Cohort PLC
Annual Report 2013

Plain-text annual report

3 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 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 3 _0_COH_ar13_cover_(PS.KC).indd 3 7/30/2013 1:23:21 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com 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 our website at www.cohortplc.com for up to the minute news, announcements and investor information _0_COH_ar13_cover_(PS.KC).indd 4 7/30/2013 5:18:50 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 Financial and operational highlights E Adjusted operating profit* up 13% to £7.3m (2012: £6.5m), a record trading profit. E Adjusted earnings per share* up 16% at 17.94 pence (2012: 15.52 pence). E Net funds up 16% to £16.4m (2012: £14.1m). E Proposed final dividend up 21% at 2.30 pence per share (2012: 1.90 pence). E Record profit at MASS. E SEA profitability significantly improved. E SCS profitable despite a very tight market. Adjusted operating profit (£m)* Net funds (£m) Overview Business review Corporate governance Financial statements In this report Overview 02 Our business 04 Chairman’s statement 06 Our strategy Business review 08 Business review 21 Key performance indicators 22 Risk management Corporate governance 26 Board of Directors and Executive Management 28 Corporate governance report 31 Directors’ report 33 Remuneration & Appointments Committee report 35 Statement of Directors’ responsibilities Financial statements 37 Independent auditor’s report 38 Consolidated income statement 38 Consolidated statement of comprehensive income 39 Consolidated statement of changes in equity 40 Company statement of changes in equity 41 Consolidated and Company statements of financial position 42 Consolidated and Company cash flow statements 43 Notes to the financial statements 67 Accounting policies 76 Shareholder information, financial calendar and advisers Order book (£m) £95.7m -11% £7.3m +13% 6.3 4.1 4.4 £16.4m +16% 7.3 6.5 16.4 14.1 112.7 103.2 107.1 95.7 6.7 3.7 3.0 47.2 09 10 11 12 13 09 10 11 12 13 09 10 11 12 13 * Excludes exceptional items, amortisation of other intangible assets and marking forward exchange contracts to market value at the year end. _0_COH_ar13_front_(PS.KC).indd 1 01 7/30/2013 4:10:43 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com 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. 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. MASS offers cyber security vulnerability assessments and solutions SEA’s Roadflow product continues to be successful in the UK and internationally MASS harnesses technology to deliver trusted services and solutions that improve the security, efficiency and effectiveness of operations in government, industry and educational establishments. www.mass.co.uk SCS is an independent consultancy with a first-class reputation for providing a wide range of technical support, consultancy and managed services to a diverse customer base. www.scs.biz SEA delivers systems engineering, software and electronic engineering services and solutions, including design and manufacture to government and industry. www.sea.co.uk Revenue 2013 (£m) £4.1m Electronic Warfare Operational Support (EWOS) Managed services £13.3m Systems development £7.5m Complex systems Information and communication services Training support services £5.1m £5.2m £3.8m Space £5.1m Communication systems £8.1m Sensor processing products Sensor and information systems £3.3m £15.4m s n o i s i v i d g n i t a r e p O l s e p m a x E 02 _0_COH_ar13_front_(PS.KC).indd 2 7/30/2013 4:10:48 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 Overview Business review Corporate governance Financial statements Application software Operational support Training Specialist expertise Applied research Studies and analysis 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.). MASS is at the heart of the UK Electronic Warfare (EW) data management system SCS continues to provide technical support to UK overseas operations MASS has opened a new state-of-the-art EW training facility in Lincoln SCS offers Human Factors expertise to support the design, build and test of complex systems SEA is leading the Delivering Dismounted Effect programme for DSTL SCS provides Independent Test and Evaluation to the DE&S Airworthiness Team and Air Platform Teams _0_COH_ar13_front_(PS.KC).indd 3 03 7/30/2013 4:10:51 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Chairman’s statement Nick Prest CBE, Chairman “ Cohort continued to improve its performance in the year, achieving a record trading profit and increasing its net funds.” In summary The Board is recommending a final dividend of 2.3 pence per ordinary share (2012: 1.9 pence) Cohort achieved a record trading profit for the year of £7.3m (2012: £6.5m) The Group ended the year with record net funds of £16.4m (2012: £14.1m) MASS achieved another year of record profit SEA continued its progress with significant profit improvement SCS remained profitable in a tight market Cohort continued to improve its performance in the year, achieving a record trading profit and increasing its net funds despite difficult conditions in some parts of its Defence market. Of Cohort’s trading subsidiaries, MASS achieved another record result and SEA made significant further progress. SCS remained profitable in a tight market, although its performance was down on last year. of other intangible assets, marking forward exchange contracts to market value at the year end and exceptional items, all net of tax. The basic earnings per share for the year ended 30 April 2013 include a benefit from the exceptional item of 3.48 pence per share. Order intake for the year was £59.6m (2012: £79.3m). The net funds at the year end were £16.4m (2012: £14.1m). Key financials In the year ended 30 April 2013, Cohort posted revenue of £70.9m (2012: £75.4m), including revenue of £24.9m (2012: £26.1m) from MASS Consultants Limited (MASS), £31.9m (2012: £31.8m) from SEA (Group) Limited (SEA) and £14.1m (2012: £17.5m) from Systems Consultants Services Limited (SCS). The reduction in revenue was due to customer rescheduling of planned milestones on certain long-term projects, slippage on specific projects, primarily at SEA’s Space division, out of the period and, notably at SCS, reduced technical support work as a result of MOD policies to restrain such spending. The Group’s adjusted operating profit was £7.3m (2012: £6.5m). This included adjusted operating profit from SCS of £0.5m (2012: £1.3m), from MASS of £5.0m (2012: £4.8m) and from SEA of £3.1m (2012: £1.7m). Cohort Group overheads were £1.3m (2012: £1.3m). The higher profitability reflected improved operational efficiency at MASS and, particularly, SEA where the extensive management and organisation changes made over the last two years are now showing results. The Group operating profit of £8.4m (2012: £4.2m) was after recognising amortisation of intangible assets, differences arising on marking forward exchange contracts to market value at the year end and an exceptional item. Profit before tax was £8.5m (2012: £4.2m) and profit after tax was £8.3m (2012: £4.6m). Basic earnings per share were 20.76 pence (2012: 11.30 pence). Adjusted earnings per share were 17.94 pence (2012: 15.52 pence). The adjusted earnings per share were based upon profit after tax, excluding amortisation Dividends The Board is recommending a final dividend of 2.3 pence per ordinary share (2012: 1.9 pence), making a total dividend of 3.5 pence per ordinary share (2012: 2.9 pence) in respect of the year ended 30 April 2013, a 21% increase. This will be payable on 25 September 2013 to shareholders on the register at 30 August 2013 subject to approval at the Annual General Meeting on 18 September 2013. MASS MASS, again, posted record figures for profit and cash generation. MASS’s revenue was down on last year due to the timing of deliveries in its Building Schools for the Future program in North Lincolnshire, which have moved into 2013/14 at the customer’s instigation. This change in revenue mix accounts for the improved net return of MASS, 20.3% compared with 18.5% last year. MASS’s order book declined during the year, partly due to run-off of longer term contracts not due to be replenished in the year. Progress was made in developing export opportunities for Electronic Warfare Operational Support (EWOS). SCS SCS has continued to experience a tight domestic market for its services, evidenced by a 19% fall in revenue year on year. The majority of this revenue fall was in its provision of technical support services to backfill gapped posts in the UK MOD, where restrictions were in place on the procurement of such support. 