearing successful completion. This gives the Company strong credentials, and real momentum, in many aspects of military airworthiness, ranging from the technical aspects – engines, airframes and avionics – to the regulatory dimension, and the degree to which other nations’ approvals regimes are compliant with UK requirements. This has resulted in a further contract, to support the DE&S Airworthiness Team in the development of the military air safety standards framework. This is an exciting development for SCS, with over £2m of contracts won during the year. The Company is establishing a significant capability for independent test and evaluation, and there is a strong focus on growing this part of the business. SCS revenue (£m) £17.5m -5% 29.2 26.1 26.4 SCS adjusted trading profit (£m) £1.3m +30% 2.3 18.4 17.5 1.5 1.3 1.0 0.1 08 09 10 11 12 08 09 10 11 12 ©TrevorSheehan 15 Cohort plc Annual Report and Accounts 2012 Business review Operations review: SEA ThishasbeenayearofrecoveryforSEA, whichhasseenthechangesmadeatthestart oftheyearbegintohaveapositiveimpact ontheperformanceofthebusiness,enabling ustodeliveratradingprofitinlinewithour expectations.Wehavealsoachievedavery strongorderintakewhich,at£38.5m,has increasedourorderbookbyalmost30%, providingastrongbasisonwhichtocontinue tobuildthebusiness. Salesrevenue,atjustunder£32m,isour bestperformancetodateandisanimprovement of37%onlastyear.Amajorcontributorto thishasbeentheworkwehaveundertaken intheresearchdomain,althoughtheimproved performanceacrossthebusinesshasalso providedanimportantcontribution.Our operatingprofitat£1.7m,whileshowinga significantimprovementonlastyear,hasbeen dilutedbythelowmargin,legacyprogrammes thatweareworkingtodeliver.Weexpectthe majorityofthesetobecompletedduringthe comingfinancialyearwiththeirrelativeimpact expectedtobelower. OurCommunicationSystemsteamhas madesignificantprogressduringtheyear. Itskeyproject,theExternalCommunications System(ECS)forAstuteBoat4(Audacious) haspasseditsFirstArticleTests(FAT),amajor milestoneontheproject.Thesystemwill nowbeintegratedwiththefullcombatsystem, beforebeingfinallycommissionedintothe boat.Duringtheyearwewereawarded contractstosupplytwofurtherECSsystems, oneforAstuteBoat3(Artful)andtheother forBoat5(Anson).Workiswellunderway onthese,withinitialequipmentforArtful alreadydeliveredtoBAESystems.Indesigning ECS,weareworkingtoensurethatitisboth scalableandflexible,suchthatitcanmeet theneedsofboththesurfaceandsubmarine fleetsintheUKandoverseas.Afurther successduringtheyearwasourselection, aspartofateamleadbyBabcockMarine, todesignasubmarinecommunicationsbuoy fortheUKMOD. Wecontinuetobeacorememberofthe SubmarineSupportManagementGroup,which workswiththeMODtosupportthein-service submarinefleet.Duringtheyearwehavebeen successfulinbuildingourscopeofsupply inthisarea,winningcontractstoprovide configurationmanagementandequipment supportservicestotheUKNavalsector. Ourresearchactivitieshaveperformed verystronglyduringtheyear,withourteams leadingtwomajorresearchprogrammes. Workingwithourpartnerswehavebeen abletodelivertoourcustomer,theDefence ScienceandTechnologyLaboratory(Dstl), highqualityoutputs,whicharesupporting currentoperationsaswellasinformingfuture equipmentneeds.Followingpublicityonsome oftheworkwehadundertakenfortheUK MOD,wewerecontractedbythegovernment ofAustraliatoperformananalysisoftheir requirementsmanagementactivities. WithinourInformationSystems,Simulation andTrainingteamourkeysuccesseshavebeen theawardofNetworkRailOnlineLogistics (NROL)contractaswellaswinningourfirst twotrainingsystemsexportcontracts.The developmentoftheseisprogressingwellwith thefirstofthetrainingsystemsdeliveredto thecustomeraheadofschedule. Atthestartoftheyearweformeda dedicatedproductteam,withtheobjective ofdevelopingandexploitingSEA’scapabilities. OurfirstareaoffocuswasRoadflow,acivil trafficenforcementsystem.Asaresultof investmenttoimprovetheproductaswell asmorefocusedsalesactivities,wehave seenthevolumeofsystemssolddoublein theyear.Weanticipatefurthergrowthinthe comingyearasthismarketcontinuestogrow andwemovefromtheUKintoexportmarkets. Lookingforwardweintendtofocusour investmentthisyearintoanovelapplication ofcommercial3Gtechnologieswhichwe believehasapplicationsinthedefence andsecuritymarkets. WithinourSpaceteamwehaveachieved importantmilestonesontheEarthcareand Bepiprogrammes.Thesuccessfuldelivery oftheseprogrammeswillprovideuswith solutionsthatcanbere-used.Weare alreadydiscussingtheapplicationof theseonfutureprogrammes. Thechangeprogramme,initiatedlast year,isstartingtodeliverbenefittothe businessandhasbeenanimportantfactor intheimprovementinourperformance. Themainareasoffocusinthishavebeen: animprovementinourprojectmanagement throughimprovedprocess,controlsand training;anorganisationalstructurewhich isfocusedondeliveringourcorecapabilities; andadrivetoreduceouroverheadcostbase. Alloftheseareprogressingwellwithclear improvementsinourprojectdeliveryas wellasourabilitytodetectproblemsearly. Despitetheprogressmadeduringtheyear thereisstillmoretobedoneandtheseareas willremainourfocusforthecomingyear. Ibelievethatasaresultoftheefforts oftheSEAteamtoimproveitsperformance andourstrongorderbook,wearewell placedtocontinueourrecoveryduring thecomingyear. “ As a result of the SEA team’s efforts to improve performance and its strong order book, SEA is well placed to continue its improvement during the coming year.” 16 AdrianScarbroughPhotography©2012 Stephen Hill ManagingDirector,SEA SEA Revenue by Market Defence and security Transport Space Other commercial Revenue by Division Aerospace Communication Systems Sensor & Information Systems Sensor Processing Products Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements 2012 £m 21.0 2.8 7.6 0.4 31.8 7.6 6.1 15.1 3.0 31.8 2011 £m 12.6 2.1 7.8 0.7 23.2 7.8 4.1 9.4 1.9 23.2 SEA has secured new contracts to provide its External Communication System (ECS), which it is currently under contract from BAE Systems to develop for Astute boat 4 (Audacious), for two further Astute boats (Artful & Anson). During the design of the ECS system, SEA working with its customer BAE Systems has designed the system to ensure that it provides the UK MOD with an open and flexible architecture. This will ultimately lower the operational cost of the system and enable it to have utility on a wide range of platforms both in the UK and overseas. SEA revenue (£m) £31.8m +37% 30.2 26.9 13.0 31.8 23.2 SEA adjusted operating profit (£m) £1.7m +467% 3.1 2.2 1.6 1.7 08 09 10 11 12 08 09 10 11 12 0.3 ©Crowncopyright/MOD2009 17 Cohort plc Annual Report and Accounts 2012 Business review Finance Director’s review Simon Walther FinanceDirector Thisreviewdetailsthesignificantfinancial issuesarisingduringtheyearended 30April2012. Aspects of the income statement warranting further explanation Adjusted operating profit Theadjustedoperatingprofitispresented toreflectthetradingprofitoftheGroup andexcludesamortisationofotherintangible assets,exchangedifferencesonmarking forwardexchangecontractstomarketatthe yearendandexceptionalitems.Thisenables theGrouptopresentitstradingperformancein aconsistentmanneryearonyear.Theadjusted operatingprofitisstatedafterchargingthe costofshare-basedpaymentsof£353,000 (2011:£317,000)whichisallocatedtoeach businessinproportiontoitsemployee participationintheGroup’sshareoption schemes.Thesegmentalanalysis(seenote1) isdisclosedforeachbusinessafterdeducting thecostofshare-basedpayments. Theexchangeadjustmentonmarkingforward exchangecontractstomarketattheyearend isarequirementofIFRSandhasnoeconomic impactupontheGroup’sperformanceorassets andliabilitiesandisdescribedfurtherbelow. Exceptional items (see note 3) TheGroupincurredminorrestructuringcosts intheyearended30April2012andinthis particularcaseareconsideredtobepart oftheongoingbusinessoftheGroupand, assuch,havenotbeendisclosedseparately. Tax TheGroup’staxcreditfortheyearended 30April2012of£411,000(2011:creditof £65,000)wasataneffectivecreditrateof 9.9%(2011:creditrateof2.4%)ofprofitbefore tax.Thisincludesacurrentyearcorporation taxchargeof£1,268,000(2011:£459,000), arateof30.5%(2011:17.0%)ofprofitbefore tax,aprioryeartaxcreditof£1,001,000 (2011:creditof£1,124,000)andacurrent yeardeferredtaxcreditof£678,000 (2011:chargeof£600,000;consistingof £14,000forthecurrentyearand£586,000 forprioryears). AdrianScarbroughPhotography©2012 In summary TheGrouprepaidallofitsdebtduringtheyear. TheGroup’snetfundsof£14.1m(2011:£6.7m)anditsfacilitiesprovide itwiththefirepowertomakeinvestments. TheGroup’sworkingcapitalhasreducedfurtherbutmoreworktobe doneatSEA. TheGroup’searningspersharebenefitedby2.48pencefromaprior yeartaxcredit. 18 Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements Includingthecurrentyeardeferredtax, theeffectivecurrenttaxratefortheyearended 30April2012is14.2%(2011:17.5%),lower thanthestandardrate(calculatedat25.83%; 2011:27.83%),primarilyduetorecognition ofResearch&Development(R&D)taxcredits. TheGroup’soveralltaxratewassignificantly belowthestandardcorporationtaxrateof 25.83%(2011:27.83%).Themajorityofthe reductionintheeffectiverateoftaxwasdue totherecognitionofR&DtaxcreditsatMASS andSEAfortheyearended30April2012and aprioryearcorporationtaxcreditreflecting thereleaseofataxprovisioninrespectof earlieryears’R&Dtaxcreditsfollowingclosure ofthe2009andmostofthe2010taxyears. TheGroup’sbusinessesareonlyallowedto claimthelowerR&Dtaxcreditallowance availabletolargercompanies,currently30%. Lookingforward,theGroup’seffectivecurrent taxratefor2012/13and2013/14isestimated at16%and17%respectively,takingaccount ofthereductioninheadlinetaxratesand assumingtheR&Dtaxcreditregimeremains unchangedfromitscurrentlevelandscope. TheGroupmaintainsacautiousapproach topreviousR&Dtaxcreditclaimsfortax periodsthatarestillopen. Adjusted earnings per share Theadjustedearningspershareof15.52pence (2011:9.60pence)isreportedinadditionto thebasicearningspershareandexcludes theeffectofamortisationofintangibleassets, exchangemovementonmarkingforward exchangecontractstomarketattheyear endandexceptionalitems,allnetoftax. Theincreaseintheadjustedearningsper shareof5.92pencefrom2011to2012includes a2.48penceeffectofprioryeartaxcredit (£1,001,000)resultingfromthereleaseof contingencyinrespectofclosedtaxyears. Theadjustedearningspershareexcluding theprioryeartaxcreditof13.04penceis 36%above2011. Capital structure of the Group and funding TheGroup’saccesstocapitalcomprises thefollowing: Share capital TheGrouphasinissue40.8mordinary sharesof10penceeach.Oftheseshares justunder0.4mareownedbytheCohort EmployeeBenefitTrustandwaivetheirrights todividends.InadditiontheGrouphasoptions overordinarysharesthroughKeyEmployee ShareOptionandSAYEschemestothelevel of2.9mat30April2012. TheGroupmaintainsaprogressive dividendpolicywithdividendshaving increasedbyapproximately20%perannum overthelastthreeyearsanddividendcover beingmaintainedinthecurrentyearatover fivetimes(2011:fourtimescover)based upontheadjustedearningspershare. Treasury At30April2012theGrouphadfacilitieswith itsbankingprovider,RBS,asfollows: Overdraftfacility forworkingcapital requirements Termat commencement offacility £m 7.5 364days Duringtheyearendedandat30April2012 noneoftheabovefacilityhadbeendrawn bytheGroup. Thestructureddebtof£3.0mandmortgages (£0.4m)werepaidoffinfullinOctober2011. AtthesametimetheGroupchangedits overdraftfacility:£2.5mwasaddedto increasetheoverdraftfacilityto£7.5m,to providegreatercapacitytomanageworking capitalrequirements,andthestructured debtfacilityof£7.5mwascancelled.The overdraftfacilityisrenewableannuallyin OctoberandtheBoardexpectsthistobe renewedonbroadlysimilartermsin2012. TheGroup’sforeignexchangeexposureis mainlyatSEAandprimarilyrelatesto receivablesfromtheEuropeanSpaceAgency; thisexposureishedgedusingforwardcontracts. At30April2012,theGrouphadinplaceforward foreignexchangecontractsasfollows: EurotoGBP Sell €11.6m Buy £9.8m Theseforwardcontractsareusedbythe Grouptomanageitsriskexposuretoforeign currencyontradingcontractswhereiteither orbothreceivesandpayscurrencyfrom customersandsuppliersrespectively. Theseforwardexchangecontractsare enteredintowhencustomercontractsare consideredhighlyprobable.TheGroupdoes notenterintospeculativeforeignexchange dealing.Themarkingofforwardexchange contractstomarketatthespotrateon 30April2012resultedintherecognition ofaderivativefinancialliabilityof£413,000 (2011:assetof£542,000)andachargetothe incomestatementof£955,000(2011:credit of£595,000).Inbothyears,thechangein thederivativefinancialinstrumenthasbeen recognisedseparatelywithinoperatingprofit andisnotdisclosedaspartoftheadjusted operatingprofitoftheGroup. TheGrouptakesaprudentapproachto treasurypolicywithitsoverridingobjective beingprotectionofcapital.Inimplementing thispolicy,depositsareheldwithinstitutions withcreditratingsofatleastA3.Depositsare generallyheldonshort(lessthanthreemonths) durationtomaturityoncommencement.This matchestheGroup’scashresourceswithits internal13weekcashforecasts,retaining flexibilitywhilsttryingtoensureanacceptable returnonitscash.AlloftheGroup’scash (thatisnotonshorttermdeposit)ismanaged throughaset-offarrangementenablingthe mostefficientuseoftheGroup’scashfrom daytoday,underthesupervisionofthe Group’sfinancefunction. TheGrouphaschangedthecreditrating requiredfromtheinstitutionswithwhich itplacesdepositsfromanAratingin2011 toanA3ratingin2012inordertomaintain itsflexibilityinthechoiceofbanksitcanuse inthecurrenteconomicclimate.TheGroup regularlyreviewstheratingsoftheinstitutions withwhichitholdscashandalwaysconsiders thiswhenplacinganewdepositanddoes notconsiderthechangetothelowerratinga materialincreaseintheGroup’sfinancialrisk. Asnotedlastyear,theGroup’sintereston depositswaslow(typicallybelow1%)whilst itsweightedinterestonitsdebtwasnearer4%. 19 Cohort plc Annual Report and Accounts 2012 Business review Finance Director’s review continued Capital structure of the Group and funding (continued) Treasury (continued) TheGrouprepaiditsdebtinfullinOctober 2011.SincethentheGrouphasusedmore shorttermdepositsobtaininginterestrates of0.5%to2.1%. TheGroup’sliquidityremainsgoodwith profitconversiontocashremainingwell above100%(seeKPIsonpage21).TheGroup hashistoricallyhadlowlevelsofworking capitalwithmanyofitscontractsbeingless thanoneyearindurationandthereliability ofitscustomerbasemakingdebtrisklow. During2012,workingcapitallevelshave fallen,asdescribedbelow.TheGroup’sreliance onitsowncashandfacilityresourcesrequires ittotakeaproactiveapproachwithitsprimary bank,RoyalBankofScotlandplc,withwhom itmaintainsaregularrelationship. Working capital TheworkingcapitaloftheGroup,defined asinventoryplustradeandotherreceivables lesstradeandotherpayables,hasfallen from£5.5mnetassetsto£4.2mnetassets, adecreaseof£1.3m(24%)despiteanincrease inrevenueofnearly16%.Thisimprovement reflectsthecontinuedgoodeffortsatSCSin managingitsworkingcapital,MASSreducing itsworkingcapitaldespiteincreasedrevenue, andalthoughSEA’sworkingcapitaldidincrease itwaslessthantheincreaseinrevenue.The yearenddebtordays(insales)havedecreased from57daysin2011to51daysin2012.This calculationisbasedupondividingtherevenue bymonth,workingbackwardsfromAprilinto thetradedebtorsbalance(excludingunbilled incomeandworkinprogress)attheyearend, amoreappropriatemeasurethancalculating basedupontheannualrevenueasittakes intoaccounttheheavyweightingoftheGroup’s revenueinthelastquarterofeachyear. Thedecreaseindebtordaysisareflection ofthetightercontroloverworkingcapital acrosstheGroup. TheGrouphasaworkingcapitalfacilityof £7.5mwithRBSwhichwasnotutilisedduring theyear.TheGrouphadcashat30April2012 of£14.1m(2011:£10.2m).Advancereceipts oncontractsattheyearendwere£3.1m 20 (2011:£3.2m).TheGroupgenerated£8.4m ofcashfromoperatingactivities(operating profitwas£6.5mbeforeamortisationof intangibleassetsandmarkingforward exchangecontractstomarketattheyear end)whichwasoffsetbyaninvestment of£0.1monfixedassetsand£1.1m ofdividendspaid. Areas of judgement Revenue recognition on fixed-price contracts TheGroup’saccountingpolicyonrevenue recognitionexplainsthisindetail(seepage 73)asdoestheaccountingjudgementnote (seepage75).Thejudgementappliedin recognisingrevenueonafixed-pricecontract ismadebyreferencetothecostincurred, includingcontingencyforriskandthe demonstrableprogressmadeondelivering keystages(oftenreferredtoasmilestones) ofthecontract.TheGroupusesbestestimates inapplyingthisjudgementandwhere uncertaintyofprogressonastageexists, revenueisnotrecognisedforthatstage. Cost contingency on fixed-price contracts Inadditiontothejudgementappliedto revenuerecognition,thecostofdelivering acontracttoaparticularstagerepresents theactualcostsincurredandcommittedplus anestimateofcostcontingencyforriskstill presentinthecontractatthatstage.Thiscost contingencytakesaccountofthestagethat thecontracthasreachedandanyjudgement anduncertaintyremainingtodeliverthe remainderofthecontract.Itisusualforthese costcontingenciestoreduceasthecontract progressesandriskanduncertaintyreduces. Goodwill and other intangible assets TheGrouphasrecognisedgoodwillandother intangibleassetsinrespectoftheacquisition ofMASS(includingAbacusEW)andSEA. Theotherintangibleassetsareinrespect ofcontractsacquired,intellectualproperty rightsandspecificopportunitiesandineach caseareamortisedovertheexpectedlife oftheearningsassociatedwiththeother intangibleassetacquired.Thegoodwill, whichisnotsubjecttoamortisationbut toannualimpairmenttesting,arisesfrom theintangibleelementsoftheacquired businessesforwhicheitherthevalueorlife isnotreadilyderived.Thisincludes,butisnot limitedto,reputation,customerrelations, contactsandmarketsynergieswithexisting Groupmembers.Thegoodwillrelatingtothe acquisitionsofMASS(includingAbacusEW) andSEAhasbeentestedforimpairmentas at30April2012.Inbothcasestherewasno impairment.Theimpairmenttestforthe goodwillinrespectofSEAismoresensitive withnoimpairmentattheGroup’spre-tax WACCof12.6%butimpairediftheGroup’s WACCincreasesto20.9%.Thefactorsaffecting theGroup’sWACCarediscussedfurtherinthe Group’saccountingpolicies(seepages70 and75to76).TheGroup’spre-taxWACC at30April2012of12.6%islowerthan2011 equivalentof15.5%.Thisdecreasereflects alowerriskfreeinterestratepartlyoffset byhigherequityrisk. ThesensitivityoftheSEAgoodwillto impairmenthasreducedsincelastyeardue totheimprovedforecastcashflowsofSEA. Provisions TheGroupmakesestimatesofprovisions forexistingcommitmentsarisingfrompast events.Inestimatingtheseprovisions,the Groupmakesjudgementsastothequantity andlikelihoodoftheliabilityarising.Certain provisionsrequiremorejudgementthan others.Inparticularwarrantyprovisionsand contractlossprovisionshavetotakeaccount offutureoutcomesarisingfrompastdeliveries ofproductsandservices.Inestimatingthese provisions,theGroupmakesuseofmanagement experience,precedentsandspecificcontract andcustomerissues. ThevendorearnoutinrespectofAbacus EWshouldbeconcludedintheyearended 30April2013.Thesituationat30April2012 isuncertainand,assuch,theGrouphas retainedtheearnoutprovisioninfull. Tax TheGroupmakesjudgementsinrespect oftherecoverabilityofdeferredtaxassets. Wheretherecoverabilitythroughsufficient futuretaxableprofitsisconsideredremote, nodeferredtaxassetisrecognised. Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements Accounting policies Therewerenosignificantchangesin accountingpoliciesapplyingtotheGroup fortheyearended30April2012. Theindicatorsshownoppositehavebeen identifiedbytheDirectorsasgivingthebest overallindicationoftheGroup’slongterm success.Revenuegrowthgivesaquantified indicationoftherateatwhichtheGroup’s businessactivityisexpanding.Theadjusted profittrendprovidesanindicationofwhether additionalrevenueisbeinggainedwithout profitmarginsbeingcompromisedand whetheranyacquisitionsarevalueenhancing. Orderbookvisibility,baseduponexpected revenueduringtheyeartocome,provides ameasureofconfidenceinthelikelihoodof achievementoffutureforecasts.Changein adjustedearningspershareisanabsolute measureoftheBoard’smanagementofthe Group’sreturntoshareholdersincludingtax andinterest.Operatingcashconversion measurestheabilityoftheGroupto convertprofitintocash. TheGroup’sKPIsdemonstrateclearlythe improvementinrevenue,adjustedoperating profitandadjustedearningspershare. TheGroup,asfor2011/12,enters2012/13 withoverhalfofitsforecastrevenueon order.Asmentionedalready,theGrouphas hadanotherstrongcashperformancein 2011/12withtheoperatingcashconversion above200%ofprofitbeforetax. Thesignificantincreasesinrevenue, adjustedoperatingprofitandadjusted earningspersharefor2008wasasaresult oftheacquisitionofSEA. Simon Walther FinanceDirector Change in revenue Change in adjusted operating profit 16% Description Changeintotal Grouprevenue comparedtothe prioryear. 