04 _0_COH_ar13_front_(PS.KC).indd 4 7/30/2013 4:10:52 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 Overview Business review Corporate governance Financial statements SCS was able to mitigate some of this revenue and margin loss through expansion of its business in other areas and by reducing its cost base to align with its revenue levels and making use of its flexible cost associate labour pool. However, these actions could not fully alleviate SCS’s profit deterioration in the year. The £0.5m (2012: £1.3m) of trading profit was after incurring £0.1m of restructuring costs which are expected to realise over £0.6m of annual cost saving in 2013/14. SCS, despite the tight market, ended the year with an order book of £7.7m, almost in line with its opening order book for the year. Cash Cash generated from operations in the period was £4.1m (2012: £8.4m). The reduction was largely due to an adverse working capital movement arising from the continued lock-up of work in progress on the delayed space projects in SEA. The Board and Executive Management have a strong focus on cash and we expect an improved performance in 2013/14. In the meantime, the Group’s healthy cash position provides flexibility for investment and, since the year end, SEA has purchased the freehold of one of its Bristol sites for £1.9m. SEA SEA continued to improve its profitability following the organisational and management changes made in 2010/11. SEA’s trading profit of £3.1m (2012: £1.7m) represented a much better level of net return of 9.8% (2012: 5.4%). SEA continued to be hampered by some poorly performing space projects which are now expected substantially to complete in 2013/14 and therefore we expect the net return to continue to improve. SEA secured nearly £34m (2012: £38m) of orders in the year pushing its closing order book up to nearly £32m. Management and staff The Group’s improving performance reflects the impact of the management changes made over the last three years. The senior management teams at Cohort and within the subsidiaries have steered the business through some difficult times and deserve credit for maintaining focus and morale. My thanks also go to all the staff within the businesses, whose hard work and ability to deliver what our customers need, within tight budgets, are what ultimately continue to drive our performance. Outlook The closing order book of £95.7m (2012: £107.1m) is in line with the opening position on a like-for-like basis after taking account of the run-off of approximately £11m of multi-year orders in 2013. Although the UK defence market remains tight, especially for shorter term in-year spend, the Cohort businesses have strong and relevant capabilities, established positions on some key long term UK MOD programmes, and a good pipeline of new opportunities. Export prospects are also strengthening. Outside Defence, MASS is making progress in its secure networks business and SEA in transport. Overall we expect order intake to be stronger in 2013/14 than 2012/13. The Cohort businesses are now on a sound operational footing and the management emphasis is shifting to driving growth, both organically and by acquisition. Despite uncertainties in the wider Defence market, the Board consider that Cohort’s order book and near term prospects provide the base for further progress in the current year. Nick Prest CBE Chairman Net funds (£m) £16.4m +16% 16.4 14.1 6.7 3.7 3.0 Dividend payment per share (p) 3.50 pence +21% 3.50 2.90 2.40 2.05 1.75 09 10 11 12 13 09 10 11 12 13 _0_COH_ar13_front_(PS.KC).indd 5 Read more about our recent operational activities, strategy and financial review on pages 6 to 21 05 7/30/2013 4:10:52 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Our strategy We are actively preserving the high-growth potential of innovative, independent businesses through a clear, three-point strategy. Our mission Our strategy Delivered through Maintain investor confidence and ensure good corporate governance Good governance and control 01. A framework of financial control, strategy review, performance management and leadership development 02. Clear and consistent communication 03. Ability to act fast if problems arise Consistently grow profits and cash  generation organically Through our subsidiary businesses: Strong performance of subsidiary businesses 04. A focus on trusted delivery to our customers 05. Encouraging innovation and responsiveness with a low cost base 06. Identifying and pursuing growth opportunities 07. Developing high quality leadership teams and a high performance culture Increase the diversity and profitability of the Group through selective acquisitions Growth through acquisition 08. Proactive engagement with businesses that can add value to the Group 09. Maintaining a strong acquisition team 10. Demonstrating a structure and culture that is attractive to potential sellers Creating value for our shareholders and customers in our markets, including defence, security and related areas where we can apply our high technology skills to deliver growth through the innovation, agility and responsiveness of smaller independent businesses in a framework of stability and the benefits of knowledge, access and cooperation provided by the wider Group 06 _0_COH_ar13_front_(PS.KC).indd 6 7/30/2013 4:10:53 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 Overview Business review Corporate governance Financial statements We measure our progress using key performance indicators which can be found on page 21 What we did in 2012/13 Our priorities for 2013/14 We have enhanced communications with our investors through the introduction of webcasts on our Investor Relations website, and have continued to publish news stories from the subsidiary businesses. IT security has had some focus in the past 12 months, and a new Cyber Forum has been set up, with representatives from across the Group charged with sharing best practice and raising the bar in this important area. The Group will conduct a Business Continuity Review in the early part of the year. The Company has made a significant investment in having a presence at the Defence and Security Equipment International (DSEI) exhibition in London in September. This is a useful opportunity to showcase our strengths and capabilities to investors, customers and business partners. Leadership development programmes have been run at two of the subsidiaries, which have been received positively and have enhanced our management capabilities. The businesses have continued to win profitable contracts in both established and new markets. For example, SEA achieved its first export order for its Roadflow product. Progress has been made to win more business in the export market. Although timing is often difficult to predict, we are confident that this effort will lead to successes in the next 12 month period. Cohort introduced its Business Excellence Awards, which aims to recognise and reward people who show behaviours consistent with our values. Following a quiet period on the acquisitions front since 2010 when Abacus EW was acquired, Cohort has increased its activity once again in this area, and we have been actively engaged with owners of businesses who could potentially join the Group. Cohort has developed