66% 34% 16% 2% -17% 08 09 10 11 12 47% Description Changein Groupprofit beforetax, amortisationof otherintangible assets,marking forwardexchange contractsto marketatthe yearendand exceptionalitems. 226% 47% 8% 3% -34% 08 09 10 11 12 Operating cash conversion Order book visibility 210% Description Netcash generatedfrom operationsbefore taxascompared totheprofit beforetax. 254% 210% 166% 155% 70% 08 09 10 11 12 Change in adjusted earnings per share 62% Description Annualchangein adjusted earnings pershare,before amortisationof otherintangible assets,marking forwardexchange contractsto marketatthe yearendand exceptionalitems. 51% 62% 19% -12% -37% 08 09 10 11 12 63% Description Ordersfornext financialyear expectedto bedelivered asrevenue, presented as apercentage ofconsensus marketrevenue forecastsfor theyear. 58% 58% 63% 50% 48% 08 09 10 11 12 21 Cohort plc Annual Report and Accounts 2012 Business review Risk management Minimising risk and uncertainty The business risks of the Group can be summarised as follows: Risk area Market risks Customers Operational risks Suppliers Operations 22 Nature of risk Mitigation The Group’s single most important customer is the UK MOD. £30.7m of revenue came directly from this source in 2012 (2011: £27.7m), 41% (2011: 42%) of Group revenue. In addition £22.6m (2011: £16.5m) of Group revenue, 30% (2011: 25%) was sourced ultimately from the UK MOD but received via other contractors. With the government running a significant budget deficit there is a risk that controls on defence expenditure could be introduced which could have an impact on the Group’s ability to win new work, or could result in termination of its existing contracts. Any event that affected the Group’s reputation with the UK MOD could put this revenue at risk. The Group is reducing this reliance by expanding its overseas defence offering as well as other non-defence sectors, including space and transport. The Group ensures it engages at all levels of the UK MOD and remains responsive to its primary customer’s needs. The increase in revenue to its ultimate primary customer in 2012 compared with 2011 reflected the Group’s position on a number of key UK MOD programmes including ECS for Astute class submarines, electronic warfare databases and research frameworks in the areas of logistics and soldier capability. £14.1m (19%) of Group revenue, representing 26% of revenue derived from the UK MOD, was in relation to the Joint Combat Aircraft, Astute submarine and nuclear deterrent programmes, all of which have been confirmed as high priority areas following the government’s Strategic Defence and Security Review. As is typical in the defence and space sectors, the Group is reliant on certain key suppliers for specific elements of its technical and product offerings. In the defence sector in particular, the reliance on suppliers is long term, with product duration in this sector often being tens of years. This risk is managed through close liaison with suppliers, good project management and having contingency plans to go to alternative suppliers or bring work in-house. The long term life of many defence products requires a regular review of product life and capability and the Group supports the customer in this respect through funded ongoing product support and re-life tasks. The Group’s operational risk is primarily through its three subsidiaries. The subsidiary trading and business risks are similar in the cases of MASS and SEA. MASS and SEA primary risks are: i. Bid risk – the businesses bid on contracts where the scope of work may not be well or fully defined by the customer. ii. Fixed-price contracts – these are often of a long term nature (greater than 12 months) and typically include delivery of hardware and software. iii. Due to the nature of their niche technical skills requirement, both MASS and SEA have a fixed level of core software engineering and technical expertise. SCS The primary cost risk is in respect of staff utilisation. SCS revenue visibility is short with typical contract duration of three to six months. This carries risk to forward utilisation. The business maintains a comprehensive prospects schedule. This risk is also an opportunity, with SCS often securing and delivering work in a very short time frame. SCS has a small number of fixed-price contracts. The Group (through all three subsidiaries) operates a number of off-site managed service contracts. These contracts are long term in nature (typically five years at commencement) and are managed through dedicated site project managers. The contracts are fixed-price in terms of revenue with opportunities for additional tasks enhancing volume and return. This is typical in defence and space and is managed through bid/no bid reviews at the appropriate level using experienced personnel, including the Cohort Executive and Board. These projects are managed by dedicated project management, monthly review by the subsidiary board and regular interaction with the customer and key suppliers. Revenue and cost is recognised taking account of risk and estimated cost at completion, taking into account any contractual contingency. This cost base is carefully monitored at budget time and by rolling quarterly forecasts to identify any potential risk of low utilisation and thus under recovery of cost. The risk is mitigated, in the short term, by the use of a small number of sub-contractor staff. In the long term, a programme of skills assessment and training is in place to ensure continued flexibility of the engineering resource. This risk is managed by retaining a minimal core staff, essential for business support, development and delivering key skills to customers. The majority of deliverable service is provided by non-core staff (associates) where cost is only incurred when the associates are on task. The forward utilisation of core staff is monitored on a weekly basis looking forward up to two months. These projects are managed by dedicated project management, monthly review by the subsidiary board and regular interaction with the customer and key suppliers. Revenue and cost is recognised taking account of risk and estimated cost at completion, including any contractual contingency. The Group carefully manages the partnership with its customer and supplier base in all these cases to ensure the customer receives value for money and skilled Group staff providing a dedicated, flexible and responsive approach. The primary risk to these managed service contracts is termination which is mitigated by the partnering approach adopted by the Group and our close engagement with the customer to ensure customer requirements remain paramount at all times. Risk area Partners Financial risks Treasury Currency risk Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements Nature of risk Mitigation The Group, especially in the defence sector, often secures business through teaming and partnering with other suppliers and this is often a requirement of securing work with the UK MOD in order to ensure the end customer receives the best solution. Cash and bank deposits are held as follows: 2012 £’000 Royal Bank of Scotland Plc 10,137 3,000 Santander UK 1,003 Barclays Plc 14,140 Moody’s credit rating of bank 2011 as at £’000 24 May 2012 A2 6,733 A2 — Aa3 — 6,733 The Group’s facilities with RBS are renewed annually. During the year, the Group renewed its working capital facility with RBS for £7.5m (previously £5.0m). This facility is available to all of the Group’s entities through an offset arrangement. The current facility expires in October 2012 when it is expected to be renewed on broadly similar terms. The Group did not utilise this working capital facility during the year ended 30 April 2012 having an average cash balance in its offset facility of £8.0m, cash balances ranging from a low of £3.8m to a high of £12.2m. The Group had no debt at 30 April 2012 other than commitments under operating leases. The Group has contracts with overseas customers and suppliers requiring payment or receipt in currencies other than £ sterling. The Group’s exposure to credit risk at 30 April 2012 in respect of financial derivatives (forward foreign exchange contracts) was £9.8m of receivable only (2011: £10.3m of receivable and £2.0m of payable). The financial derivatives at 30 April 2012 were all held with RBS. These are disclosed in detail in note 20 to the financial statements. The Group takes an active part in these arrangements and, through regular (usually monthly) project review meetings and other correspondence, ensures that the team (including our partners) delivers as a whole to the customer and to the needs of the individual team members. In addition, the Group’s Executive Management team maintains regular and co-ordinated relationships with partners and ensures the Group’s approach is consistent and avoids unnecessary overlap or omissions. A number of the Group’s key revenue streams are a result of the partnering relationship, as borne out by the increase in the revenue to the UK MOD via other contractors as well as the increased revenue through research framework agreements. The Group takes a very prudent approach to the management of its financial instruments which are described in note 17. The Group’s cash is held with at least A3 rated institutions and on deposits usually not exceeding three months. This ensures a very low risk to capital and a reasonable balance of liquidity against interest earned on cash deposits. The Group has reduced the minimum credit rating of its banking providers from A to A3 in order to maintain flexibility in the current market circumstances. This is not considered to materially increase the Group’s financial risk. The Group regularly reviews the ratings and other relevant factors in respect of the banks with which it deposits its cash and on each and every occasion that a short term deposit is placed. The Group has regular (at least quarterly) meetings with its bank to discuss operational and other business issues and keeps the bank informed of progress. The Group manages its exposure to currency risk by using forward foreign currency exchange contracts. The level of forward cover is determined contract by contract taking into account the net currency exposure to receipts and purchases. Forward contracts are only put in place when customer contracts are deemed highly probable. The Group does not enter into speculative forward exchange contracts. The Group’s primary exposure to the € is through SEA’s Aerospace division which has most of its contracts denominated in €. Its exposure to non-contractual bids and quotes priced in € is managed by using appropriate levels of contingency in its pricing and force majeure clauses in quotes and contracts. The Group takes a prudent approach to revenue and credit risk, and any work done at risk is minimal, authorised at the appropriate level and reviewed on a monthly basis. The Group uses project control processes and regularly reviews the project progress to ensure recognition of revenue takes account of external milestones and customer acceptance as well as the internal costs incurred. The calibre of the Group’s customers and the control processes in respect of revenue capture and invoicing ensures minimal bad debts. The Group also uses letters of credit and other methods of payment guarantee, including customer advances, especially in respect of overseas customers, to ensure any export debt risk is minimised. Significant debt receivable in foreign currency is hedged using forward exchange contracts which are entered into when contracts are deemed effective. The risk to the major debtor of the Group, as a government department, is considered very low. Revenue The Group has risk in respect of: i. milestone and acceptance failure on projects; and ii. unrecoverable trade debts. The recognition of revenue is discussed at length in the Accounting Policies (page 73) and Critical Accounting Judgements (page 75) and as such may from time to time have a degree of risk. The 2012 bad debt charge was £78,000 (2011: £43,000) on Group revenue of £75.4m (2011: £65.1m) and is gross of £81,000 (2011: £30,000) either no longer considered a bad debt or recovered and credited to the income statement. Financial assets exposed to credit risk at 30 April: 2012 £m 12.6 7.9 14.1 Trade receivables Other receivables Cash and bank deposits 2011 £m 13.2 7.1 10.2 Of the trade receivables, £5.1m was with the UK MOD at 30 April 2012 (2011: £3.5m). Strategic risks Acquisitions The buying (and selling) of businesses is a risk in respect of value, distraction, integration and ongoing obligations and undertakings. The Group’s acquisition risk is mitigated as far as practicable by the acquisition process being managed at the Cohort Board level, making use of appropriate external expertise and resources as and when required. 23 Cohort plc Annual Report and Accounts 2012 Corporate governance Board of Directors and Executive Management 4 2 3 5 1 6 7 8 ImagescourtesyofAdrianScarbroughPhotography©2012 24 Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements 1. Nick Prest CBE *+ Chairman NickPrestbecameChairmanofCohorton flotationinMarch2006.Aftergraduating fromOxfordin1974NickjoinedtheMOD. In1982NickmovedtoAlvis,thedefence contractor,undertakingavarietyofroles beforebecomingChiefExecutivein1989 andChairmanandChiefExecutivein1996. NickleftAlvisfollowingitsacquisitionbyBAE Systemsin2004,bywhichtimethecompany hadbecomealeadinginternationalbusiness inmilitarylandsystems.Inadditiontobeing ChairmanofCohort,NickisalsoChairman ofShephardGroup,aprivatelyownedmedia companyspecialisingindefenceandaerospace, andwasChairmanofAvevaGroupplcuntil July2012. 2. Stanley Carter *+ Co-Chairman StanleyCarterbecameCo-Chairmanof Cohortin2009havingpreviouslybeenits ChiefExecutive,apostwhichhehadheld sinceCohort’sformationin2006.Priorto thathewasManagingDirectorofSCS,which hefoundedin1992onleavingtheRegular Army,whichwasacquiredbyCohortatthe timeofitsflotation.Duringhismilitary serviceasaRoyalArtilleryofficerheheld awiderangeofoperationalpostsandstaff officerappointmentsintheMOD,including thecentralstaff,procurement,government researchestablishmentsandhadsignificant interactionwithindustry.Healsorepresented theUKonNATOtechnicalcommittees.Hehas degreesinTechnologyandBehaviouralScience fromLoughboroughandtheOpenUniversity respectively,andanMScinInformationSystems fromtheRoyalMilitaryCollegeofScience. 3. Andrew Thomis * Chief Executive AndrewThomisgraduatedfromImperial College,Londonin1987.Hespentnine yearsintheMODasafast-streamcivil servant,carryingoutrolesincluding technologyresearch,scientificadviceanda spellasaprivatesecretarytothedefence procurementminister.Heleftin1996and, followingaperiodwithCapitaplc’s managementconsultancyarm,hejoinedAlvis inarolecoveringstrategy,M&Aandbusiness development.Followingtheacquisitionof AlvisbyBAESystemsin2004,heworkedwith NickPrestandStanleyCarteronthecreation ofCohortplc,actingasFinanceDirectorduring theflotationandsubsequentlyCorporate DevelopmentDirector.Followingtwoyears asManagingDirectorofMASShetookover asChiefExecutiveofCohortinMay2009. 4. Simon Walther * Finance Director and Company Secretary AftergraduatingwithaBScfromUniversity College,London,SimonWaltherwentonto qualifyasacharteredaccountantwith ToucheRossin1992.Simonmovedtothe PeninsularandOrientalSteamNavigation Company(P&O)in1993wherehewas appointedachiefaccountantforP&O EuropeanFerriesin1995.In1997hewas appointedGroupFinancialControlleratAlvis. HejoinedCohortasFinanceDirectorinMay 2006,havingconsiderableindustryrelevant experiencewithAlvisandBAESystems. 5. Sir Robert Walmsley KCB *+ Independent Non-executive Director SirRobertWalmsleyservedintheRoyalNavy wherehisfinalappointmentwasasController oftheNavyandmemberoftheNavyBoard asaViceAdmiral.Hewasknightedin1995. AfterretiringfromtheNavy,hewasappointed asChiefofDefenceProcurement,occupying thatpositionfrom1996until2003.Heserved ontheBritishEnergyBoardfrom2003until 2009.Hecontinuesontheboardofthe GeneralDynamicsCorporationandUltra ElectronicHoldingsaswellasbeingasenior adviseratMorganStanleyInternationaland ChairmanoftheMajorProjectsAssociation. 7. Bill Bird Managing Director of SCS BillgraduatedfromCambridgewithanMAin MedicalScience.Followinganaircrewcareer intheRoyalAirForce,whenhewasawarded anMBEforhisworkintheIntelligence community,Billspent10yearsingeneral management,gaininganMBAfromReading Universityin2000.HewastheGeneral ManagerofRockwell’sUKDefencebusiness andspentthreeyearsasManagingDirector ofBoeing’sUKsubsidiary,BDUK,whichheset upin1996.BilljoinedKPMGin2000andleft todevelopHedra’sdefenceandaerospace practiceinOctober2003.Duringhisconsulting career,Billhashadextensiveexperienceof MODprocurementandsupport,outsourcing andcommercialnegotiations.Billwasappointed asManagingDirectorofSCSinSeptember2010. *MemberoftheCohortplcBoard +MemberofRemuneration&Appointmentsand AuditCommittees 8. Stephen Hill Managing Director of SEA Stephenhasovertenyears’seniormanagerial experience,predominantlyintheinternational aerospaceanddefencesector.Hebeganhis careerin1983atGECMarconiasanelectronics engineer,eventuallybecomingBusiness Directorwithresponsibilityfortheland systemselectro-opticsbusinessatBasildon. In2000,hemovedtoThales,wherehisroles includedManagingDirectoroftheAir OperationsbusinessatWells,andVice PresidentwithresponsibilityfortheUKAir SystemsDivision.Mostrecentlyhewas ChiefExecutiveofCircleBath,anewventure capitalbackedprivatehospitalinBath. Stephenhasafirstclasshonoursdegree inElectricalandElectronicEngineering andaMastersinEngineeringProject Management.Stephenwasappointedas ManagingDirectorofSEAinMarch2011. 6. Ashley Lane Managing Director of MASS AshleyLanegraduatedin1991from SurreyUniversitywithaMastersDegree (Distinction)inElectronicandElectrical Engineering.OngraduationhejoinedThorn EMIElectronicsasaSystemsEngineerworking oncountermeasuresandelectronicsurveillance systems.Hespentfouryearsintechnology developmentandlicensing,buildingthe successfulwirelesstechnologycompany UbiNetics.Ashleyhasheldkeytechnicalroles onanumberofelectronics,ITandreal-time systemprojects.Hehasheldpositionsas BusinessManager,ConsultancyDivisionHead, ProgrammeManagerand,forfiveyears, SystemsDevelopmentandTechnicalDirector forMASS.AshleywasappointedasManaging DirectorofMASSinMay2009. 25 Cohort plc Annual Report and Accounts 2012 Corporate governance Corporate governance report 26 © Crown copyright/MOD Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements Introduction As Cohort plc is listed on AIM it is neither required to comply with the UK Corporate Governance Code that was published in 2010 by the Financial Reporting Council (the Code) nor issue a statement of compliance with it. Nevertheless, the Board fully supports the principles set out in the Code and seeks to comply wherever this is appropriate, having regard to the size of the Company and the resources available to it. Details are provided below of how the Company applies the Code. The Board The Board of Directors comprises the Chairman, two Executive Directors and two Non-executive Directors, Stanley Carter (Co-Chairman) and Sir Robert Walmsley. Nick Prest and Stanley Carter are not considered independent. The Board has determined Sir Robert Walmsley to be independent and he is designated the Senior Independent Director. The Board meets most months and receives a monthly Board pack comprising individual reports from each of the Executive Directors and the subsidiary Managing Directors together with any other material deemed necessary for the Board to discharge its duties. It is the Board’s responsibility to formulate, review and approve the Group’s strategy, budgets, major items of expenditure and acquisitions. All Directors retire by rotation and are subject to election by shareholders at intervals of once every three years. Corporate structure The Board The Board Audit Committee Chairman: Sir Robert Walmsley Members: Nick Prest Stanley Carter Remuneration and Appointments Committee Chairman: Sir Robert Walmsley Members: Nick Prest Stanley Carter Nick Prest Chairman 27 Cohort plc Annual Report and Accounts 2012 Corporate governance Corporate governance report continued N Prest (Chairman) S Carter (Co-Chairman) Sir Robert Walmsley (Non-executive Director) A Thomis (Chief Executive) S Walther (Finance Director and Company Secretary) Board (11 meetings) Audit (3 meetings) Remuneration & Appointments (3 meetings) 11 10 11 11 11 2 3 3 — — 3 3 3 — — Board committees The Board has established two committees: Audit and Remuneration & Appointments, each having written terms of delegated responsibilities. The attendance of the Directors at Board and Committee meetings for the year ended 30 April 2012 is shown above. Audit Committee The Audit Committee comprises the Company Chairman and the Non-executive Directors and is scheduled to meet at least twice a year. It is the Audit Committee’s role to provide formal and transparent arrangements for considering how to apply the financial reporting and internal control requirements of the Code, whilst maintaining an appropriate relationship with the independent auditor of the Group. In order to comply with the requirement of the Code that at least one member has relevant financial experience, the Chairman of the Board sits on the Audit Committee. The independent auditor liaises with the Audit Committee regarding work to be undertaken and complies with the Ethical Standards for Auditors issued by the Auditing Practice Board. Each year, prior to commencing its audit work, the independent auditor confirms in writing the nature of any non-audit work on behalf of the Group and the safeguards in place to ensure its independence and objectivity; any in-year proposals for non-audit work are subject to prior approval by the Audit Committee. The Company has formal arrangements in place to facilitate “whistle-blowing” by employees through a contract with a third-party service provider. If any call is made to this third party, either the Chief Executive or the Chairman of the Audit Committee is notified promptly of the fact and the content of the call, so that appropriate action can be taken. Remuneration & Appointments Committee The Remuneration & Appointments Committee comprises the Company Chairman and the Non-executive Directors and is scheduled to meet at least once a year. It is the Remuneration & Appointments Committee’s role to establish a formal and transparent policy on Executive remuneration and to set remuneration packages for individual Directors. Sir Robert Walmsley is Chairman of both the Audit and Remuneration & Appointments Committees. The Board has not established a Nominations Committee. This is not considered necessary due to the small size of the Cohort Board. The role of the Nominations Committee is undertaken by the Remuneration & Appointments Committee and the Chief Executive. Management of the Group and its subsidiary undertakings The management of the Group and subsidiary undertakings is as follows: Group management XX Cohort plc Board meeting at least eight times per year. XX Group Executive Committee meeting at least four times per year, comprising Cohort plc Executive Directors and subsidiary Managing Directors. Subsidiary management XX Monthly executive management meetings involving the senior management of each subsidiary. Cohort Executive Directors attend subsidiary executive management meetings on a regular basis. Shareholder relations The Company meets with its institutional shareholders and analysts as appropriate and uses the AGM to encourage communication with private shareholders. In addition, the Company uses the Annual Report and Accounts, Interim Report and website (www.cohortplc.com) to provide further information to shareholders. Internal control and risk management The Board is responsible for the system of internal control and for reviewing its effectiveness. Such systems are designed to manage rather than eliminate risks and can provide only reasonable and not absolute assurance against material misstatement or loss. Each year, on behalf of the Board, the Audit Committee will review the effectiveness of these systems. This is achieved primarily by considering the risks potentially affecting the Group and from discussions with the external auditor. The Group does not currently have an internal audit function due to the small size of the Cohort administrative function and the high level of Director review and authorisation of transactions. A comprehensive budgeting process is completed once a year, reviewed and approved by the Board. In addition the Group conducts quarterly re-forecasts. The Group’s results, as compared against budget and the latest quarterly forecast, are reported to the Board on a monthly basis and discussed in detail at each meeting of the Board. The subsidiary balance sheets are reviewed in detail on a quarterly basis by the Cohort Finance Director. While the issue of bribery was not regarded as a material risk in the past, in response to the Bribery Act 2010, the Board carried out a full review of its processes to ensure compliance with the Act. The Group has issued a policy and each of its businesses has implemented that policy and appropriate procedures described by the Act to prevent bribery. Each business within the Group reports annually on its compliance with the policy and procedures. The Cohort plc Chief Executive is the Board member responsible for the Group’s compliance. As part of its procedures, the Group has implemented training in respect of compliance with the Act for its employees. 28 Corporate governance Directors’ report Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements The Directors present their report and the audited financial statements (pages 37 to 76) of Cohort plc for the year ended 30 April 2012. Cohort plc is a company incorporated in and operating from England. Its registered address is Arlington House, 1025 Arlington Business Park, Theale, Reading RG7 4SA. The corporate governance report set out on pages 26 to 28 forms part of this report. Dividends The Directors recommend a final dividend of 1.90 pence (2011: 1.60 pence) per 10 pence ordinary share to be paid on 19 September 2012 to ordinary shareholders on the register on 24 August 2012 which, together with the interim dividend of 1.00 pence paid on 7 March 2012, makes a total of 2.90 pence for the year (2011: 2.40 pence). Principal activities The principal activity of the Company is that of a holding company. The principal activities of the Group are described in the Overview on pages 2 to 7. Business review The Company is required by the Companies Act 2006 to include a business review in this report. The information that fulfils the requirements of the business review can be found in the following sections, which are incorporated in this report by reference: Research and development During the year ended 30 April 2012 the Group expenditure on research and development, both on behalf of customers and the Group’s own private venture expenditure, was £10.4m (2011: £10.2m). Going concern The Group’s financial statements have been prepared on the going concern basis. The reasons for this are set out on page 68 of the Accounting Policies. XX Chairman’s statement XX Our business and strategy XX Chief Executive’s review XX Operations reviews Pages 2 to 3 4 to 7 8 to 10 11 to 17 XX Finance Director’s review and key performance indicators 18 to 21 Information about the use of financial instruments by the Company and its subsidiaries is given in note 20 to the financial statements and on pages 19 to 20 of the Finance Director’s review. There have been no significant events since the balance sheet date. Capital structure Details of issued share capital, together with details of the movements in the Company’s issued share capital during the year are shown in note 21. The Company has one class of ordinary shares which carry no right to fixed income. Each share carries the right to one vote at general meetings of the Company. There are no specific restrictions on the size of a holding nor on the transfer of shares, which are both governed by the general provisions of the Articles of Association and prevailing legislation. The Directors are not aware of any agreements between holders of the Company’s shares that may result in restrictions on the transfer of securities or on voting rights. Details of employee share schemes are set out in note 22. Shares held by the Cohort plc Employee Benefit Trust (see note 23) abstain from voting and do not receive any dividend. No person has any special rights of control over the Company’s share capital and all issued shares are fully paid. With regard to the appointment and replacement of Directors, the Company is governed by its Articles of Association, the Code, the Companies Act and related legislation. The Articles themselves may be amended by special resolution of the shareholders. The powers of Directors are described in the Cohort plc Board Terms of Reference, copies of which are available on request, and the corporate governance report on pages 26 to 28. Under its Articles of Association, the Company has authority to issue up to half of its issued shares as new ordinary shares. This approximates to 20.4m shares at 30 April 2012. There are also a number of other agreements that take effect, alter or terminate upon a change of control of the Company, such as: commercial contracts; bank loan agreements; property lease arrangements; and employee share plans. None of these are considered to be significant in terms of their likely impact on the business of the Group as a whole. Furthermore, the Directors are not aware of any agreements between the Company and its Directors or employees that provide for compensation for loss of office or employment that occurs because of a takeover bid, other than those disclosed in the Remuneration & Appointments Committee report on page 31 to 33. International Financial Reporting Standards (IFRS) The Group and parent company’s reported results for the year ended 30 April 2012 are in accordance with IFRS. 29 Cohort plc Annual Report and Accounts 2012 Corporate governance Directors’ report continued Table 1 Disclosure Report Directors who served throughout the year Directors retiring by rotation Directors’ biographies Directors’ interests Directors’ share options Remuneration & Appointments Committee report Remuneration & Appointments Committee report Board of Directors and Executive Management Remuneration & Appointments Committee report Remuneration & Appointments Committee report Table 2 A E S Carter Schroder Investment Management Hargreave Hale N M Prest H Dale-Staples Percentage of voting rights and issued share capital % 26.15 9.85 6.97 5.11 5.06 Number of ordinary shares 10,665,718 4,015,827 2,842,295 2,084,580 2,063,089 Pages 31 to 33 31 to 33 24 to 25 31 to 33 31 to 33 Nature of holding Direct Direct Direct Direct Direct A resolution to reappoint KPMG Audit Plc as auditor will be proposed at the Annual General Meeting (AGM). The Directors who were in office on the date of approval of these financial statements have confirmed, as far as they are aware, that there is no relevant audit information of which the auditor is unaware. Each of the Directors has confirmed that they have taken all the steps they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that it has been communicated to the auditor. Approved by the Board of Directors on 25 June 2012 and signed on its behalf by: Simon Walther Company Secretary Directors The Group maintains appropriate insurance cover in respect of legal actions against the Directors, as well as against material loss or claims against the Group, and reviews the adequacy of the cover regularly. Details of information in respect of the Directors of the Company is referenced in table 1 above. Supplier payment policy In respect of all of its suppliers, the Group’s policy is: XX to agree the terms of payment when contracting with suppliers; XX to ensure suppliers are made aware of the terms of payment; and XX to abide by the terms of payment. All suppliers are treated alike in terms of payment with no preference to any one supplier and the Group does not follow any particular code of practice or standard in its payment policy. At 30 April 2012, the trade creditors of the Group represented 39 days (2011: 53 days) of purchases. Fixed assets There is no material difference between the book value and current open market value of the Group’s interests in land and buildings. Employee consultation The Group organises staff communications locally through its subsidiary undertakings. The media used for organised communications includes local intranets, in-house magazines, staff bulletins, presentations and copies of press releases. In addition, regular staff meetings are held and notices are published containing information about matters of interest within the Group and its subsidiaries. Disabled employees The policy of the Group is to offer the same opportunity to disabled people as to all others in respect of recruitment and career advancement, provided their disability does not prevent them from carrying out their required duties. Employees who become disabled will, wherever possible, be retained, rehabilitated and, where necessary, retrained. Donations During the year ended 30 April 2012 the Group made charitable donations of £8,020 (2011: £9,341), mainly in respect of military and local charities. The Group made no political donations during the year (2011: £Nil). Substantial shareholdings The Company has been notified as at 15 June 2012, in accordance with chapter 5 of the Disclosure and Transparency Rules, of the voting rights as a shareholder of the Company as shown in table 2 above. 30 Corporate governance Remuneration & Appointments Committee report Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements Introduction The Remuneration & Appointments Committee of the Board is responsible for considering Directors’ remuneration packages and makes its recommendations to the Board. Remuneration policy Remuneration packages are designed to be competitive and to reward good performance. Executive Directors receive salary, medical cover, pension contribution, annual bonuses and share options. Service contracts of the Executive Directors who served in the year Andrew Thomis and Simon Walther have service agreements with the Company which can be cancelled by either party giving six months’ notice at any time or 12 months’ notice in the event of a change of control arising as a result of any person or persons acquiring more than 50% of the voting rights at a general meeting of the Company. Pensions The Group makes contributions to a stakeholder pension scheme (a defined contribution scheme) at a rate of 10% of the Executive Director’s contribution. Director’s interest in the equity of Cohort plc The Directors in office during the year under review and their interests in the equity of the Company are shown in the table below. Performance incentives The Group operates a cash bonus scheme and grants share options. A bonus of £99,494 was payable to the Executive Directors for the year ended 30 April 2012 (2011: £22,500) as determined by the Remuneration & Appointments Committee on 7 June 2012. S Carter N Prest A Thomis Sir Robert Walmsley S Walther At 30 April 2012 number of 10p ordinary shares 10,665,718 2,084,580 35,230 25,035 25,601 At 30 April 2011 number of 10p ordinary shares 10,665,718 2,084,580 35,230 25,035 25,601 Sir Robert Walmsley Independent Non-executive Director Adrian Scarbrough Photography © 2012 31 Cohort plc Annual Report and Accounts 2012 Corporate governance Remuneration & Appointments Committee report continued Ordinary shares under option granted and forfeited during the year ended 30 April 2012 and outstanding at 30 April 2012 were as follows: At 1 May 2011 or date of appointment Number Granted Number Exercised Number Lapsed/ forfeited Number At 30 April 2012 Number Date from which option can be exercised Exercise period Years Date of grant A Thomis Cohort plc 2006 share option scheme under the Enterprise Management Incentive (EMI) scheme – Option price of £1.23 per share – Option price of £1.66 per share – Option price of £1.89 per share Cohort plc 2006 share option scheme (unapproved) – Option price of £1.66 per share – Option price of £1.89 per share – Option price of £1.715 per share – Option price of £0.835 per share – Option price of £0.915 per share Save as you earn (SAYE) scheme – Option price of £0.97 per share S Walther Cohort plc 2006 share option scheme under the Enterprise Management Incentive (EMI) scheme – Option price of £1.41 per share – Option price of £1.66 per share – Option price of £1.89 per share Cohort plc 2006 share option scheme (approved) – Option price of £0.915 per share Cohort plc 2006 share option scheme (unapproved) – Option price of £1.89 per share – Option price of £1.715 per share – Option price of £0.835 per share – Option price of £0.915 per share Save as you earn (SAYE) scheme – Option price of £0.97 per share 40,650 9,036 10,582 14,056 15,873 39,650 66,995 — 3,711 200,553 — — — — — — — 76,546 — 76,546 42,554 21,084 13,227 — — — — 32,786 13,228 32,653 55,172 — 9,278 187,196 — — — 30,252 — 63,038 — — — — — — — — — — — — — — — — — — — — 32 — (9,036) (10,582) (14,056) (15,873) (39,650) — — 40,650 8 Mar 2006 9 Mar 2009 — 21 Aug 2007 22 Aug 2010 12 Jul 2011 — 11 Jul 2008 — 21 Aug 2007 22 Aug 2010 12 Jul 2011 — 11 Jul 2008 6 Aug 2012 — 5 Aug 2009 24 Jul 2013 66,995 23 Jul 2010 27 Jul 2014 26 Jul 2011 76,546 — 3,711 27 Jul 2010 1 Sep 2013 (89,197) 187,902 (42,554) (21,084) (13,227) — 10 Jul 2006 10 Jul 2009 — 21 Aug 2007 22 Aug 2010 12 Jul 2011 — 11 Jul 2008 — 32,786 26 Jul 2011 27 Jul 2014 (13,228) (32,653) — — — 11 Jul 2008 — 5 Aug 2009 55,172 23 Jul 2010 26 Jul 2011 30,252 12 Jul 2011 6 Aug 2012 24 Jul 2013 27 Jul 2014 — 9,278 27 Jul 2010 1 Sep 2013 (122,746) 127,488 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements The following Directors are due to retire by rotation and, being eligible, offer themselves for re-election at the forthcoming Annual General Meeting on 11 September 2012: A Thomis Sir Robert Walmsley S Walther Performance incentives (continued) There are no performance conditions applying to any of the share option schemes above. The price paid for all share options in the above schemes was nil pence. Options over shares were forfeited in the year to provide fresh incentives to management. These option forfeits were applied to all members of the Cohort plc 2006 Share Option Scheme (see also note 22). The mid-market price of Cohort plc 10 pence ordinary shares at 30 April 2012 was 98.5 pence (2011: 63.5 pence); the lowest and highest market prices in the year were 61.5 pence and 111.5 pence respectively. For the year ending 30 April 2013, the bonus payable to the Executive Directors of Cohort plc in respect of that year will be based upon performance compared to budget for adjusted operating profit, cash and order intake and will be payable up to a maximum of 35% of salary. No bonuses are payable or share options awardable to the Non-executive Directors. Bonus schemes for senior management of the subsidiary companies have been established for the year ending 30 April 2013, with a similar framework to that of the Cohort plc Executive Directors, with varying levels of percentage of salary, none exceeding 35%. The Group has the right to recover from the Cohort plc Executive Directors and senior management of the subsidiary companies any bonus paid in respect of a reporting period where a material adverse restatement is made. Chairman and Non-executive Directors Both Nick Prest and Sir Robert Walmsley were appointed in February 2006. Stanley Carter was appointed Non-executive Co-Chairman of Cohort plc on 25 May 2009. These appointments can be terminated upon three months’ notice being given by either party. Directors’ remuneration Details of Directors’ remuneration are set out below: Executive Directors A Thomis S Walther Non-executive Directors N Prest S Carter Sir Robert Walmsley Salary 2012 £ 175,100 144,200 60,000 45,000 30,000 Bonus 2012 £ 54,561 44,933 — — — Benefits in kind 2012 £ Emoluments 2012 £ Pension contributions 2012 £ 598 598 230,259 189,731 1,920 1,200 — — — 60,000 45,000 30,000 — — — Total 454,300 99,494 1,196 554,990 3,120 Total 2012 £ 232,179 190,931 60,000 45,000 30,000 558,110 Total 2011 £ 184,912 150,698 54,000 55,190 27,000 471,800 Salaries for Andrew Thomis and Simon Walther have been increased to £185,000 and £150,000 per annum respectively for the year ended 30 April 2013. The fees payable to the Chairman and Non-executive Directors for the year ended 30 April 2013 are the same as for the year ended 30 April 2012. 