a proprietary system for identifying, researching and targeting potential businesses that could be suitable acquisitions for the Group. We continue to get positive feedback from potential business vendors that the Cohort structure presents an attractive proposition. The businesses have delivered a robust set of business plans for the period 2013/14, which continue the Group's strategic objective. Growing capabilities in cyber and winning more business in the export market remain strategic priorities for Cohort along with a focus on delivery to all our customers, including the UK MOD, who continue to rely on our performance during times of great change and uncertainty for them. With a growing pipeline of potential acquisitions and a strong balance sheet, we are confident that this aspect of our Group strategy will progress. The priority is to find value enhancing acquisitions, that complement, but do not directly compete with, the subsidiaries within the Group. _0_COH_ar13_front_(PS.KC).indd 7 07 7/30/2013 4:10:53 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Business review Andrew Thomis, Chief Executive, and Simon Walther, Finance Director In summary Cohort has continued its progress, delivering a record level of adjusted operating profit and cash Operational net return was over 10% of revenue MASS achieved record profit SEA’s operating performance continues to improve SCS remained profitable despite a tight market and falling revenue Order book at 30 April 2013 underpins over £45m of 2013/14 revenue Record net funds provide capacity to carry out our strategy Operating review 2012/13 has been another year of continued progress for Cohort, building on the improvements made in the last two years. This progress has resulted in delivery of a record level of adjusted operating profit and cash. The Group’s adjusted operating profit of £7.3m (2012: £6.5m) on revenue of £70.9m (2012: £75.4m) was a net return of 10.3% (2012: 8.6%). The improved operating performance reflects the improvements made in what have been weaker areas of the business, primarily at SEA. There has also been a contribution from the mix of work, with a smaller proportion of revenue coming from lower margin areas such as space and education. There remain some areas of the business where performance needs to improve further and we will continue to work on these in the year ahead. Operating strategy Cohort operates as a group of three medium-sized businesses, operating primarily in defence and security markets, and with a strong emphasis on technology, innovation and specialist expertise: X MASS is a leading international provider in the fields of electronic warfare (EW) and secure communications, including cyber security. Its products include the THURBON™ electronic warfare database and it provides EW operational support services to a number of customers in the UK and overseas. MASS has some unique capabilities that have enabled it to establish strong niche positions in these important areas of defence and security, as well as gaining an increasing reputation as a provider of secure networks to educational and other non-defence markets. MASS is led by its Managing Director, Ashley Lane. It celebrates its 30th anniversary in 2013. X SCS is a provider of independent expert advisory services to defence and related markets. It serves both government and private sector customers in the UK and internationally. Its highly capable people combine experience in the armed forces with a wide range of technical specialisations, enabling the business to provide rapid expert support in areas including information systems, training, airworthiness, delivery and management of complex systems and support to operations in high threat areas. It was founded in 1992. SCS’s Managing Director is Bill Bird. Defence & Security (£m) Transport (£m) 84% of Group revenue 64.9 64.6 61.0 59.4 51.4 6% of Group revenue 4.5 3.4 4.3 2.8 2.1 09 10 11 12 13 09 10 11 12 13 08 _0_COH_ar13_front_(PS.KC).indd 8 7/30/2013 4:10:53 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 Overview Business review Corporate governance Financial statements “ Cohort has continued its progress, delivering a record level of adjusted operating profit and cash.” X SEA specialises in providing systems engineering and specialist design solutions to government and industry. SEA is an expert in naval and tactical communications, providing solutions for the UK submarine flotilla and tactical battlefield data systems. It provides a range of simulation-based training solutions and middleware to provide realistic training for complex environments. SEA also provides software and systems for the transport market and high-integrity space-flight hardware for scientific missions. It was founded in 1998 and is led by Managing Director Steve Hill. SEA is celebrating its 25th anniversary in 2013 by organising voluntary activities to raise money for a range of national and local charities selected by its staff. Cohort’s strategy is to allow its subsidiary businesses a significant degree of operational autonomy in order to fully develop their potential, while providing light-touch but rigorous financial and strategic controls at Group level. Our experience is that our customers prefer to work with businesses where decision-making is streamlined and focused on solving their immediate problems. This model provides us with a degree of competitive advantage over some larger rivals where the decision-making process can be more extended. It is also cost-effective as it avoids the need for additional layers Space (£m) 7% of Group revenue 8.2 7.8 7.6 4.2 5.1 Adjusted operating profit by subsidiary MASS SCS SEA Central costs Adjusted operating profit Net return of revenue 2013 £m 5.0 0.5 3.1 (1.3) 7.3 2012 £m 4.8 1.3 1.7 (1.3) 6.5 Change % 4 (62) 82 — 13 2013 % 20.3 3.7 9.8 — 10.3 2012 % 18.5 7.5 5.4 — 8.6 of management involved in coordination activities and for a large headquarters team. It is also attractive to high calibre employees who find it more rewarding to be involved in decisions affecting the business, even at a relatively junior level, rather than being constrained to a narrow or purely technical role. The characteristics we look to in our people were recently recognised in the Group’s inaugural Business Excellence Awards. This approach is more difficult for very large prime contractors for whom co-ordination of large teams through repeatable and enforceable processes can be more important than speed or innovation. But it positions us well to supply systems and services to our customers where these attributes are highly valued. Other commercial (£m) 3% of Group revenue 4.0 3.8 3.1 1.9 2.1 09 10 11 12 13 09 10 11 12 13 _0_COH_ar13_front_(PS.KC).indd 9 09 7/30/2013 4:10:54 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Business review continued “ Our strategies have allowed us to grow our profit at a time when UK defence expenditure has been constrained.” Operating strategy continued Within our markets we have sought to use our agility and innovation to identify niches where future prospects are attractive and where we have some sustainable competitive advantage. These can be for products, services or high value one-off projects to design bespoke equipment or software. Examples include MASS’s electronic warfare operational support offerings and SEA’s Roadflow product range. We have also been active in finding new customers for the capabilities we have developed, both in export markets and for non-defence purposes. Being part of the Cohort Group adds significant value to our businesses compared to being an independent operation. The strong Group balance sheet gives customers the confidence to award large or long-term contracts that we are technically well-able to execute but which would otherwise be perceived as risky. Examples include MASS’s £50m in-service support contract awarded in 2010, and the £20m of contracts awarded to SEA so far for the Astute