33 Cohort plc Annual Report and Accounts 2012 Corporate governance Statement of Directors’ responsibilities in respect of the Annual Report and financial statements The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Directors’ responsibility statement We confirm to the best of our knowledge: 1. the financial statements, prepared in accordance with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and 2. the management report, which is incorporated into the Directors’ report, includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. By order of the Board on 25 June 2012 Andrew Thomis Chief Executive Simon Walther Finance Director The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and parent company financial statements for each financial year. As required by the AIM Rules of the London Stock Exchange, they are required to prepare the Group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the parent company financial statements on the same basis. 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 parent company and of their profit or loss for that period. In preparing each of the Group and parent company financial statements, the Directors are required to: XX select suitable accounting policies and then apply them consistently; XX make judgements and estimates that are reasonable and prudent; XX state whether they have been prepared in accordance with IFRSs as adopted by the EU; and XX prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the parent company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company’s transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. 34 Financial statements Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements © Trevor Sheehan 35 Cohort plc Annual Report and Accounts 2012 Financial statements Financial statements Independent auditor’s report to the members of Cohort plc We have audited the financial statements of Cohort plc for the year ended 30 April 2012 set out on pages 37 to 76. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and auditor As explained more fully in the Statement of Directors’ responsibilities set out on page 34, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the APB’s website at www.frc.org.uk/apb/scope/private.cfm. Opinion on financial statements In our opinion: XX 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 30 April 2012 and of the Group’s profit for the year then ended; XX the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU; XX the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006; and XX the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: XX 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 XX the parent company financial statements are not in agreement with the accounting records and returns; or XX certain disclosures of Directors’ remuneration specified by law are not made; or XX we have not received all the information and explanations we require for our audit. Matt Lewis (Senior Statutory Auditor) for and on behalf of KPMG Audit Plc Statutory Auditor Chartered Accountants Arlington Business Park Theale RG7 4SD 25 June 2012 36 Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements Financial statements Consolidated income statement for the year ended 30 April 2012 Revenue Cost of sales Gross profit Administrative expenses Operating profit Comprising: Adjusted operating profit (Charge)/income on marking forward exchange contracts to market value at the year end (included in cost of sales) Amortisation of other intangible assets (included in administrative expenses) Exceptional items (included in administrative expenses) Finance income Finance costs Profit before tax Income tax credit Profit for the year attributable to the equity shareholders of the parent Earnings per share Basic Diluted Notes 1 1 1 20 11 3 6 7 8 4 10 10 2012 £’000 75,408 (53,386) 22,022 (17,828) 4,194 6,513 (955) (1,364) — 4,194 77 (115) 4,156 411 4,567 Pence 11.30 11.28 All profit for the year is attributable to equity shareholders of the parent and is derived from continuing operations. Consolidated statement of comprehensive income for the year ended 30 April 2012 Profit for the year attributable to the equity shareholders of the parent Cash flow hedges – (expense)/income taken to equity (net of tax credit or charge) 20 Total comprehensive income for the year attributable to the equity shareholders of the parent Notes 2012 £’000 4,567 (24) 4,543 2011 £’000 65,135 (45,217) 19,918 (17,079) 2,839 4,439 595 (1,477) (718) 2,839 27 (170) 2,696 65 2,761 Pence 6.79 6.79 2011 £’000 2,761 13 2,774 37 Cohort plc Annual Report and Accounts 2012 Financial statements Consolidated statement of changes in equity for the year ended 30 April 2012 Group At 1 May 2010 Profit for the year Other comprehensive income for the year Total comprehensive income for the year Own shares acquired Equity dividends Share-based payments Transfer of share option reserve on vesting of options At 30 April 2011 Profit for the year Other comprehensive expense for the year Total comprehensive income for the year Equity dividends Share-based payments Transfer of share option reserve on vesting of options Share capital £’000 Share premium account £’000 4,079 29,519 — — — — — — — — — — — — — — 4,079 29,519 — — — — — — — — — — — — Own shares £’000 — — — — (302) — — — (302) — — — — — — At 30 April 2012 4,079 29,519 (302) Share option reserve £’000 379 — — — — — 317 (141) 555 — — — — 353 (205) 703 Hedge reserve £’000 11 — 13 13 — — — — 24 — (24) (24) — — — — Retained earnings £’000 12,372 2,761 — 2,761 — (894) — 141 Total £’000 46,360 2,761 13 2,774 (302) (894) 317 — 14,380 4,567 48,255 4,567 — (24) 4,567 (1,051) — 205 4,543 (1,051) 353 — 18,101 52,100 38 Financial statements Company statement of changes in equity for the year ended 30 April 2012 Company At 1 May 2010 Profit for the year Other comprehensive income for the year Total comprehensive income for the year Own shares acquired Equity dividends Share-based payments Transfer of share option reserve on vesting of options At 1 May 2011 Profit for the year Other comprehensive income for the year Total comprehensive income for the year Equity dividends Share-based payments Transfer of share option reserve on vesting of options Share capital £’000 Share premium account £’000 4,079 29,519 — — — — — — — — — — — — — — Own shares £’000 — — — — (302) — — — 4,079 29,519 (302) — — — — — — — — — — — — — — — — — — At 30 April 2012 4,079 29,519 (302) The reserves of the Group and the Company are described in note 24. Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements Share option reserve £’000 379 — — — — — 317 (141) 555 — — — — 353 (205) 703 Retained earnings £’000 2,485 2,609 — Total £’000 36,462 2,609 — 2,609 2,609 — (894) — 11 4,211 1,801 — 1,801 (1,051) — 13 (302) (894) 317 (130) 38,062 1,801 — 1,801 (1,051) 353 (192) 4,974 38,973 39 Cohort plc Annual Report and Accounts 2012 Financial statements Consolidated and Company statements of financial position as at 30 April 2012 Assets Non-current assets Goodwill Other intangible assets Property, plant and equipment Investment in subsidiaries Deferred tax asset Current assets Inventories Trade and other receivables Derivative financial instruments Cash and cash equivalents Total assets Liabilities Current liabilities Trade and other payables Current tax liabilities Derivative financial instruments Bank borrowings Provisions Non-current liabilities Bank borrowings Deferred tax liability Provisions Total liabilities Net assets Equity Share capital Share premium account Own shares Share option reserve Hedge reserve Retained earnings Group Company Notes 2012 £’000 2011 £’000 2012 £’000 2011 £’000 11 11 12 13 19 14 15 20 31,395 31,395 791 7,252 — 157 2,155 7,820 — 118 — — 11 — — 20 42,825 42,718 7 6 39,595 41,488 42,843 42,744 215 356 20,468 20,339 — 575 14,140 10,177 34,823 31,447 — 80 — 4,003 4,083 — 414 — — 414 74,418 72,935 46,926 43,158 16 (16,492) (15,220) (450) (402) 20 17 18 17 19 18 21 23 22 20 (1,086) (413) — (3,318) (973) — (3,131) (3,339) (4) — — — (7,499) (4,694) — — (21,309) (22,663) (7,953) (5,096) — (953) (56) (313) (1,601) (103) (1,009) (2,017) — — — — — — — — (22,318) (24,680) (7,953) (5,096) 52,100 48,255 38,973 38,062 4,079 29,519 (302) 703 — 4,079 29,519 4,079 29,519 (302) (302) 555 24 703 — 4,079 29,519 (302) 555 — 18,101 14,380 4,974 4,211 Total equity attributable to the equity shareholders of the parent 52,100 48,255 38,973 38,062 The financial statements on pages 37 to 76 were approved by the Board of Directors and authorised for issue on 25 June 2012 and are signed on its behalf by: Andrew Thomis Chief Executive Simon Walther Finance Director Company number 05684823 40 Financial statements Consolidated and Company cash flow statements for the year ended 30 April 2012 Net cash from operating activities Cash flow from investing activities Interest received Proceeds on disposals of property, plant and equipment Purchases of property, plant and equipment Acquisition of subsidiaries, net of cash acquired Net cash (used in)/received from investing activities Cash flow from financing activities Dividends paid Repayment of borrowings Purchase of own shares Net cash used in financing activities Net increase/(decrease) in cash and cash equivalents Notes 2012 £’000 25 8,424 2012 £’000 2,183 2011 £’000 2,580 12 31 9 17 23 Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements Group Company 2011 £’000 6,512 27 — (599) (918) 77 2 (141) — (62) (1,490) 69 — (3) — 66 27 — (14) — 13 (894) — (302) (1,051) (3,444) — (894) (171) (302) (1,051) (3,000) — (4,495) (1,367) (4,051) (1,196) 3,867 3,655 (1,802) 1,397 41 Cohort plc Annual Report and Accounts 2012 Financial statements Notes to the financial statements for the year ended 30 April 2012 1. Segmental analysis For management and reporting purposes, the Group currently operates through its three subsidiaries: MASS, SCS and SEA. These subsidiaries are the basis on which the Company reports its primary business segment information in accordance with IFRS 8. The principal activities of the subsidiaries are described in the Overview (pages 1 to 7) and in the Business review (pages 8 to 23). Business segment information about these subsidiaries is presented below: 2012 Revenue External revenue Inter-segment revenue Segment adjusted operating profit Unallocated corporate expenses Adjusted operating profit Charge on marking forward exchange contracts to market value at the year end Amortisation of other intangible assets Operating profit Finance cost (net of income) Profit before tax Income tax credit Profit after tax MASS £’000 SCS £’000 SEA £’000 Eliminations £’000 Group £’000 26,117 17,508 31,783 2 53 14 26,119 17,561 31,797 4,831 1,320 1,723 — — — 4,831 1,320 1,723 — (1,219) — — 3,612 1,320 — 8 3,612 1,328 (955) (145) 623 (66) 557 — (69) (69) 75,408 — 75,408 — — — — — — — — 7,874 (1,361) 6,513 (955) (1,364) 4,194 (38) 4,156 411 4,567 All are UK operations and all are continuing. Inter-segment sales are charged at arm’s length rates. Unallocated corporate expenses are the costs of the Cohort plc head office including the remuneration of the Cohort plc Board. MASS £’000 5 228 SCS £’000 49 61 SEA £’000 84 398 Central £’000 3 12 Group £’000 141 699 Eliminations 7,699 12,500 791 4,054 — — 17,568 18,895 — (1,386) 20,990 4,054 36,463 27,935 31,395 791 157 14,140 74,418 (6,449) (4,503) (10,247) 920 (20,279) (6,449) (4,503) (10,247) (1,086) (953) (22,318) Other information Capital additions Depreciation Balance sheet Assets Segment assets Goodwill Other intangible assets Deferred tax asset Cash Consolidated total assets Liabilities Segment liabilities Current tax liabilities Deferred tax liability Consolidated total liabilities 42 Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements MASS £’000 SCS £’000 SEA £’000 Eliminations £’000 Group £’000 23,526 18,450 23,159 8 34 — 23,534 18,484 23,159 4,231 1,025 289 4,231 1,025 — (1,187) (13) 3,031 — 3,031 — — (167) 858 — 858 289 595 (290) (538) 56 (35) 21 — (42) (42) — — — — — — — — 65,135 — 65,135 5,545 (1,106) 4,439 595 (1,477) (718) 2,839 (143) 2,696 65 2,761 1. Segmental analysis (continued) 2011 Revenue External revenue Inter-segment revenue Segment adjusted operating profit Unallocated corporate expenses Adjusted operating profit Income on marking forward exchange contracts to market value at the year end Amortisation of other intangible assets Exceptional items Operating profit Finance cost (net of income) Profit before tax Income tax credit Profit after tax All are UK operations and all are continuing. Inter-segment sales are charged at arm’s length rates. Unallocated corporate expenses are the costs of the Cohort plc head office including the remuneration of the Cohort plc Board. Other information Capital additions Depreciation Balance sheet Assets Segment assets Goodwill Other intangible assets Deferred tax asset Cash Consolidated total assets Liabilities Segment liabilities Bank borrowings Current tax liabilities Deferred tax liability MASS £’000 374 187 SCS £’000 7 83 SEA £’000 204 426 Central £’000 14 11 Group £’000 599 707 Eliminations (1,705) 8,483 12,500 2,010 4,507 — — 17,805 18,895 145 22,993 4,507 36,845 (9,279) (4,045) — — (8,081) (444) 2,743 29,090 31,395 2,155 118 10,177 72,935 (18,662) (3,444) (973) (1,601) (24,680) Consolidated total liabilities (9,279) (4,045) (8,525) For the purposes of monitoring segment performance and allocating resource between segments, the Group’s Chief Executive monitors the tangible, intangible and financial assets attributable to each segment. All assets are allocated to reportable segments with the exception of central cash and bank borrowings, and current tax liabilities. Goodwill and other intangible assets are allocated to reportable segments as analysed in note 11. 43 Cohort plc Annual Report and Accounts 2012 Financial statements Notes to the financial statements continued for the year ended 30 April 2012 1. Segmental analysis (continued) Geographical segments The Group’s subsidiaries are all located in the UK. The following table provides an analysis of the Group’s revenue by geographical location of the customer: UK Other EC countries Asia Pacific USA All the Group’s assets, tangible and intangible, are located in the UK. Market segments The following table provides an analysis of the Group’s revenue by market sector: Defence (including security) Space Transport Other commercial 2012 £’000 64,740 6,085 4,274 309 75,408 2012 £’000 61,003 7,562 2,763 4,080 75,408 2011 £’000 52,432 6,336 6,104 263 65,135 2011 £’000 52,224 7,791 2,138 2,982 65,135 Major customers Revenue from major customers included in the Group’s business segments for the year ended 30 April 2012 is as follows: 2012 UK MOD £’000 9,966 9,167 11,606 30,739 2012 Customer A £’000 2012 Customer B £’000 2,474 526 6,402 9,402 — — 4,019 4,019 2011 UK MOD £’000 9,601 12,494 5,644 27,739 2011 Customer A £’000 2011 Customer B £’000 3,892 612 4,137 8,641 — — 5,858 5,858 2011 £’000 26,622 2,912 1,791 317 31,642 2012 £’000 23,505 2,644 1,924 353 28,426 MASS SCS SEA 2. Employee benefit expense (including Directors) Wages and salaries Social security costs Defined contribution pension plan costs Share-based payments 44 Cohort plc Annual Report and Accounts 2012 2. Employee benefit expense (including Directors) (continued) Average number of employees (including Directors) Other operational Managed services Total operational Administration and support Overview Business review Corporate governance Financial statements 2012 Number 331 70 401 126 527 The above disclosures include Directors. Directors’ emoluments and share option details are disclosed separately in the Remuneration & Appointments Committee report on pages 31 to 33. 3. Exceptional items The net exceptional charge comprises: Restructuring at SCS Restructuring at SEA Cost of acquisition of Abacus EW Profit on sale of AGS All exceptional items are in respect of continuing operations. The tax credit in respect of exceptional items is £Nil (2011: £200,000) and is in respect of the continuing items. 4. Profit for the year The profit for the year has been arrived at after charging/(crediting): Net foreign exchange losses/(gains) Research and development costs Depreciation of property, plant and equipment Amortisation of other intangible assets Cost of inventories recognised as expenses Staff costs (excluding share-based payments) Share-based payments All of the above charges/(credits) are in respect of continuing operations. Notes 20 12 11 2 22 2012 £’000 — — — — — 2012 £’000 857 10,398 699 1,364 22,963 28,073 353 2011 Number 379 68 447 129 576 2011 £’000 177 538 13 (10) 718 2011 £’000 (555) 10,241 707 1,477 18,193 31,325 317 45 Cohort plc Annual Report and Accounts 2012 Financial statements Notes to the financial statements continued for the year ended 30 April 2012 5. Auditor’s remuneration The analysis of the auditor’s, KPMG Audit Plc (2011: KPMG Audit Plc), remuneration is as follows: Fees payable to the Company’s auditor for the audit of the Company’s and consolidated accounts Fees payable to the Company’s auditor for the audit of the Company’s subsidiaries Total audit fees Interim review fee Audit related assurance services Total non-audit fees Total fees paid to the auditor and its associates Charged to profit for the year 2012 £’000 13 63 76 12 3 15 91 91 Audit related assurance services include £3,000 in respect of a review of the Group’s payroll processes. Fees payable to KPMG Audit Plc and their associates for non-audit services to the Company are not required to be disclosed because the consolidated financial statements are required to disclose such fees on a consolidated basis only. 6. Finance income Interest on bank deposits Other interest receivable All finance income is in respect of continuing operations. 7. Finance costs Bank and short term interest All finance costs are in respect of continuing operations. 8. Income tax credit Corporation tax: in respect of this year Corporation tax: in respect of prior years Deferred tax: in respect of this year Deferred tax: in respect of prior years 2012 £’000 69 8 77 2012 £’000 115 2012 £’000 1,268 (1,001) 267 (678) — (678) (411) The corporation tax is calculated at 25.83% (2011: 27.83%) of the estimated assessable profit for the year, as disclosed below. The current tax in respect of the year ended 30 April 2012 includes £Nil charge (2011: £200,000 credit) in respect of exceptional items. The deferred tax includes a credit of £370,000 in respect of amortisation of other intangible assets (2011: £414,000 credit) and a credit of £240,000 (2011: charge of £155,000) in respect of marking forward exchange contracts to market at the year end. The deferred tax is further explained in note 19. 