submarine External Communications System. The Group Executive and Non-executive Directors have long experience of operating in the defence sector and have contacts and working relationships with senior customers in the UK and internationally which it would be hard for independent smaller businesses to establish. The three operating businesses, while remaining operationally independent, have close working relationships and are able to benefit from each other’s technical capabilities, customer relationships and market knowledge. These strategies have allowed us to grow our profit at a time when UK defence expenditure, our largest source of revenue, has been tightly constrained. They have also developed long term customer relationships and good opportunities that give us confidence that we can continue to prosper despite the difficult and unpredictable market conditions. Acquisitions Alongside our organic growth strategy we see opportunities to accelerate our growth by making targeted acquisitions. We believe that there are good small businesses in the UK and elsewhere that would thrive under Cohort ownership, whether as new members of the Group or as “bolt-in” acquisitions to our existing operations. The most likely candidates for bolt-in acquisitions are small, innovative businesses with capabilities and/or customer relationships that are closely linked to one of our existing subsidiaries. We would expect to integrate an acquired business of this nature fully within the relevant subsidiary. This could lead to both cost savings and benefits from shared access to markets and technologies. The acquisition by MASS of Abacus EW Consultancy in 2010 is a good example of this, and was successful for the Group in terms of its immediate financial return and the access it has provided for MASS into new markets. For stand-alone acquisitions we are looking for agile, innovative businesses of comparable size to MASS, SCS and SEA and which have reached a stage of development where there will be mutual benefit in joining Cohort. It is likely that candidates will be operating in the defence and security markets either in the UK or internationally as that is where the Group can add most value. Growth prospects, sustainable competitive advantage and the ability to operate as part of a publicly quoted UK group will all be key evaluation criteria. MASS Revenue Adjusted operating profit Operating cash flow 2013 £m 24.9 5.0 4.4 2012 £m 26.1 4.8 3.9 MASS had another successful year under Ashley Lane’s leadership, once again achieving a record level of trading profit despite a 5% reduction in revenue compared to 2011/12. Early in the year it became clear that work to provide secure networks for several schools under the North Lincolnshire Building Schools for the Future contract would be postponed into the next financial year. Some significant export prospects have also slipped, and one of MASS’s Middle East contracts has been extended for successive short periods in place of the expanded contract that had been expected. MASS also saw a decrease in its Electronic Systems work, experiencing a tighter market and a taking back in-house of some of the work it has traditionally done for prime contractors. These areas have been the main contributors to the reduced revenue at MASS. These reductions in revenue have been partly compensated by increases in activity on the UK SHEPHERD program, which is a key project for the UK’s Defence EW centre with MASS’s own proprietary EW data management system, THURBON™, at its core. MASS’s net return of 20.3% was due to the mix of revenue and the release of risk contingency as certain projects came to a conclusion. MASS’s net return is expected 10 _0_COH_ar13_front_(PS.KC).indd 10 7/30/2013 4:10:54 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 Overview Business review Corporate governance Financial statements to return to a more usual level in the coming year. During the year MASS completed and opened a new dedicated Electronic Warfare (EW) training centre at its Lincoln office to provide state-of-the-art training facilities to UK and overseas customers. MASS has now delivered over 40,000 EW training days to customers from around 20 countries. MASS continues to have a good pipeline of training opportunities and these often provide openings to promote its capabilities of EW Operational Support (EWOS), EW application software (THURBON™) and secure network provision. EWOS revenues were slightly down compared to 2011/12 due to timing of orders. MASS also continues to develop its business in the secure networks area with key wins including a further University Technical College at Sheffield. To further enhance MASS’s offering to government, education and commercial customers in this field, MASS has trained and qualified in-house a number of IT consultants to be accredited to the listed adviser scheme run by the Government’s Communications Electronics Security Group (CESG), known as CLAS. CLAS consultants are used by government and other organisations to provide high level cyber security assurance. MASS has also secured a position on the UK Government's G-Cloud-3 framework, a contracting mechanism to deliver security-related and other information systems services to the public sector. At the end of the year MASS reorganised its divisional structure, to reflect its capabilities and markets. It now has two main market-facing divisions, Electronic Warfare Operational Support and Secure Information Systems. In addition there is a third division focused on developing the THURBON™ product for Project SHEPHERD and also for export customers. Looking forward, MASS’s export pipeline for THURBON™ projects, whether alone or as part of a larger SHEPHERD type offering, remains good. We are also expecting an expansion of the EWOS work done by MASS in certain export markets during the coming year. As always with export prospects, the timing of these is hard to predict and MASS takes a prudent view in its internal forecasts. Redevelopment of three further schools has now been formally approved by North Lincolnshire Council, and MASS has been awarded a three-year contract to be the Council’s ICT and business partner; accordingly we expect our secure networks activity to increase this year. Secure networks Maintaining assured access to, and protection of, secure data is more important than ever before for both government and business organisations. MASS has deep experience within highly secure, business critical environments, and has the tools, skills and experience to ensure that critical data is kept safe – whether personal, commercially sensitive or government classified. The Company’s highly skilled cyber security team is able to help customers identify vulnerabilities in their computer networks and to put them right. This is achieved through a combination of people, process and technology, as well as training. _0_COH_ar13_front_(PS.KC).indd 11 11 7/30/2013 4:10:56 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Business review continued SCS Revenue Adjusted operating profit Operating cash flow 2013 £m 14.1 0.5 0.1 2012 £m 17.5 1.3 2.2 SCS, under Managing Director Bill Bird, has experienced a sharp decline in revenue and profit compared to 2011/12. This reflects developments within the UK MOD, SCS’s main customer. MOD has imposed tight restrictions on manpower substitution work as it reduces its own workforce. Furthermore, additional MOD review processes and shortages of experienced commercial staff have slowed down the contracting process for technical support work, creating delays and additional cost. As a result SCS’s revenue from provision of technical experts to the UK MOD suffered a marked decline from around £4.4m in 2011/12 to £1.8m in 2012/13. We have recently seen some of the restrictions ease a little, but we are not expecting a rapid recovery in this line of business in the coming year. Other areas of SCS’s work have been more buoyant. Applied research for