46 2011 £’000 10 60 70 5 21 26 96 96 2011 £’000 27 — 27 2011 £’000 170 2011 £’000 459 (1,124) (665) 14 586 600 (65) Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements 8. Income tax credit (continued) The tax credit for the year is reconciled to the profit per the consolidated income statement for the year ended 30 April 2012 as follows: Profit before tax on continuing operations Tax at the UK corporation tax rate of 25.83% (2011: 27.83%) Tax effect of expenses that are not deductible in determining taxable profit Tax effect of R&D tax credits Tax effect of exceptional items that are not recognised in determining taxable profit Tax effect of change in tax rate from 26% to 24% (2011: 28% to 26%) Tax effect of de-recognising brought forward tax losses Tax effect of prior year R&D tax credits Tax credit for the year 2012 £’000 4,156 1,074 118 (534) — (68) — (1,001) (411) 2011 £’000 2,696 750 126 (716) 1 (155) 467 (538) (65) The UK corporation tax rate for the year ended 30 April is calculated at 25.83%, based upon eleven months at 26.00% and one month at 24.00%. In addition to the amount credited to the income statement, the following amounts relating to tax have been recognised for the year ended 30 April 2012 directly in other comprehensive income: Deferred tax (credit)/charge arising on income and expenses recognised in other comprehensive income: Revaluations of financial instruments treated as cash flow hedges 9. Dividends Amounts recognised as distributions to equity holders in the period: Final dividend in respect of the year ended 30 April 2011 at 1.60 pence per ordinary share (2010: 1.40 pence per ordinary share) Interim dividend in respect of the year ended 30 April 2012 at 1.00 pence per ordinary share (2011: 0.80 pence per ordinary share) Proposed final dividend for the year ended 30 April 2012 at 1.90 pence per ordinary share (2011: 1.60 pence per ordinary share) 2012 £’000 (9) 2012 £’000 647 404 1,051 768 2011 £’000 5 2011 £’000 571 323 894 647 The proposed final dividend is subject to approval by shareholders at the AGM to be held on 11 September 2012 and has not been included as a liability in these financial statements. If approved, this dividend will be paid on 19 September 2012 to shareholders on the register as at 24 August 2012. The Cohort plc Employee Benefit Trust, which holds ordinary shares in Cohort plc, representing 0.9% of the Company’s called up share capital, has agreed to waive all dividends due to it in accordance with an arrangement dated 20 November 2009. 47 Cohort plc Annual Report and Accounts 2012 Financial statements Notes to the financial statements continued for the year ended 30 April 2012 10. Earnings per share The earnings per share are calculated as follows: 2012 2011 Weighted average number of shares Number Earnings £’000 Earnings per share Pence Weighted average number of shares Number Earnings £’000 Earnings per share Pence Basic earnings (net profit attributable to equity holders of Cohort plc) 40,425,342 4,567 11.30 40,633,523 2,761 Share options Diluted earnings 70,022 — — 1,143 — 40,495,364 4,567 11.28 40,634,666 2,761 6.79 — 6.79 The basic earnings per share are calculated by dividing the profit attributable to equity holders of the parent company (Cohort plc) by the weighted average number of ordinary shares in issue during the year. The diluted earnings per share are calculated by dividing the profit attributable to equity holders of the parent company by the weighted average number of shares in issue during the year as adjusted for the effects of potentially dilutive share options. The weighted average number of shares for the year ended 30 April 2012 is after deducting the own shares. In addition, the adjusted earnings per share of the Group are calculated in a similar manner to the basic earnings per share with the adjustments to the basic earnings as shown below: Basic earnings Charge/(income) on marking forward exchange contracts to market value at the year end (net of income tax of £240,000; 2011: £155,000) Exceptional items (net of income tax of £Nil; 2011: £200,000) Amortisation of other intangible assets (net of income tax of £370,000; 2011: £414,000) Notes 20 3 11 Adjusted earnings Share options Diluted adjusted earnings The adjusted earnings are in respect of continuing operations. 2012 2011 Weighted average number of shares Number Earnings £’000 Earnings per share Pence Weighted average number of shares Number Earnings £’000 Earnings per share Pence 40,425,342 4,567 11.30 40,633,523 2,761 6.79 — 715 — — — 994 — — — — — — (440) 518 1,063 40,425,342 6,276 15.52 40,633,523 3,902 70,022 — — 1,143 — 40,495,364 6,276 15.50 40,634,666 3,902 — — — 9.60 — 9.60 48 Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements Goodwill Other intangible assets SEA £’000 MASS £’000 Group £’000 18,895 12,148 31,043 — 352 352 18,895 12,500 31,395 18,895 12,500 31,395 — — — — — — — — — — — — — — — 18,895 12,500 31,395 18,895 12,500 31,395 SEA £’000 1,160 — 1,160 1,160 725 290 1,015 145 1,160 — 145 MASS £’000 1,340 3,000 4,340 Group £’000 2,500 3,000 5,500 4,340 5,500 1,143 1,187 2,330 1,219 1,868 1,477 3,345 1,364 3,549 4,709 791 2,010 791 2,155 11. Goodwill and other intangible assets Cost At 1 May 2010 Acquisition of Abacus EW At 1 May 2011 At 30 April 2012 Amortisation At 1 May 2010 Charge for the year ended 30 April 2011 At 1 May 2011 Charge for the year ended 30 April 2012 At 30 April 2012 Net book value At 30 April 2012 At 30 April 2011 Goodwill arises on the acquisition of subsidiaries. These subsidiaries are the cash-generating units to which goodwill has been allocated. The amortisation charge is disclosed as “Amortisation of other intangible assets” in the income statement. The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired. The recoverable amounts of the subsidiaries (cash-generating units) are determined from value-in-use calculations. The key assumptions for the value-in-use calculations are those regarding discount rates, growth rates and any other factors which may affect future performance as are known of in the current period. The Group’s subsidiaries have prepared cash flow forecasts as part of the recent annual budgetary process, as approved by management. This provides the next three years’ cash flow forecasts which have been extrapolated forward at an estimated long term growth rate of 2.25% (2011: 2.25%). The cash flow forecasts are prepared on a consistent basis based upon each subsidiary’s budget. To this has been applied the Group’s estimated pre-tax weighted average cost of capital (WACC) of 12.6% (2011: 15.5%). The Group’s WACC is an estimate based upon the Company’s current equity risk, market interest rates, Company debt interest rates and market equity risk. The same rate of WACC and long term growth rate have been applied to the assessment of the carrying value of goodwill for both MASS and SEA, since the businesses have similar market experience and exposures. On the basis of these tests, no impairment of goodwill has arisen in the year ended 30 April 2012 in respect of either MASS or SEA. The goodwill of SEA is more sensitive with no impairment at the Group’s WACC of 12.6% but is impaired if the Group’s WACC increases to 20.9%. 49 Cohort plc Annual Report and Accounts 2012 Financial statements Notes to the financial statements continued for the year ended 30 April 2012 11. Goodwill and other intangible assets (continued) The other intangible assets arise on the acquisition of the subsidiaries and are disclosed above. The other intangible assets are amortised over the estimated lives of the specific other intangible asset, as follows: Other intangible assets £’000 Estimated life Years Remaining period of amortisation at 30 April 2012 Years MASS On acquisition of MASS: Contracts acquired Contracts to be secured On acquisition of Abacus EW: Contracts acquired Future orders and prospects Intellectual property rights 1,060 280 1,340 1,446 1,074 480 3,000 4,340 4 7 3 2 3 The SEA other intangible asset which is now fully amortised was in respect of contracts acquired on the acquisition of SEA. 12. Property, plant and equipment Group Cost At 1 May 2010 Additions On acquisition of Abacus EW Disposals At 1 May 2011 Additions Disposals At 30 April 2012 Depreciation At 1 May 2010 Charge in the year Eliminated on disposal At 1 May 2011 Charge in the year Eliminated on disposal At 30 April 2012 Net book value At 30 April 2012 At 30 April 2011 50 Land and buildings £’000 Fixtures and equipment £’000 6,702 13 — (1) 6,714 — — 6,714 510 106 — 616 110 — 726 5,988 6,098 4,099 586 4 (35) 4,654 141 (288) 4,507 2,361 601 (30) 2,932 589 (278) 3,243 1,264 1,722 — 1.25 1.10 0.10 1.10 Total £’000 10,801 599 4 (36) 11,368 141 (288) 11,221 2,871 707 (30) 3,548 699 (278) 3,969 7,252 7,820 Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements 12. Property, plant and equipment (continued) The Company’s property, plant and equipment was £11,000 at 30 April 2012 (2011: £20,000). The depreciation charge is disclosed within “administrative expenses” in the consolidated income statement. The property, plant and equipment have been pledged to secure the Group’s banking facilities. The valuation (in accordance with International Valuation Standards) of the Group’s land and buildings at 30 April 2012 supports the above net book value. The Group’s land and buildings as disclosed above are the cost of purchase plus refurbishment and the valuation on acquisition. As such the Group has no revaluation reserve at this time. 13. Investment in subsidiaries and joint ventures Subsidiary undertakings Joint ventures Group 2012 £’000 — — — 2011 £’000 — — — Company 2012 £’000 42,825 — 42,825 2011 £’000 42,718 — 42,718 A list of the significant investments in joint ventures and subsidiaries is as follows: Name of company Directly owned Systems Consultants Services Limited (SCS) MASS Limited SEA (Group) Limited (SEA) Country of registration Type of shares England Ordinary England Ordinary England Ordinary Digital Millennium Map LLP (DMM) England Ordinary Advanced Geospatial Solutions Limited (AGS) England Ordinary Held through a subsidiary MASS Consultants Limited (MASS) England Ordinary Systems Engineering & Assessment Limited England Ordinary Beckington Castle Limited England Ordinary Abacus EW Consultancy Limited England Ordinary Proportion of shareholding and voting rights held Nature of business 100% Technical consultancy 100% Holding company of MASS Consultants Limited 100% Holding company of Systems Engineering and Assessment Limited, Beckington Castle Limited and various dormant subsidiaries 2D digital mapping – in administration Formerly 3D mapping technology (business of AGS sold 1 August 2009) Electronic warfare, managed services, secure communications and IT support services Deliverer of systems engineering, software and electronic engineering services and solutions to defence, space and transport Property company holding freehold of Beckington Castle Electronic warfare training services and software applications 25% 50% 100% 100% 100% 100% DMM and AGS, which are both retained as investments of the Group, are not accounted for under the equity method of accounting as the Group ceased to have an active participation from 1 November 2006 and 30 April 2009 respectively. All shares held in subsidiaries and joint ventures are the same class and carry equal weighting to any shares held by other shareholders. 51 Cohort plc Annual Report and Accounts 2012 Financial statements Notes to the financial statements continued for the year ended 30 April 2012 13. Investment in subsidiaries and joint ventures (continued) For information, the performance of DMM for the year ended 30 April 2012 was as follows: Unrecognised share of profit Revenues Expenses Profit/(loss) Total assets Total liabilities Year ended 30 April 2012 £’000 Cumulative to 30 April 2012 £’000 23 95 (2) 93 2012 £’000 17 (6) 63 2,920 (3,626) (706) 2011 £’000 14 (4) The Group has received and continues to receive a return on its original investment in DMM. This income is disclosed in “administrative expenses” within the consolidated income statement. For information, the performance of AGS for the year ended 30 April 2012 was as follows: Unrecognised share of profit Revenues Expenses Profit/(loss) Total assets Total liabilities Year ended 30 April 2012 £’000 7 — 14 14 2012 £’000 — (1,114) Cumulative to 30 April 2012 £’000 27 901 (2,056) (1,155) 2011 £’000 7 (1,135) AGS sold its business on 1 August 2009. The Group retains its investment in AGS and received further consideration in respect of the business disposal of £13,743 in the year ended 30 April 2012 (2011: £10,000, disclosed as an exceptional item per note 3), which is disclosed in the adjusted operating profit of the Group. Company The Company’s investments in subsidiaries are as follows: MASS £’000 14,437 105 (27) 14,515 117 (77) 14,555 SCS £’000 1,705 84 (66) 1,723 81 (58) 1,746 SEA £’000 26,412 105 (37) 26,480 103 (59) 26,524 Total £’000 42,554 294 (130) 42,718 301 (194) 42,825 At 1 May 2010 Share-based payments Vested in year At 1 May 2011 Share-based payments Vested in year At 30 April 2012 52 Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements 2012 £’000 215 Company 2012 £’000 — — — — 80 — 80 2011 £’000 356 2011 £’000 — — — — 29 385 414 14. Inventories Finished goods The inventory at 30 April 2012 is after a stock provision of £141,000 (2011: £164,000). The inventory has been pledged to secure the Group’s banking facilities. 15. Trade and other receivables Trade receivables Allowance for doubtful debts Amounts recoverable on contracts Prepayments and accrued income Amounts due from subsidiary undertakings Group 2012 £’000 12,688 (78) 12,610 6,218 1,640 — 20,468 2011 £’000 13,329 (108) 13,221 5,822 1,296 — 20,339 The average credit period taken on sales of goods is 51 days (2011: 57 days). Of the trade receivables balance, £2.4m was considered overdue at 30 April 2012 (2011: £3.3m). Overdue is defined as trade receivables still due 30 days or more after invoice date. The allowance for doubtful debt is determined by management’s best estimate, by reference to the particular receivables over which doubt may exist. None of the other receivables was past due. The Directors consider that the carrying amount of trade and other receivables approximates to their fair values. The largest trade receivable to which the Group is exposed at 30 April 2012 is the UK MOD, with a balance outstanding of £5.1m (2011: £3.5m). Other customers who represent more than 5% of the total balance of trade receivables include: Customer A Customer B Customer C 2012 £m 0.9 1.5 0.2 2011 £m 1.6 1.1 1.0 Trade receivables include £2.2m (2011: £1.7m) denominated in foreign currency. The majority of the Group’s customers are UK or overseas government organisations and larger prime contractors in the defence and space sectors. The Group assesses all new customers for credit worthiness before extending credit. In the case of overseas customers, the Group utilises various payment protection mechanisms including but not limited to export credit guarantees, letters of credit and advance payments. Trade receivables disclosed above include amounts which are past due at the reporting date but against which the Group has not recognised an allowance for doubtful debts because the credit quality of the customer is not considered to have changed and the amount due is considered fully recoverable. Ageing of past due but not impaired receivables 30 – 60 days 60 – 90 days > 90 days 2012 £’000 1,197 445 752 2,394 2011 £’000 2,795 153 323 3,271 53 Cohort plc Annual Report and Accounts 2012 Financial statements Notes to the financial statements continued for the year ended 30 April 2012 15. Trade and other receivables (continued) Movement for the allowance in doubtful debts Balance at 1 May Impairment losses recognised Amounts written off as uncollectable in year Amounts recovered during year Impairment losses reversed Balance at 30 April 2012 £’000 108 78 (27) (5) (76) 78 The trade receivables which are impaired and provided for by the allowance in doubtful debts are all greater than 90 days old. 16. Trade and other payables Advance receipts Trade payables and accruals Other payables Social security and other taxes Accruals and deferred income Amounts due to subsidiary undertakings Group Company 2012 £’000 3,092 4,875 2 2,209 6,314 — 16,492 2011 £’000 3,185 5,407 22 2,593 4,013 — 15,220 2012 £’000 — 45 2 74 329 — 450 2011 £’000 104 43 (9) (30) — 108 2011 £’000 — 36 22 52 284 8 402 Trade payables and accruals principally comprise amounts outstanding for trade purchases and ongoing contract costs. Advance receipts reflect invoicing ahead of work done in accordance with contracted terms. The average credit period taken for trade purchases is 39 days (2011: 53 days). The Group has financial risk management policies in place to ensure that all payables are paid within the pre-agreed credit terms. Trade payables and accruals, other payables and taxes are all due for settlement within 12 months of the year end, the majority within three months. The advance receipts will unwind over the next 12 months. Social security and other taxes include employment taxes and VAT. The Directors consider that the carrying amount of trade payables approximates to their fair values. Total payable includes £0.5m (2011: £1.3m) denominated in foreign currency. 17. Bank borrowings Bank overdrafts Bank loans Group 2012 £’000 — — — 2011 £’000 — 3,444 3,444 Company 2012 £’000 7,499 — 7,499 2011 £’000 1,694 3,000 4,694 All borrowings are secured using the fixed and floating assets of the Group. 54 Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements Euros £’000 US$ £’000 — — — — — — 2011 £’000 3,131 84 229 3,444 (3,131) 313 — — — — — — Company 2012 £’000 7,499 — — 7,499 (7,499) — 2012 % — 4.50 Total £’000 — — — — 3,444 3,444 2011 £’000 4,694 — — 4,694 (4,694) — 2011 % — 3.10 17. Bank borrowings (continued) Analysis of Group bank borrowings by currency: At 30 April 2012: Bank overdrafts Bank loans At 30 April 2011: Bank overdrafts Bank loans These borrowings are repayable as follows: On demand or within one year In the second year In the third to fifth years inclusive Less: amounts due for settlement within 12 months (shown under current liabilities) Amount due for settlement after 12 months The weighted average interest rates paid were as follows: Bank overdrafts Bank loans Sterling £’000 — — — — 3,444 3,444 Group 2012 £’000 — — — — — — The other principal features of the Group’s borrowings are as follows: a. The bank overdrafts are repayable on demand. The Group operates a sterling current account offset facility. The interest rate applicable to the overdraft facility when drawn is at 2.25% (2011: 2.25%) above the Bank of England base rate. Overdrafts in currency other than sterling are not part of the sterling current account offset facility and are disclosed as part of bank borrowings above. b. In October 2011 the Group repaid all of its borrowings, a total of £3.4m, and at the same time cancelled its structured debt facility. At 30 April 2012, the Group had available £7.5m of undrawn overdraft facility. The Directors consider the carrying amount of bank borrowings approximate to their fair value. The Group’s net funds at 30 April 2012 of £14.1m are held with the following banks: Royal Bank of Scotland Plc Santander UK Barclays Plc 2012 £’000 10,137 3,000 1,003 14,140 2011 £’000 6,733 — — 6,733 Moody’s credit rating of bank as at 24 May 2012 A2 A2 Aa3 55 Cohort plc Annual Report and Accounts 2012 Financial statements Notes to the financial statements continued for the year ended 30 April 2012 18. Provisions Group At 1 May 2010 Charged/(credited) to the income statement Utilised Acquisition of Abacus EW At 1 May 2011 Charged/(credited) to the income statement Utilised At 30 April 2012 Provisions due less than one year Provisions due greater than one year At 30 April 2012 Provisions due less than one year Provisions due greater than one year At 30 April 2011 Abacus EW earn out £’000 Withdrawal from AGS £’000 Restructuring £’000 Onerous lease commitment £’000 Warranty £’000 Other contract related provisions £’000 — — — 1,400 1,400 — — 1,400 1,400 — 1,400 1,400 — 1,400 22 — — — 22 (6) — 16 16 — 16 22 — 22 105 538 (581) — 62 — (62) — — — — 62 — 62 215 — (45) — 170 20 (67) 123 67 56 123 67 103 170 305 82 (98) — 289 50 (32) 307 307 — 307 289 — 289 1,919 (21) (510) 111 1,499 677 (648) 1,528 1,528 — 1,528 1,499 — 1,499 Total £’000 2,566 599 (1,234) 1,511 3,442 741 (809) 3,374 3,318 56 3,374 3,339 103 3,442 The earn out provision in respect of the acquisition of Abacus EW was recognised at 14 May 2010. The earn out payable of up to £1.4m is disclosed above on acquisition and is potentially payable over the next year. Any reduction in the net earn out payable in respect of Abacus EW over the next year will be recognised in the consolidated income statement as an exceptional item. The provision in respect of the withdrawal from AGS is to cover existing commitments related to the period prior to the sale of the AGS business in August 2009. The onerous lease commitment (including a provision for dilapidations) is in respect of MASS’s continuing lease obligations on its former operating property in St Neots which it vacated in August 2011 to enter its new freehold property, Enterprise House. This obligation will expire in May 2013. The warranty provisions are management’s best estimates of the Group’s liability under warranties granted on software and other products supplied and are based upon past experience. The timing of such expenditure is uncertain although warranties generally have a time limit of no more than 12 months, unless a longer warranty period is purchased by the customer. Warranty provisions are reviewed at the half year and year end in the light of actual spend and the remaining obligations to be fulfilled. The other contract related provisions are management’s best estimate of the Group’s exposure to contract related costs and undertakings which are in addition to contract accruals and include contract loss provisions. The timing of these is uncertain but expected to be resolved within 12 months of the balance sheet date. These arise where a service or product has been previously delivered to the customer and the Group receives a claim or an adverse indication in respect of the work done. Where the amount required is uncertain or the Group disputes the amount of the claim, provision is made for the best estimate of the amount that will be required to settle the issue. 56 Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements 18. Provisions (continued) Contract loss provisions are in respect of contracts where the estimated cost at completion exceeds the total expected revenue of the contract. The contract loss provision is recognised as a provision in full immediately as it arises. The contract loss provisions are held in respect of contracts which are expected to complete in the next 12 months. Other contract related provisions also includes property dilapidation provisions and other trade related issues which may not be related to a trading contract. These balances are immaterial. 19. Deferred tax At 1 May 2010 Credit/(charge) to the income statement On acquisition of Abacus EW Debit to equity Effect of change in tax rate – income statement – equity At 1 May 2011 Credit/(charge) to the income statement Credit to equity Effect of change in tax rate – income statement – equity At 30 April 2012 Accelerated tax depreciation £’000 Other intangible assets £’000 (227) (178) — — 68 — (337) 51 — 23 — (177) 414 (840) — 43 — (560) 354 — 16 — Revaluation of building £’000 (649) 52 — — 43 — (554) 12 — 42 — (263) (190) (500) Other short term timing differences £’000 Tax losses £’000 Derivatives £’000 537 (409) — — (10) — 118 (55) — (5) — 58 467 (467) — — — — — — — — — — 11 (167) — (5) 11 — (150) 248 9 (8) — 99 Group £’000 (38) (755) (840) (5) 155 — (1,483) 610 9 68 — (796) The deferred tax credit of £678,000 is a combination of the credit to the income statement (£610,000) and the effect of the change in tax rate from 26% to 24% on those items recognised in the income statement (£68,000 credit). The credit is disclosed as £678,000 (2011: £14,000 charge) in respect of the current year (2011: £586,000 charge in respect of prior years). Certain deferred tax assets and liabilities have been offset where the Group has a legally enforceable right to do so. The following is the analysis of the deferred tax balances (after offset) for financial reporting purposes: Deferred tax assets Deferred tax liabilities 2012 £’000 157 (953) (796) 2011 £’000 118 (1,601) (1,483) At the balance sheet date the Group had unused trading tax losses within its subsidiaries of £1.9m (2011: £1.9m) available for offset against future profits. This was not recognised as a deferred tax asset at 30 April 2012 (2011: £Nil) as the losses are not considered recoverable in the foreseeable future. These tax losses can all be carried forward indefinitely. A deferred tax liability in respect of the revaluation of freehold building arose on the acquisition of SEA and is the potential tax liability payable on the revaluation gain in respect of the building with reference to its historical cost. 57 Cohort plc Annual Report and Accounts 2012 Financial statements Notes to the financial statements continued for the year ended 30 April 2012 19. Deferred tax (continued) The deferred tax asset in respect of the share-based payments has not been recognised as the majority of the Group’s share options in issue remain below the average market price and the realisation of any deferred tax asset is considered remote. The Company’s deferred tax balance at 30 April 2012 was an asset of £7,000 (2011: £6,000) being £5,000 (2011: £5,000) in respect of other short term timing differences and accelerated tax depreciation of £2,000 (2011: £1,000). On 21 March 2012, the Chancellor announced the reduction in the main rate of UK corporation tax to 24% with effect from 1 April 2011. This change became substantively enacted on 26 March 2012 and therefore the effect of the rate reduction creates a reduction in the deferred tax liability which has been included in the figures above. The Chancellor also proposed changes to further reduce the main rate of corporation tax by 1% per annum to 22% by 1 April 2014, but these changes have not yet been substantively enacted and therefore are not included in the figures above. The overall effect of the further reductions from 24% to 22%, if these applied to the deferred tax balance at 30 April 2012, would be to further reduce the net tax liability by £66,000. 20. Derivative financial instruments The Group has derivative financial instruments as follows: Assets Foreign currency forward contracts Interest rate swap Liabilities Foreign currency forward contracts Interest rate swap 2012 £’000 — — — (413) — (413) i. The changes in marking the outstanding foreign currency forward contracts to fair value are charged or credited to the consolidated income statement as ‘(charge)/income on marking forward exchange contracts to market value at the year end’. They are in respect of trading contracts undertaken by the Group and are all in respect of the SEA subsidiary and are disclosed within the SEA’s operating profit in the segmental analysis (see note 1). The charge to the consolidated income statement for the year ended 30 April 2012 was as follows: Foreign currency forward contracts 2012 £’000 (955) ii. The interest rate swap was settled in full in October 2011 on paying down the loan to which the interest rate swap attached. 2011 £’000 542 33 575 — — — 2011 £’000 595 58 2011 At forward exchange rates At 1 May 2010 Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements 20. Derivative financial instruments (continued) Currency derivatives The Group utilises forward currency contracts to hedge significant future transactions and cash flows. The Group is party to a number of foreign currency forward contracts in the management of its foreign exchange rate exposure. The changes in total outstanding committed foreign currency forward contracts of the Group were as follows: 2012 At forward exchange rates At 1 May 2011 Transferred to the income statement in respect of matured contracts New contracts At 30 April 2012 Fair value adjustment At 30 April 2012 at closing spot rate Buy £’000 Sell €’000 Sell £’000 Buy €’000 Sell £’000 Buy US$’000 Sell €’000 Buy US$’000 10,341 12,107 — — (543) (873) (1,699) (2,380) (14,032) (16,242) 11,771 13,753 543 873 1,699 2,380 13,531 15,703 (11,771) (13,753) 9,840 11,568 (413) 9,427 — — — — — — — — — — — — — — — — The total fair value adjustment is £413,000 credit (2011: £542,000 debit) and the change in the forward exchange fair values for the year ended 30 April 2012 is £955,000 (30 April 2011: £595,000 income) which is included in the operating profit of the Group as a charge. Buy £’000 Sell €’000 Sell £’000 Buy US$’000 Sell €’000 Buy US$’000 Transferred to the income statement in respect of matured contracts (9,286) (10,629) New contracts At 30 April 2011 Fair value adjustment At 30 April 2011 at closing spot rate 9,707 12,107 8,257 10,341 440 10,781 11,370 13,029 — — (543) (543) 19 (524) — — (873) (873) — — — — (1,699) (2,380) (1,699) (2,380) 93 (1,606) For the year ended 30 April 2011 the €93,000 fair value adjustment in respect of Euros to US$ forward contracts equates to a sterling equivalent of £83,000. The maturity of the outstanding contracts was as follows: At 30 April 2012 Within one year One to two years Greater than two years Buy £’000 8,394 680 766 Sell €’000 9,868 800 900 At 30 April 2012 at closing spot rate 9,840 11,568 At 30 April 2011 Within one year One to two years Greater than two years Sell £’000 Buy €’000 Sell £’000 Buy US$’000 Sell €’000 Buy US$’000 — — — — Buy £’000 6,210 2,924 1,207 — — — — Sell €’000 7,339 3,368 1,400 — — — — Sell £’000 (543) — — — — — — — — — — — — — — Buy US$’000 Sell €’000 Buy US$’000 (873) (1,699) (2,380) — — — — — — At 30 April 2011 at closing spot rate 10,341 12,107 (543) (873) (1,699) (2,380) 59 Cohort plc Annual Report and Accounts 2012 Financial statements Notes to the financial statements continued for the year ended 30 April 2012 20. Derivative financial instruments (continued) The following significant exchange rates applied at 30 April: 2012 2011 US $ Euro Canadian $ US $ Euro 0.6149 0.8149 0.6270 0.6007 0.8905 Sensitivity analysis A 10% strengthening of £ sterling against the above currencies at 30 April 2012 would have decreased profits by £4,000 (2011: £1,000), after taking into account assets and liabilities hedged by forward exchange contracts. Interest rate swaps The Group used an interest rate swap to manage its exposure to interest rate movements on its mortgage borrowings. The interest rate swap was settled in full following the repayment of the Group’s mortgage borrowings in October 2011. The derivative financial instrument in respect of the interest rate swap was valued as follows: 2012 £’000 — — — 2011 £’000 (395) 428 33 £’000 11 18 (5) 24 (33) 9 — 2012 Number 2011 Number 40,786,788 40,786,788 Number 40,786,788 — 40,786,788 — 40,786,788 Nominal value of swap Fair value of swap Derivative financial asset The movement in the hedge reserve was as follows: At 1 May 2010 Gain recognised on cash flow hedge in respect of interest rate swap Deferred tax relating to gain on cash flow hedge At 30 April 2011 Loss recognised on closing out interest rate swap on repayment of mortgages Deferred tax relating to loss on closing out interest rate swap At 30 April 2012 21. Share capital Allotted, called up and fully paid 10 pence ordinary shares Movement in allotted, called up and fully paid 10 pence ordinary shares: At 1 May 2010 Share options exercised At 30 April 2011 Share options exercised At 30 April 2012 The Company has one class of ordinary shares which carry no right to fixed income. 60 Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements 22. Share options The Group grants share options under the Cohort plc 2006 share option scheme to senior management and key employees. In addition, the Group operates a Save As You Earn (SAYE) scheme which is available to all employees. The details of the share option schemes are contained in the Remuneration & Appointments Committee report on pages 31 to 33. The following options were outstanding at 30 April 2012: Scheme and grant date Exercise price £ Vesting date Expiry date Vested Not vested Total Vested 30 April 2012 30 April 2011 Not vested Cohort plc 2006 share option scheme 8 Mar 2006 9 Jul 2006 19 Feb 2007 21 Aug 2007 11 Jul 2008 5 Aug 2009 23 Jul 2010 27 Oct 2010 26 Jul 2011 24 Jan 2012 Save As You Earn (SAYE) scheme 5 May 2006 26 Jan 2006 12 Feb 2008 18 Aug 2009 27 July 2010 08 Aug 2011 1.230 1.410 1.770 1.660 1.890 1.715 0.835 0.770 0.915 1.100 1.230 1.450 1.330 1.380 0.970 0.885 8 Mar 2009 10 Jul 2009 8 Mar 2016 89,430 9 Jul 2016 — 20 Feb 2010 19 Feb 2017 99,941 22 Aug 2010 21 Aug 2017 — 12 Jul 2011 6 Aug 2012 11 Jul 2018 17,091 5 Aug 2019 24 Jul 2013 23 Jul 2020 28 Oct 2013 27 Oct 2020 27 Jul 2014 26 Jul 2021 25 Jan 2015 24 Jan 2022 — — — — — — — — — — 51,028 89,430 — 99,941 — 17,091 51,028 111,788 42,554 215,475 44,176 12,333 14,431 — — — — 309,028 418,003 724,887 724,887 46,299 840,796 64,935 64,935 950,686 950,686 68,000 68,000 — — — 64,935 — — Total 111,788 42,554 215,475 44,176 321,361 432,434 887,095 64,935 — — 206,462 1,859,536 2,065,998 487,056 1,632,762 2,119,818 — 47,428 — — — — — — 112,663 125,810 275,921 — 47,428 112,663 125,810 275,921 — — 156,490 — — 45,547 47,428 118,978 166,667 360,085 45,547 47,428 275,468 166,667 360,085 272,448 272,448 47,428 786,842 834,270 156,490 738,705 895,195 253,890 2,646,378 2,900,268 643,546 2,371,467 3,015,013 The SAYE options have maturity periods of three or five years from grant date. The Group plan provides for a grant price equal to the average quoted market price of the Group shares on the date of grant. The vesting period is generally three years, five years in the case of some SAYE schemes. If options under the Cohort plc 2006 share option scheme remain unexercised after a period of ten years from the date of grant, the options expire. Furthermore, options are forfeited if the employee leaves the Group before the options vest. 61 Cohort plc Annual Report and Accounts 2012 Financial statements Notes to the financial statements continued for the year ended 30 April 2012 22. Share options (continued) The movement in share options during the year is as follows: Outstanding at 1 May Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at 30 April Exercisable at 30 April 2012 2011 Weighted average exercise price £ 1.28 0.92 1.52 — 1.31 1.00 1.53 Options 2,309,506 1,429,109 (632,899) — (90,703) 3,015,013 643,546 Weighted average exercise price £ 1.58 0.87 1.42 — 1.45 1.28 1.47 Options 3,015,013 1,365,737 (1,279,888) — (200,594) 2,900,268 253,890 The weighted average share price at the date of exercise for share options exercised during the year was £Nil (2011: £Nil). The options outstanding at 30 April 2012 had a weighted average exercise price of £1.00 (2011: £1.28) and a weighted average remaining contractual life of seven years (2011: six years). In the year ended 30 April 2012, options were granted as follows: 1,015,686 on 26 July 2011, 282,051 on 8 August 2011 and 68,000 on 24 January 2012. The exercise prices of the options granted on those dates were £0.915, £0.885 and £1.100 respectively. In the year ended 30 April 2011 options were granted as follows: 966,947 on 26 July 2011 and 397,227 on 27 July 2011 and 64,935 on 27 October 2010. The exercise prices of the options granted on those dates were £0.835, £0.970 and £0.770 respectively. Share options granted during the current and previous years were valued using the Quoted Companies Alliance Model, a Black Scholes based binomial model. The inputs to this model for the current and previous year were as follows: Weighted average share price Weighted average exercise price Expected volatility Risk free rate Leaver rate (per annum) Dividend yield 2012 £0.92 £1.00 20% – 45% 0.96% – 5.75% 6.5% – 10.0% 0.26% – 1.96% 2011 £0.78 £1.28 20% – 45% 2.45% – 5.75% 6.5% – 10.0% 0.26% – 1.96% Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous three years. The leaver rate used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. The Group recognised a cost of £353,000 (2011: £317,000) relating to share-based payment transactions which are all equity settled, an equivalent amount being transferred to the share option reserve. The cost of share-based payments is included in “administrative costs” within the consolidated income statement. 23. Own shares Balance at 1 May 2010 Acquired in the year Balance at 30 April 2011 Acquired in the year Balance at 30 April 2012 £’000 — 302 302 — 302 The own shares reserve represents the cost of shares in Cohort plc purchased in the market and held by the Cohort plc Employee Benefit Trust to satisfy options under the Group’s share option schemes (see note 22). The number of ordinary shares in Cohort plc held by the Employee Benefit Trust at 30 April 2012 was 361,446 (2011: 361,446). 62 23. Own shares (continued) The ordinary shares in Cohort plc were acquired by the Employee Benefit Trust as follows: 19 November 2010 29 November 2010 Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements Number 61,446 300,000 361,446 Cost £’000 51 251 302 The market valuation of the ordinary shares in Cohort plc held by the Employee Benefit Trust at 30 April 2012 was £356,024 (2011: £229,518). The cost of operating the Employee Benefit Trust during the year ended 30 April 2012 was £5,720 (2011: £9,863) and this cost is included within the “administrative expenses” of the consolidated income statement. 24. Reserves The Group (consolidated) and Company statements of changes in equity are disclosed as primary statements on pages 38 and 39. Below is a description of the nature and purpose of the individual reserves: XX Share capital represents the nominal value of shared issued, including those issued to the Employee Benefit Trust (see also note 21). XX Share premium includes the amounts over the nominal value in respect of share issues. In addition, costs in respect of share issues are debited to this account. XX Own shares held by the Group represent shares in Cohort plc. All the shares are held by the Employee Benefit Trust (see also note 23). XX Share option reserve represents the cumulative share-based payment charged to reserves less the transfer to retained earnings on vesting of options. XX Hedge reserve represents the cumulative change in fair value of interest rate swaps net of tax charged to reserves (see also note 20). XX Retained earnings include the realised gains and losses made by the Group and the Company. 25. Cash flow a. Net cash from operating activities Profit for the year Adjustments for: Income tax (credit)/expense Depreciation of property, plant and equipment Amortisation of other intangible assets Net finance cost/(income) Derivative financial instruments Share-based payment Decrease in provisions Operating cash flows before movements in working capital Decrease in inventories (Increase)/decrease in receivables Increase/(decrease) in payables Cash generated by operations Income taxes paid Interest paid Net cash inflow from operating activities Group 2012 £’000 4,567 (411) 699 1,364 38 955 353 (68) 7,497 141 (129) 1,236 1,248 8,745 (206) (115) 8,424 2011 £’000 2,761 (65) 707 1,477 143 (595) 317 (635) 4,110 84 2,802 (148) 2,738 6,848 (166) (170) 6,512 Company 2012 £’000 1,801 2 12 — (20) — 53 — 1,848 — 335 49 384 2,232 — (49) 2,183 2011 £’000 2,609 (8) 11 — 108 — 23 — 2,743 — (80) 52 (28) 2,715 — (135) 2,580 63 Cohort plc Annual Report and Accounts 2012 Financial statements Notes to the financial statements continued for the year ended 30 April 2012 25. Cash flow (continued) b. Cash and cash equivalents at 30 April 2012 Cash and bank Short term deposits Total cash and cash equivalents Bank loans Total debt Net funds 2012 £’000 10,137 4,003 14,140 — — 14,140 2011 £’000 10,177 — 10,177 (3,444) (3,444) 6,733 Cash and cash equivalents comprise cash held by the Group and short term bank deposits with a maturity at commencement of three months or less. The carrying amounts of these assets approximate to their fair value. 