the NATO Communications and Information Agency more than doubled in 2012/13 to around £1.5m of revenue and the prospects for the current year appear good. SCS continues to provide exercise support to the UK’s Joint Forces Command, a program it has run now for over 10 years and recently secured a further extension of this work for 2013/14. It was this capability which enabled SCS to win and deliver a key piece of high level command and co-ordination training for the UK Government and its stakeholders for the 2012 London Olympics. This work was a one-off project delivered in 2011/12, and so accounts for part of the drop in revenue this year. There was a slight reduction in SCS’s work in air domain hazard analysis for MOD, mostly due to limited customer resource pushing our effort into 2013/14. SCS’s pipeline for activity in the independent technical evaluation and other air domain work remains strong. SCS recently secured its first contract in Oman, where it will be supporting the National Defence College with similar services to those it provides for the Royal College of Defence Studies in the UK. Recognising the continuing squeeze on its main source of revenue, SCS cut its cost base last year, reducing the number of operating divisions from four to three. The full benefit of this should be seen in 2013/14. Studies & analysis SCS provides Independent Technical Evaluation services to the DE&S Airworthiness Team and Air Platform Project Teams. SCS provides independent expert technical support using Suitably Qualified and Experienced Persons (SQEP) to underpin certification, acceptance and integration activities of aircraft and support DE&S more generally in airworthiness development and implementation. Our airworthiness support work helps to ensure that military aircraft are released to Service safely and effectively. SCS has recently introduced its own Independent Technical Evaluation Accreditation Scheme – an industry-leading scheme for assuring the competency of both individuals and the organisation to undertake this mission-critical work. 12 _0_COH_ar13_front_(PS.KC).indd 12 7/30/2013 4:10:57 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 Overview Business review Corporate governance Financial statements Group revenue by market and business Defence & Security Transport Space Other commercial 2013 £70.9m £24.9m £31.9m £14.1m Total revenue by market 2012 £75.4m MASS SCS SEA £31.8m £26.1m £17.5m MASS SCS SEA Total revenue by market £59.4m (A) £4.3m £5.1m £2.1m £61.0m (B) £2.8m £7.6m £4.0m Further breakdown of Defence & Security (D&S) revenue Direct to UK MOD Indirect* to UK MOD where the Group acts as a sub-contractor or partner Export & other 2013 £59.4m (A) £23.0m £22.3m £14.1m MASS SCS SEA 2012 £61.0m (B) £22.5m £21.0m £17.5m MASS SCS SEA £28.9m £23.3m Total to UK MOD: £52.2m £7.2m £30.7m £22.5m Total to UK MOD: £53.2m £7.8m Total D&S revenue Total D&S revenue _0_COH_ar13_front_(PS.KC).indd 13 13 7/30/2013 4:10:58 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Business review continued SEA Revenue Adjusted operating profit Operating cash flow 2013 £m 31.9 3.1 2.1 2012 £m 31.8 1.7 3.5 SEA, under the leadership of Managing Director Steve Hill, has had a successful year with profit increasing substantially on a similar level of revenue. Sharply increasing revenue in areas such as transport and a reduction in relatively low margin space electronics work resulted in much improved profitability. SEA made good progress on its External Communications System (ECS) for the Astute Class of submarines. This included testing of integration with the submarines’ combat system, which is expected to complete in the first half of 2013/14. SEA also delivered and installed ECS on Astute Boat 3. SEA’s activities in the transport market have seen a marked increase with deliveries on two key software projects for Network Rail. These were ISP Scheme and Network Rail Operational Logistics (NROL); ISP Scheme is a state of the art signalling design tool for the UK signalling design industry, designed to replace legacy tools and increase the efficiency of signalling design and is due to complete in 2013/14. NROL will be used by Network Rail to plan the delivery of heavy resources across the rail network in order to carry out essential maintenance and engineering. NROL is a significant project in Network Rail with £800m worth of resources to be processed through the system each year and to be used by over 1,500 Network Rail employees, customers and suppliers. This system is due to be deployed by Network Rail in the coming year. The Roadflow products also had a successful year with sales increasing from £0.8m in 2011/12 to £1.7m in 2012/13, including a first export customer. A variant of Roadflow is currently undergoing approval tests for use as an enforcement system for level crossing offences, a high profile application that has the potential to prevent a significant number of serious accidents. SEA’s applied research activity for the Defence Science and Technology Laboratory (DSTL) decreased slightly compared to 2011/12. The DSTL framework effort was on Expeditionary Logistics and Support, a program which concludes next month and Delivering Dismounted Effects, the follow on to Future Dismounted Close Combat (FDCC). The decrease from last year was mainly due to 2011/12 including an exceptional level of activity on FDCC as the program approached its Electronic systems During the last year SEA has deployed the first of its new Roadflow Flexi systems. These are used by councils across the UK to enforce civil traffic regulations, for example bus lanes and parking. A variant of the system has been supplied to a key export customer and a further variant is being developed for use in the enforcement of criminal offences within the UK. 14 _0_COH_ar13_front_(PS.KC).indd 14 7/30/2013 4:11:03 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 Overview Business review Corporate governance Financial statements conclusion. This capability provides an entry for promoting other capabilities and services to the customer (DSTL) including products for development by the ultimate customer, the UK MOD. The lower space revenue was due to slippage of milestones, primarily on the various Earthcare missions. We have made progress in addressing many of the project issues in SEA’s Space division by introducing additional project management resource and stronger commercial oversight. Some of the delivery delays were a result of this more robust commercial approach taken by SEA with both customers and suppliers, as we have worked to maintain and, where possible, improve our margins. The delays in Space have affected SEA’s operating cash performance this year, and we expect this to improve in 2013/14. The progress we have made in Space has enabled us to deliver newly won Space projects to expectations. SEA’s pipeline of opportunities remains strong in both defence and non-defence markets. Revenue breakdown by capability Notable changes between 2012 and 2013 were: X A significant increase in Application Software work, both in absolute terms and as a proportion of total revenue. This was driven primarily by the increased work at SEA on the ISP Scheme and NROL projects for Network Rail, and by Project SHEPHERD at MASS. X A drop in revenue from Secure Networks in both absolute and relative terms. This is a capability area where we expect to see growth in the medium term, but the 2012/13 result was affected by the decision by North Lincolnshire Council to delay its acquisition of new secure networks for schools into 2013/14. X A drop in revenue from Specialist Expertise, again in both absolute and relative terms. This was entirely a result of the sharp drop in revenue from this source at SCS. Our people All of the Group’s capabilities and customer relationships ultimately derive from our people. We are very much a people business and such success as we achieve is entirely due to the technical excellence, managerial