26. Operating lease arrangements Group Minimum lease payments under operating leases recognised as an expense in the year: – land and buildings – other 2012 £’000 773 172 945 2011 £’000 732 151 883 At 30 April 2012 the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases which fall due as follows: Land and buildings: – leases which expire within one year – leases which expire in the second to fifth year inclusive – leases which expire after five years Other: – leases which expire within one year – leases which expire in the second to fifth year inclusive – leases which expire after five years 2012 £’000 82 960 2,090 3,132 17 164 — 181 3,313 2011 £’000 58 204 3,371 3,633 — 167 — 167 3,800 Significant leasing arrangements held by the Group are in respect of its operating facilities in Lincoln, Bristol and Theale. The lease on MASS’s former operating property in St Neots (Grove House) is £67,200 per annum and is due to cease on 31 May 2013. MASS occupied its new operating freehold property (Enterprise House) in September 2010. The remaining lease commitment (including a dilapidation provision) on Grove House at 30 April 2012 of £123,000 (2011: £170,000) is provided for in full as an onerous lease commitment (see note 18). In respect of all the Group’s operating leases (including the Company’s), there is no contingent rent payable, no escalation clauses and no restrictions for further leasing or restrictions on the Group’s ability to access debt or pay dividends. 64 Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements 26. Operating lease arrangements (continued) None of the significant operating leases entered into by the Group have any renewal or purchase options. Company Minimum lease payments under operating leases recognised as an expense in the year: – land and buildings 2012 £’000 38 2011 £’000 26 At 30 April 2012 the Company had outstanding commitments for future minimum lease payments under non-cancellable operating leases which fall due as follows: Land and buildings: – leases which expire within one year 27. Commitments There was £1,200 of capital commitments at 30 April 2012 (2011: £29,000). 2012 £’000 — 2011 £’000 — 28. Pension commitments The Group makes contributions to defined contribution stakeholder pension schemes. The contributions for the year of £1,924,000 (2011: £1,791,000) were charged to the income statement. Contributions outstanding at 30 April 2012 were £162,000 (2011: £64,000). 29. Contingent liabilities At 30 April 2012 the Group has in place an advance payment guarantee of £175,000 (2011: £175,000) with RBS. This guarantee was in respect of SCS’s leased property, Arlington House. 30. Related party transactions Balances and transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation. However, the key transactions are disclosed as follows: 2012 2011 Management fees received from subsidiaries £’000 1,300 1,200 Rent paid to subsidiaries £’000 40 29 Transactions between the Group and its joint ventures are disclosed below: Advanced Geospatial Solutions (AGS) 2012 2011 Digital Millennium Map LLP (DMM) 2012 2011 Purchases £’000 — — — — Sales £’000 — — — — Dividends received from subsidiaries £’000 1,850 2,600 Investment in year £’000 — — (23) (48) Group relief received from subsidiaries £’000 — (8) Changes in loans/current account/ sales ledger £’000 (21) (9) — — The change in the loans, current accounts and sales ledgers reflects purchases, sales and support costs to the related party undertakings less any receipts received. 65 Cohort plc Annual Report and Accounts 2012 Financial statements Notes to the financial statements continued for the year ended 30 April 2012 30. Related party transactions (continued) The relationships are described as follows: XX AGS – the interest in which is owned by Cohort plc, a 50% joint venture. From 1 May 2009 this has been accounted for as an investment, the Group no longer having an active participation in this entity. XX DMM – the interest in which is owned by Cohort plc, a 25% joint venture. From 1 November 2006 this has been accounted for as an investment, the Group no longer having an active participation in this entity. The change in investment in the current and previous year in DMM reflects recovery of the investment through a dividend. The Group is expected to have no significant transactions with either AGS or DMM. The Group had a leasing agreement (dated 27 February 2006) with the Court House Partnership to lease the Court House at an annual rent of £57,000 for an initial period of five years, terminable by the Group with six months’ notice at no penalty. Stanley Carter (a Director of Cohort plc) is a partner in the Court House Partnership. SCS vacated the Court House on 31 March 2010 with its lease commitment ceasing at that point. The Group’s dilapidation obligations in respect of the Court House was settled at a cost of £35,000 in the year ended 30 April 2012. The transactions with Directors of the Company are disclosed in the Remuneration & Appointments Committee report on pages 31 to 33. During the year ended 30 April 2012, the Directors of Cohort plc received dividends from the Company as follows: S Carter N Prest A Thomis Sir Robert Walmsley S Walther 2012 £ 277,309 54,199 916 651 666 2011 £ 234,646 45,861 775 551 563 333,741 282,396 Further details of the remuneration of the Directors are set out in the Remuneration & Appointments Committee report (pages 31 to 33). The aggregate remuneration (excluding share option costs) of the key management of the Group was as follows: Salary (including any allowances, benefits and employers NI) Employers pension contribution Long term benefits Termination payments or benefits (including employers NI) The key management of the Group is the Board of Cohort plc plus each subsidiary’s Managing Director. 2012 £ 967,988 78,143 — — 1,046,131 2011 £ 906,582 89,662 — 141,915 1,138,159 66 Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements 31. Acquisition of subsidiaries, net of cash acquired On 14 May 2010, the Group’s subsidiary, MASS Consultants Ltd acquired the entire share capital of Abacus EW Consultancy Limited (Abacus EW) for a cash consideration of £918,000 and deferred cash consideration of up to £1.8m payable over three years from completion according to specific performance criteria being achieved by Abacus EW over the three year period to April 2013. The contingent consideration arrangement or earn out was payable in cash to the vendor of Abacus EW over the three-year period to 30 April 2013 as follows: Specific contract win Performance of Abacus EW (up to £1.4m over these three years) The maximum earn out payable was £1.8m. 2011 £’000 200 2012 £’000 200 2013 £’000 — Total £’000 400 1,400 1,800 Review of the earn out obligation at 30 April 2011 showed no earn out was payable in respect of the specific contract win for 2011 and 2012. The £0.4m earn out was derecognised and the adjustment made to the other intangible assets arising on acquisition. The earn out in respect of the performance of Abacus EW is payable up to 30 April 2013 to a maximum of £1.4m and has been recognised as a provision due in less than one year at 30 April 2012. 67 Cohort plc Annual Report and Accounts 2012 Financial statements Accounting policies Basis of accounting Both the parent company financial statements and the Group financial statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards as adopted by the EU (Adopted IFRSs). On publishing the parent company financial statements here, together with the Group financial statements, the Company is taking advantage of the exemption in Section 408 of the Companies Act 2006 not to present its individual income statement and related notes that form part of these approved financial statements. As highlighted in note 17 to the financial statements, the Company meets its day-to-day working capital requirements through an offsetting facility which is due for renewal in October 2012. Both the current domestic economic conditions and continuing UK government budget pressures, including defence, create uncertainty particularly over (a) the level of demand for the Group’s products; (b) the exchange rate between sterling and euro and thus the consequence for certain long term contracts; and (c) the availability of bank finance in the foreseeable future. The Company’s forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Company should be able to operate within the level of its current facility. The Company will open renewal negotiations with the bank in due course and has at this stage not sought any written commitment that the facility will be renewed. However, the Company has held discussion with its bankers about its future borrowing needs and no matters have been drawn to its attention to suggest that renewal may not be forthcoming on acceptable terms. The Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis in preparing the annual financial statements. Further information regarding the Company’s business activities, together with the factors likely to affect its future development, performance and position is set out in the Business review on pages 8 to 23. The financial position of the Company, its cash flows, liquidity position and borrowing facilities are described in the Finance Director’s review on pages 18 to 21. In addition, the Finance Director’s review of the financial statements includes the Company’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit risk and liquidity risk. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and its subsidiary undertakings made up to 30 April 2012. Subsidiaries acquired during the year are consolidated from the date of acquisition, using the purchase method (see business combinations opposite). Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used in line with those used by the Group. This is necessary as the Group’s subsidiaries continue to prepare statutory financial statements in accordance with UK GAAP. Adoption of new and revised standards Various new and revised standards and interpretations have been adopted by the Group in the year ended 30 April 2012 which have had no significant impact on the amounts reported in these financial statements by the Group. These include amendments to IFRS 3 ‘Business Combinations’, IAS 1 ‘Presentation of Financial Statements’, IFRS 10 ‘Consolidated Financial Statements’ and IAS 24 ‘Related Party disclosures’. These changes may impact the accounting for future transactions and arrangements. Bank borrowings Interest-bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are accounted for on an accruals basis in the income statement using the effective interest rate method and are disclosed within accruals to the extent they are not settled in the period, unless the loan terms provide for the interest to be added to the principal; in which case the interest is added to the carrying amount of the instrument to which it pertains. Borrowing costs All borrowing costs are recognised in the income statement in the period in which they are incurred unless, where appropriate, interest costs are capitalised into assets, fixed and current. 68 Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements Business combinations The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured as the aggregate of the fair values, at the completion date, of assets acquired, liabilities incurred or assumed and equity instruments issued by the Group in exchange for control of the acquired subsidiary. The costs of acquisition are charged to the Group income statement as an exceptional item in accordance with IFRS 3 (Revised). Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable intangible assets, assets, liabilities and contingent liabilities recognised. If, after reassessment, which is a point in time greater than 12 months after the completion date, the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities exceeds or is below the cost of the business combination, the excess or shortfall is recognised immediately in the income statement as an exceptional item. Adjustments to the provisional value of assets and liabilities acquired in a business combination when the final values have become known within 12 months are adjusted as if the accounting had been completed at the acquisition date and the comparative information for prior periods is restated accordingly. Any change in consideration, where previously estimated, is immediately recognised as an exceptional item in the income statement. Cash and cash equivalents Cash and cash equivalents comprise cash on hand and on-demand deposits, and other short term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. Deposits are included within cash and cash equivalents where the maturity from commencement of the deposit is three months or less. Derivative financial instruments and hedge accounting The Group’s activities expose it to the financial risks of changes in foreign currency exchange rates and interest rates. The Group uses foreign exchange forward contracts and interest rate swap contracts to hedge these exposures. The Group does not use derivative financial instruments for speculative purposes. Changes in the fair value of derivative financial instruments that are designated and effective as hedges of future cash flows are recognised directly in equity and the ineffective portion is recognised immediately in the income statement. If the cash flow hedge of a firm commitment or forecasted transaction results in the recognition of an asset or a liability, then, at the time the asset or liability is recognised, the associated gains or losses on the derivative that had previously been recognised in equity are included in the initial measurement of the asset or liability. For hedges that do not result in the recognition of an asset or a liability, amounts deferred in equity are recognised in the income statement in the same period in which the hedged item affects net income. Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognised in the income statement as they arise. Equity instruments Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. Exceptional items Cohort’s trade is the provision of technical advice and support, and the design, development and manufacture of niche products. As part of its operations, the Group may dispose of, or recognise impairment of, subsidiaries, or significant parts of subsidiaries, associates (including joint ventures and investments) and fixed assets as well as other significant non-trading transactions including significant restructuring costs, either as part of continuing operations or discontinued operations. These items form part of the Group’s operating activities and are reported in arriving at the Group’s profit from operations; however, management does not consider these items to be part of trading activities. The gains or losses on such items can be significant and arise in different reporting periods and would consequently have a material impact upon the absolute amount of and trend in the Group’s trading profit from operations. Any gains or losses (including transaction costs) on these non-trading items are disclosed as a separate line item (in aggregate) in the income statement with analysis in a note to the accounts. Financial instruments Financial assets and financial liabilities are recognised in the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument. 69 Cohort plc Annual Report and Accounts 2012 Financial statements Accounting policies continued Financial liabilities and equity instruments Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Foreign currencies The individual financial statements of each Group Company are presented in the currency of the primary economic environment in which it operates (its functional currency), which is currently sterling for the whole Group. For the purpose of the consolidated financial statements, the results and financial position of each Group company are expressed in pounds sterling, which is the functional currency of the Company and the presentational currency for the consolidated financial statements. In preparing the financial statements of the individual companies, transactions in currencies other than the entity’s functional currency (foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in the income statement for the year. In order to hedge its exposure to certain foreign exchange risks, the Group enters into forward contracts. The Group’s Accounting policies in respect of such derivative financial instruments are described above. These forward foreign exchange contracts are revalued to fair value at each balance sheet date with any movement included in the consolidated income statement as part of the cost of sales and disclosed separately in deriving the Group’s adjusted operating profit. Goodwill Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable intangible assets, assets and liabilities of a subsidiary, associate or jointly controlled entity at the date of acquisition. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. Goodwill which is recognised as an asset is reviewed for impairment at least annually. Any impairment is recognised immediately in the income statement as an exceptional item and is not subsequently reversed. For the purpose of impairment testing, goodwill is allocated to each of the Group’s subsidiaries as appropriate. Subsidiaries (cash-generating units) to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the subsidiary is less than the carrying amount of the subsidiary, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the subsidiary and then to the other assets of the subsidiary pro rata on the basis of the carrying amount of each asset in the subsidiary. An impairment loss recognised for goodwill is not reversed in a subsequent period. The impairment of goodwill is a critical judgement and estimate and is discussed in detail below. On disposal of a subsidiary, associate or jointly controlled entity, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. Impairment of tangible and intangible assets excluding goodwill At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment (if any). An intangible asset with an indefinite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or subsidiary) is estimated to be less than its carrying amount, the carrying amount of the asset (subsidiary) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (subsidiary) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (subsidiary) in prior years. A reversal of an impairment loss is recognised as income immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. 