skills and business acumen of our employees. We are very grateful for the many examples of hard work and dedication we have seen, from the senior management group to individuals and teams delivering what our customers need. Revenue breakdown by capability 2013 2012 Electronic systems The design and supply of such equipment and its associated embedded software, as well as the integration of commercial “off the shelf” equipment for specialist applications. Secure networks The provision of advice and system implementation to protect against cyber attack and other threats. Both MASS and SCS provide these services for a range of clients. Specialist expertise The provision of expert individuals as part of a customer’s team. All three of our businesses are active in this area, most notably SCS. Applied research The management and execution of scientific investigation work aimed at specific objectives, such as SEA’s leadership of the Expeditionary Logistics and Support research program for MOD. Application software The design and supply of specialist software systems such as MASS’s work on Project SHEPHERD and SEA’s work for its transport customers. Training This includes formal, on-the-job and scenario-based training services. An example is SCS’s provision of exercise-based training for the UK’s Joint Forces Command. Operational support The provision of direct support to active operations which takes place at both MASS (including its Electronic Warfare Operational Support activities) and SCS. Studies and analysis Other self-contained studies, consultancy and analytical work such as SCS’s Hazard Analysis work on the Joint Combat Aircraft. 2013 £m 2012 £m 15.7 18.5 23% 24% 12.3 14.1 10.1 12.2 17% 19% 9.2 9.1 14% 16% 8.8 5.5 13% 12% 7.2 7.6 12% 7% 4.3 5.0 10% 10% 6% 7% 3.3 3.4 70.9 75.4 5% 5% _0_COH_ar13_front_(PS.KC).indd 15 15 7/30/2013 4:11:04 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Business review continued “ The pipeline and underpinning for the coming year gives us confidence that we will continue to make progress in 2013/14.” Order intake and order book MASS SCS SEA Order intake Order book 2013 £m 11.7 14.2 33.7 59.6 2012 £m 25.6 15.8 38.5 79.9 2013 £m 56.1 7.7 31.9 95.7 2012 £m 69.2 7.8 30.1 107.1 Operational outlook The fall in the Group’s order intake, and consequently order book, is a result of delays to some significant orders, primarily at MASS. Last year MASS secured the Project SHEPHERD order which is deliverable over several years as well as multi-year refreshes on its support to the UK Air Warfare Centre. These contracts have not been due for renewal in 2012/13. However, MASS is awaiting some key multi-year export orders which have been covered during this year by successive short-term orders as the work has been delivered. Further export opportunities for THURBON™ and Electronic Warfare operational support and training are in the pipeline but the timing of these, as with all export orders, is unpredictable. Of MASS’s order book at 30 April 2013, over £17m is deliverable in 2013/14, a similar level of underpinning as last year. SCS’s order intake was affected by a considerable tightening of its technical support offering through the former Logistics division, a fall of £2m year on year. However in other areas, SCS’s order intake grew by around 4% compared to last year and its closing order book of £7.7m is virtually all deliverable in 2013/14 representing a similar level of underpinning to 2012/13. The visibility of SCS’s pipeline, as in the past, remains short (typically around six months) and so SCS retains a flexible resource model to enable it to respond quickly to changes in market conditions. SCS’s pipeline of opportunities includes extension and expansion of its air domain offering through independent technical evaluation, both on the Joint Strike Fighter and other air platforms. SEA’s order intake was also down on 2011/12 but much of the drop was due to the receipt last year of nearly £9m of ECS orders for Astute Boats 3 and 5. Orders for the next batch of ECS systems for Astute Boats 6 and 7 are expected soon and the prospects for further deliveries of this system on other submarine platforms are good. SEA’s order intake included a new research framework for the UK MOD’s research arm, DSTL, Delivering Dismounted Effects. This £10m plus framework is a follow on to its successful four year research project, Future Dismounted Close Combat and a strong endorsement of SEA’s continuing capability to manage expert teams and deliver leading research to the customer’s requirements. SEA’s Roadflow product goes from strength to strength with orders of nearly £2m this year compared with under £1m in 2011/12. This year also saw it secure its first export order and further export opportunities exist. SEA’s Space division order intake was down on 2011/12 with some key programs slipping into 2013/14. The pipeline for Space is good and the recently announced increased financial commitment of the UK Government to Space, through the UK Space Agency, is an encouraging signal for future growth. SEA’s closing order book of nearly £32m underpins over £20m of revenue in 2013/14. After adjusting for revenue delivered from multi-year orders secured previously (an amount of around £11m), the closing order book of the Group on a like-for-like basis is in line with last year and provides a similar level of underpinning of revenue at MASS and SCS to that seen historically. At SEA, the level of revenue for 2013/14 underpinned by the 30 April 2013 order book is slightly less than that seen historically, primarily due to the timing of ECS orders. In the near term, the majority of Cohort’s business will continue to derive, either directly or indirectly, from the UK MOD. There are continuing uncertainties as to both the volume and future procurement system in this market. The Government continues to examine the merits of moving to a Government Owned Contractor Operated (GOCO) defence equipment and support organisation and the implications of this for Cohort are not yet clear. Despite these uncertainties, high priority programs, several of which are important to Cohort, 16 _0_COH_ar13_front_(PS.KC).indd 16 7/30/2013 4:11:04 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 Overview Business review Corporate governance Financial statements remain focused and have progressed. Good examples are submarines, the nuclear deterrent and combat aircraft. We are also increasingly active in export markets, some of which have growing demands for defence equipment with resources to match. This market background, together with our improved operational performance and the pipeline of opportunities and underpinning for the coming year, gives us confidence that we will continue to make progress in 2013/14. Funding resource and policy The Group retains a robust financial position and continues to be cash generative enabling it to continue to invest in internal R&D and other value adding projects on a carefully considered basis as well as maintaining its progressive dividend policy. The Group’s cash position provides it with the firepower to conduct its acquisition strategy and has also enabled it, after the year end, to secure its operational facilities in Bristol from which some of its key defence and most of its transport capabilities are sourced. The purchase of one of its offices in the North Bristol Business Park for a total cost of £1.9m will enable SEA to continue to grow its business as well as deliver some immediate operational savings. At 30 April 2013 the Group had facilities with its banking provider, RBS, as follows: Overdraft facility for working capital requirements Term at commencement of facility £m 7.5 364 days During the year ended and at 30 April 2013 none of the above facility had been drawn by the Group. The overdraft facility is renewable 1 October 2013 and the Board expects it to be renewed on broadly similar terms. The Group takes a prudent approach