70 Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements Intangible assets Intangible assets are recognised in respect of contracts, intellectual property rights and other measurable intangibles arising on business combinations. The value of these intangible assets is determined by the estimated value to the Group going forward and the intangible assets are written off on a straight-line basis over the estimated useful life. As discussed below, the valuation of intangible assets is an area of critical judgement and estimate by the Directors. Inventories Inventories are stated at the lower of cost and net realisable value. Cost of finished goods and work in progress includes overheads appropriate to the stage of manufacture. Net realisable value is based upon estimated selling price less further cost expected to be incurred to completion and disposal. Provision is made for obsolete and slow-moving items. Joint ventures The Group accounts for joint ventures where it has a participating interest using the equity method of accounting and discloses the net investment in non-current assets. Where the investment in a joint venture is negative, the negative investment, to the extent it is a liability of the Group, is offset against any trade and other receivables held by the Group in respect of that joint venture. The Group accounts for joint ventures in which it no longer has a participating interest by recognising any investment and assets or liabilities due to or from the Group. Leasing Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. The Group as lessee Assets held under finance leases are recognised as assets of the Group at their fair value or, if lower, at the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over the lease term. Pension contributions Payments are made to the Company’s stakeholder pension schemes, all defined contribution schemes. Amounts are charged to the income statement as incurred. Property, plant and equipment Land and buildings held for use in the production or supply of goods or services, or for administrative purposes, are stated in the balance sheet at their fair value at the date of acquisition, plus any subsequent cost, less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Fixtures and equipment are stated at cost less accumulated depreciation and any recognised impairment loss. Depreciation is charged so as to write off the cost or valuation of assets, other than land and properties under construction, over their estimated useful lives, using the straight-line method, on the following bases: Buildings 2% – 4% Fixtures, fittings and equipment 20% – 50% Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease. The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income statement as an exceptional item. 71 Cohort plc Annual Report and Accounts 2012 Financial statements Accounting policies continued Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event and it is probable that the Group will be required to settle that obligation. Provisions are measured at the Directors’ best estimate of the expenditure required to settle the obligation at the balance sheet date and are discounted to present value where the effect is material. In respect of specific types of provisions the policy is as follows: Restructuring A restructuring provision is recognised when the Group has developed a detailed formal plan for the restructuring and has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement the plan or announcing its main features to those affected by it. The measurement of a restructuring provision includes only the direct expenditures arising from the restructuring, which are those amounts that are both necessarily entailed by the restructuring and not associated with the ongoing activities of the Group. Onerous lease commitment Present obligations arising under an onerous lease are recognised and measured as a provision. An onerous lease is considered to exist where the Group has a contract under which the unavoidable costs of meeting the obligations under the lease exceed the economic benefits expected to be received. An onerous lease includes the vacation of a property prior to termination of the associated lease. Warranty Provisions for the expected cost of warranty obligations under local sale of goods legislation and specifically contracted warranty undertakings are recognised at the date of sale of the relevant product or service. The provision is the Directors’ best estimate of the expenditure required to settle the Group’s obligation. Other contract related provisions including contract loss provisions These include the following: The Group undertakes a number of contracts where contractual and/or third-party obligations arise as a result of delivering the contract. This provision includes amounts for losses on contracts which are recognised in full immediately that it is probable that total contracts costs will exceed total contract revenue. In some cases, after a product has been delivered and revenue has been recognised, the Group receives claims (including warranty issues) from customers in respect of work done. Where the amount required to settle the claim is uncertain or the Group disputes the amount of the claim, provision is made for the best estimate of the amount that will be required to settle the claim. Where the expected cost at completion of a current contract exceeds the sum of the contracted revenue and any probable revenue, then the amount of that excess (the estimated contract loss) is immediately provided for in full. Such contract loss provisions are reviewed on a regular basis to determine whether the provision is still adequate or excessive. Contract loss provisions and subsequent adjustments to them are charged as cost of sales in the income statement. Where such an obligation relates to a discontinued operation then the charge will be disclosed as an exceptional item. Research and development expenditure Expenditure on research activities is recognised as an expense in the period in which it is incurred. An internally generated intangible asset arising from the Group’s own development activity is recognised only if all of the following conditions are met: XX an asset is created that can be identified (such as software and new processes) and is technically and commercially feasible; XX it is probable that the asset created will generate future economic benefits and the Group has available to itself sufficient resources to complete the development and to subsequently sell and/or use the asset created; and XX the development cost of the asset can be measured reliably. Internally generated intangible assets are amortised on a straight-line basis over their useful lives. Where no internally generated intangible asset can be recognised, development expenditure is recognised as an expense in the period in which it is incurred. 72 Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements Revenue recognition Revenue is recognised at the fair value of the consideration received or receivable for the provision of goods and services, excluding discounts, VAT and other sales related taxes: Sales of goods are recognised when goods are delivered and title has passed. The Group applies either IAS 11 ‘Construction Contracts’ or IAS 18 ‘Revenue’ to account for revenue depending on the nature of the arrangement with the customer. The Group’s arrangements fall into four main categories: 1. Time hire Revenue is recognised in accordance with IAS 18 when the services are provided, i.e. when the employees undertake the work. 2. Managed services In managed services, revenue is generally a fixed-price for the provision of specific ongoing defined services (not the construction of an asset) over an agreed period. These services include the provision of technical engineering support, maintaining help desks and consultancy. Where the services comprise an indeterminate number of acts over a specified period of time, revenue is recognised on a straight-line basis over the period that the services are provided. Where the services comprise one or more significant acts, revenue is recognised as each act is completed. 3. Product Goods are delivered to customers and, on their acceptance by the customer, revenue is recognised. At that point, the Group does not have any continuing involvement or control over the goods and all significant risks and rewards have been transferred to the customer. 4. System design, build, test and delivery These contracts are typically for building complex custom designed assets which are usually components for use in larger customer owned assets. These contracts are accounted for under IAS 11. The Group’s contracts of this nature are generally fixed-price and without “stand alone” values for each element as the contracts are negotiated and ultimately delivered/accepted as a single package. In these contracts the revenue is recognised using the “percentage of completion” method in IAS 11. In almost all cases the percentage of completion is based on input measures (i.e. costs incurred as a proportion of estimated total costs). In some cases, an output measure based on surveys of work performed may be used where these are available and measure reliably the work performed. Costs are expensed as incurred in respect of all contracts unless they relate to goods yet to be delivered, services related to a significant act that has yet to be completed or future activities on a contract accounted for under IAS 11 in which case they are recorded as an asset (either inventory or amounts recoverable on contract). In some cases, Group contracts can be divided into multiple elements with stand alone values using either the principle in IAS 18.13 or the following criteria based on IAS 11.7–10: XX separate proposal for each element; XX each element was subject to separate negotiations; and XX costs and revenues for each element can be identified. Where separate elements are identified, each is treated as one of the four revenue types described above. Bid costs Costs incurred before the award of a contract is probable are expensed as incurred. Where material bid costs arise after the award of a contract has become probable but before the contract is in place, then such identified bid costs are included in contract costs. 73 Cohort plc Annual Report and Accounts 2012 Financial statements Accounting policies continued Share-based payments The Group has applied the requirements of IFRS 2 ‘Share-based Payments’. In accordance with the transitional provisions, IFRS 2 has been applied to all grants of equity instruments after 7 November 2002 that were unvested as of 1 May 2006. The Group issues equity-settled and cash-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value (excluding the effect of non-market based vesting conditions) at the date of grant. The fair value determined at the grant date of equity-settled share-based payments is expensed on a straight-line basis over the vesting period based on the Group’s estimate of shares that will eventually vest and adjusted for the non-market based vesting conditions. Fair value is measured by use of the Quoted Companies Alliance binomial model (a Black Scholes model). The expected life used in the models has been adjusted, based on management’s best estimate, for the effect of non-transferability, exercise restrictions and behavioural considerations. A liability equal to the portion of the goods and services received is recognised at the current fair value determined at each balance sheet date for cash-settled, share-based payments. The cost of share-based payments is charged to the income statement with a corresponding credit applied to the share option reserve. The appropriate element of the reserve is transferred to the retained profit of the Group when the share options to which the reserve relates vest. Taxation The tax expense represents the sum of the tax currently payable and the deferred tax expense or credit. The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and 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. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interest in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. 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 asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited to the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Trade and other receivables Trade receivables are initially measured at fair value. Appropriate allowances for estimated irrecoverable amounts are recognised in the income statement when there is objective evidence that the asset is impaired. The allowance recognised is measured as the difference between the asset’s carrying amount and the estimated recoverable amount. Long term contracts are assessed on a contract by contract basis and reflected in the income statement by recording revenue and related costs as contract activity progresses. Revenue is ascertained in a manner appropriate to the stage of completion of the contract, and credit taken for profit earned to date when the outcome of the contract can be assessed with reasonable certainty. The amount by which revenue exceeds payments on account is classified as “amounts recoverable on contracts” and included within trade and other receivables; to the extent that payments on account exceed relevant revenue, the excess is included as an advance receipt within trade and other payables. The amount of long term contracts, at cost net of amounts transferred to cost of sales, costs incurred plus recognised profits, less provision for foreseeable losses and payments on account not matched with revenue, is included within trade and other receivables as “amounts recoverable on contracts”. 74 Cohort plc Annual Report and Accounts 2012 Overview Business review Corporate governance Financial statements Trade payables Trade payables are initially measured at fair value. Critical accounting judgements and key sources of estimation uncertainty In the application of the Group’s accounting policies, which are described above, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised. The Directors have identified the following critical judgements and estimates in applying the Group’s accounting policies that have the most significant impact on the amounts recognised in the financial statements. XXCritical accounting judgements Revenue recognition The revenue recognition policy of the Group is described in detail on page 73. There are areas where the Directors have to make judgements as to the level of revenue to be recognised in the financial statements, in particular “stage of completion”: XX In accordance with IAS 11, revenue is recognised using the “percentage of completion” method for system design, build, test and delivery contracts. In almost all cases the percentage of completion is based on input measures (i.e. costs incurred as a proportion of estimated total costs). In a few cases, an output measure based on surveys of work performed may be used where these are available and measure reliably the work performed. XX These contracts generally are not capable of segmentation and the percentage of completion method is applied to the contract as a whole. XX In advance of completion of key stages (or deliverables) of contracts, there is additional uncertainty in the estimated total costs and accordingly this additional uncertainty is reflected in increased estimates of the total costs, i.e. a contingency is added. XX Once those key stages have been completed and the risks expired, the relevant remaining contingencies are removed from the forecast total contract costs. It is a critical judgement of the Directors as to both the level of contingency recognised and its retention or not. Acquisition of other intangible assets Intangible assets other than goodwill that are obtained through acquisition are capitalised on the balance sheet. These other intangible assets are valued on acquisition using a discounted cash flow methodology which depends on future assumptions about the revenue from contracts, prices and costs and on the Group’s cost of capital. These assumptions reflect management’s best estimates but depend on inherent uncertainties which may not be within the control of management. XXKey sources of estimation uncertainty The key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are as follows: Impairment of goodwill The Group has significant goodwill balances, the life of which it considers to be indefinite. It assesses annually the recoverability of the balance, or more frequently in the event of an occurrence indicating impairment. The assessment involves comparing the carrying amount of the asset with its recoverable amount, which is the greater of its value in use and net realisable value by reference to external measures. 75 Cohort plc Annual Report and Accounts 2012 Financial statements Accounting policies continued XXKey sources of estimation uncertainty (continued) Impairment of goodwill (continued) Value in use is determined using discounted cash flow techniques that involve the estimation of future cash flows over a long period and an appropriate discount rate to apply. Future cash flows are estimated based on historical experience, internal estimates and data from external sources. Such estimates are subject to change as a result of changes in economic and competitive conditions. Higher estimates of future cash flows will increase the value in use of goodwill, but lower estimates of cash flows will reduce the value in use and increase the risk of impairment. Discount rates (weighted average cost of capital) are applied to the cash flows to arrive at the value in use. An increase in the discount rate will reduce the value in use of the goodwill, and therefore increases the risk of the value in use falling below the carrying value and resulting in the requirement for an impairment provision. A reduction in the discount rate decreases the likelihood of impairment. Future changes in interest rates, the premium that markets place on equity investments relative to risk free rates and the specific assessment of the capital markets as to the Group’s risk relative to other companies can affect our discount rate. Increases in interest rates or the risk premiums applied by capital markets would result in an increase in the Group’s discount rate and vice versa. These factors are largely outside the Group’s control or ability to predict and can therefore have a significant impact on the estimated fair value of goodwill and hence its impairment. The assessment of goodwill impairment is disclosed in note 11. Standards and interpretations issued at 30 April 2012 not applied to these financial statements A number of other standard amendments and International Financial Reporting Interpretation Committee (IFRICs) have been issued and are yet to be applied by the Group. There are eleven proposed changes to international standards proposed by the International Accounting Standards Board. These have an effective date of implementation of 1 January 2014 with a few exceptions, which are immediate. The impact of these standards on the Group’s financial statements are not significant. Two current exposure drafts which are not standards but will have an impact on the Group are: i. Revenue recognition ii. Leases The full impact for the Group has not been assessed at this stage. 76 Advisers Registered company number of Cohort plc 05684823 Cohort plc is a company registered in England and Wales Nominated adviser and broker Investec 2 Gresham Street London EC2V 7QP Auditor KPMG Audit Plc Chartered Accountants Arlington Business Park Theale Reading RG7 4SD Tax advisers Deloitte LLP Abbots House Abbey Street Reading RG1 3BD Legal advisers Pitmans The Anchorage 34 Bridge Street Reading RG1 2LU Registrars Capita Registrars The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Public and investor relations MHP Communications 60 Great Portland Street London W1W 7RT Bankers RBS Abbey Gardens 4 Abbey Street Reading RG1 3BA Shareholder information and financial calendar Shareholders’ enquiries If you have an enquiry about the Company’s business, or about something affecting you as a shareholder (other than queries which are dealt with by the Registrar), you should contact the Company Secretary by letter to the Company’s registered office or by email to info@cohortplc.com. Share register Capita Registrars maintains the register of members of the Company. If you have any questions about your personal holding of the Company’s shares, please contact: Daily share price listings The Financial Times – AIM, Aerospace and Defence The Times – Engineering Daily Telegraph – AIM section Financial calendar Annual General Meeting Final dividend payable 11 September 2012 19 September 2012 Expected announcements of results for the year ending 30 April 2013: Preliminary half year announcement Preliminary full year announcement December 2012 June 2013 Registered office Cohort plc Arlington House 1025 Arlington Business Park Theale Reading RG7 4SA Capita Registrars The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Telephone: 0871 664 0300 (Calls cost 10 pence per minute plus network extras)(from outside the UK: +44 (0) 20 8639 3399) Lines are open Monday to Friday, 8:30am to 5.30pm Facsimile: +44 (0) 20 8639 2220 E-mail: ssd@capitaregistrars.com If you change your name or address or if details on the envelope enclosing this report, including your postcode, are incorrect or incomplete, please notify the Registrars in writing. 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