to treasury policy with its overriding objective being protection of capital. In implementing this policy, deposits are held with institutions with credit ratings of at least A3. Deposits are generally held on short (less than three months) duration to maturity on commencement. This matches the Group’s cash resources with its internal 13 week cash forecasts, retaining flexibility whilst trying to ensure an acceptable return on its cash. All of the Group’s cash (that is not on short term deposit) is managed through a set-off arrangement, enabling the most efficient use of the Group’s cash from day to day, under the supervision of the Group’s finance function. Application software The MASS THURBON™ EW data management system is at the heart of Team Excalibur’s solution to deliver a significant improvement programme for the UK’s Defence Electronic Warfare Centre (DEWC). This programme, named Project SHEPHERD by the UK Ministry of Defence (MOD), is a strategically important project, which will enable significant improvements in the delivery of the EW information that is so important to modern operations. At a time when military forces have to meet many challenges, SHEPHERD will provide the DEWC with a crucial step-change in automated end-to-end capability that will support improved situational awareness and platform protection. Team Excalibur will upgrade the UK Defence Electronic Warfare Database and provide a suite of state of the art EW Operational Support tools. MASS is utilising THURBON™ to provide the advanced data management capability as part of the SHEPHERD solution. _0_COH_ar13_front_(PS.KC).indd 17 17 7/30/2013 4:11:05 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Business review continued Cash performance of the Group Adjusted operating profit Depreciation and other non-cash operating movements Working capital movement Tax, dividends, capital expenditure, interest and investments Increase in net funds 2013 £m 7.3 0.9 (3.1) 5.1 (2.8) 2.3 2012 £m 6.5 1.1 1.2 8.8 (1.4) 7.4 Funding resource and policy continued The Group regularly reviews the ratings of the institutions with which it holds cash and always considers this when placing a new deposit. The Group’s return on net funds during the period was 0.6% to 2.1% (2012: 0.5% to 2.1%). In addition to its cash resources, the Group has in issue 40.8m ordinary shares of 10 pence each. Of these shares just over 0.7m are owned by the Cohort plc Employee Benefit Trust and waive their rights to dividends. In addition the Group has issued options over ordinary shares through Key Employee Share Option and SAYE schemes to the level of 3.1m at 30 April 2013. The Group maintains a progressive dividend policy with dividends having increased by approximately 20% per annum over the last three years and dividend cover being maintained in the current year at over five times (2012: five times) based upon the adjusted earnings per share. The Group’s cash generation in 2012/13 has not been as strong as during 2011/12. In summary, the Group’s cash performance was as set out in the table above. The primary reason for the weaker cash performance has been an increase in working capital at both MASS and SEA, mostly due to an unwinding of cash advances and an increase in work in progress. These were partly offset by a reduction in trade debtors. The unwinding of advances was as expected but the increase in work in progress in the year was not, as milestones failed to complete on some legacy Space projects and have now slipped into 2013/14. Tax payments were also higher by £0.8m as the Group’s profitability and consequently current year’s tax charge have risen. The Group’s customer base of governments, major prime contractors and international agencies make its debtor risk low. The year end debtor days in sales were 42 days (2012: 51 days). This calculation is based upon dividing the revenue by month, working backwards from April into the trade debtors balance (excluding unbilled income and work in progress) at the year end, a more appropriate measure than calculating based upon the annual revenue as it takes into account the heavy weighting of the Group’s revenue in the last quarter of each year. The decrease in debtor days is a reflection of the tighter control over working capital across the Group. The Group’s foreign exchange exposure is mainly at SEA and primarily relates to receivables from the European Space Agency; this exposure is hedged using forward contracts. At 30 April 2013, the Group had in place forward foreign exchange contracts as follows: Euro to GBP US$ to GBP Sell Buy €10.0m $0.8m £8.5m £0.5m These forward contracts are used by the Group to manage its risk exposure to foreign currency on trading contracts where it either or both receives and pays currency from customers and to suppliers respectively. These forward exchange contracts are entered into when customer contracts are considered highly probable. The Group does not enter into speculative foreign exchange dealing. The marking of forward exchange contracts to market at the spot rate on 30 April 2013 resulted in the recognition of a derivative financial liability of £39,000 (2012: £413,000) and a credit to the income statement of £374,000 18 _0_COH_ar13_front_(PS.KC).indd 18 7/30/2013 4:11:05 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 Overview Business review Corporate governance Financial statements (2012: £955,000 charge). In both years, the change in the derivative financial instrument has been recognised separately within operating profit and is not disclosed as part of the adjusted operating profit of the Group. Tax The Group’s tax charge for the year ended 30 April 2013 of £168,000 (2012: £411,000 credit) was at an effective rate of 2.0% (2012: credit rate of 9.9%) of profit before tax. This includes a current year corporation tax charge of £1,158,000 (2012: £1,268,000), a rate of 13.6% (2012: 30.5%) of profit before tax, a prior year corporation tax credit of £411,000 (2012: £1,001,000) and a deferred tax credit of £579,000 (2012: £678,000). Including the current year deferred tax, the effective current tax rate for the year ended 30 April 2013 is 6.8% (2012: 14.2%), lower than the standard rate (calculated at 23.92%; 2012: 25.83%), primarily due to recognition of Research & Development (R&D) tax credits, an exceptional income of £1.4m which is not taxable and recognising a deferred tax asset on unutilised trading losses at SEA. The Group’s overall tax rate was below the standard corporation tax rate of 23.92% (2012: 25.83%). The reduction is due to the reasons given above for the current year’s rate and in addition, a prior year tax credit in respect of additional R&D tax credits claimed. The Group’s businesses are only allowed to claim the lower R&D tax credit allowance available to larger companies, currently 30%. Looking forward, the Group’s effective current tax rate for 2013/14 and 2014/15 is estimated at 16% and 15% respectively, taking account of the reduction in headline tax rates and assuming the R&D tax credit regime remains unchanged from its current level and scope. The Group maintains a cautious approach to previous R&D tax credit claims for tax periods that are still open, currently 2010/11 through to 2012/13. Exceptional items (see note 3) The Group incurred minor restructuring costs in the year ended 30 April 2013 (over £0.1m) and in this particular case are considered to be part of the ongoing business of the Group and, as such, have not been disclosed separately. The release of the earn out provision (£1.4m) in respect of the acquisition of Abacus EW by MASS was a result of the Abacus EW business not achieving the high targets set for the earn out. Operational support SCS Field Service Representative engineers continue to provide essential support to critical base protection systems, vital for the safety and security of British forces on operations overseas. The SCS field engineers provide a comprehensive and wide range of services including: site reconnaissance, installation and integration for new deployments, plus full maintenance of the installed systems hardware and software ensuring 100% availability. A help-desk is also provided in the UK to ensure 24/7 logistic and welfare cover. SCS engineers have been employed as contractors on UK Operations for over 3 years, principally in Camp Bastion, Afghanistan, but also in Forward Operating Bases when required. Previous support has also been provided in other countries such as Iraq. _0_COH_ar13_front_(PS.KC).indd 19 19 7/30/2013 4:11:07 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Business review continued Adjusted earnings per share The adjusted earnings per share of 17.94 pence (2012: 15.52 pence) are reported in addition to the basic earnings per share and exclude the effect of amortisation of intangible assets, exchange movement on marking forward exchange contracts to market and exceptional items, all net of tax. The adjusted earnings per share, excluding the prior year tax credit and the deferred tax credit in respect of unutilised trading losses, £835,000 in total (2012: £1,001,000), were 15.86 pence (2012: 13.04 pence), an increase of 22%. year on year. The adjusted operating profit is stated after charging the cost of share-based payments of £292,000 (2012: £353,000) which are allocated to each business in proportion to its employee participation in the Group’s share option schemes. The segmental analysis (see note 1) is disclosed for each business after deducting the cost of share-based payments. The exchange adjustment on marking forward exchange contracts to market at the year end is a requirement of IFRS and has no economic impact upon the Group’s performance or assets and liabilities. Andrew Thomis Chief Executive Simon Walther Finance Director Additional financial reporting disclosure As in the past, the Group makes reference to additional financial reporting over and above that required by IFRS, specifically: Adjusted operating profit The adjusted operating profit is presented to reflect the trading profit of the Group and excludes amortisation of other intangible assets, exchange differences on marking forward exchange contracts to market and exceptional items. This enables the Group to present its trading performance in a consistent manner Applied research SEA won the Delivering Dismounted Effect (DDE) programme last August and has now completed the first year of a 4 year contract for DSTL. The focus for the first year has been to baseline the current capability and to identify candidate technologies to enhance the lethal and non-lethal effects of the dismounted soldier. 20 _0_COH_ar13_front_(PS.KC).indd 20 7/30/2013 4:11:09 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 Overview Business review Corporate governance Financial statements Key performance indicators The indicators shown below have been identified by the Directors as giving the best overall indication of the Group’s long-term success. Performance indicator 1. Change in revenue Description Changes in total Group revenue compared to the prior year. Why measured? Revenue growth gives a quantified indication of the rate at which the Group’s business activity is expanding over time. 2. Change in adjusted operating profit Change in Group operating profit before amortisation of other intangible assets, marking forward exchange contracts to market and exceptional items. The adjusted profit trend provides an indication of whether additional revenue is being gained without profit margins being compromised and whether any acquisitions are value enhancing. 3. Order book visibility Orders for next financial year expected to be delivered as revenue, presented as a percentage of consensus market revenue forecasts for the year. 4. Change in adjusted earnings per share Annual change in earnings per share, before amortisation of other intangible assets, marking forward exchange contracts to market and exceptional items, all net of tax. 5. Operating cash conversion Net cash generated from operations before tax as compared to the profit before tax. Order book visibility, based upon expected revenue during the year to come, provides a measure of confidence in the likelihood of achievement of future forecasts. Change in adjusted earnings per share is an absolute measure of the Board’s management of the Group’s return to shareholders including tax and interest. Operating cash conversion measures the ability of the Group to convert profit into cash. 2013 (6)% 13% 2012 16% 47% 60% cover on forecast 2014 revenue of £75.5m 67% cover on forecast 2013 revenue of £73.8m 16% 61% 62% 210% Comment Fall in revenue in 2013 due to reduction in manpower substitution at SCS and slippage of education work at MASS and Space milestones at SEA into 2013/14. Increase in 2013 due to improved operational efficiency at MASS and, particularly, SEA. Cover at MASS and SCS same as 2012. SEA down slightly due to timing of ECS orders. Increase in 2013 reflects profitability arising from operational improvements, particularly at SEA. _0_COH_ar13_front_(PS.KC).indd 21 Weaker operating cash conversion in 2013 was due to the work in progress from SEA’s Space projects not falling as expected, whilst customer advances unwound as anticipated. 21 7/30/2013 4:11:09 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Risk management Risk identification, analysis and management allows Cohort to deliver its strategic objectives effectively. Market risks Risk area Nature of risk Mitigation and progress Customers The Group’s single most important customer is the UK MOD. £28.9m of revenue came directly from this source in 2013 (2012: £30.7m), 41% (2012: 41%) of Group revenue. In addition £23.3m (2012: £22.5m) of Group revenue, 33% (2012: 30%) 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 further 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 increase in the proportion of its revenue to its ultimate primary customer in 2013 compared with 2012 reflected the Group’s position on a number of key UK MOD programmes including ECS for Astute class submarines, electronic warfare database and research frameworks in the areas of logistics and soldier capability. £16.6m (2012: £14.1m) (23%) of Group revenue, representing 32% 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. Operational risks Risk area Nature of risk Mitigation and progress Suppliers Operations (MASS & SEA) 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 manifested through its three subsidiaries. The subsidiary trading and business risks are similar in the cases of MASS and SEA. 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 and hardware engineering and technical expertise. 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 (including 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. 22 _0_COH_ar13_front_(PS.KC).indd 22 7/30/2013 4:11:09 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 Overview Business review Corporate governance Financial statements Read more about how we manage risk in the Corporate Governance report on pages 28 to 30 Operational risks continued Risk area Nature of risk Operations (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. Partners 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. Mitigation and progress The risk is mitigated, in the short term, by the use 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 three months. Utilisation in the year was below 2012 due to the fall in revenue; SCS reduced its cost base at the half year to align with future expected revenue levels. 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. 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. Strategic risks Risk area Nature of risk Mitigation and progress 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. _0_COH_ar13_front_(PS.KC).indd 23 23 7/30/2013 4:11:10 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Risk management continued Financial risks Risk area Nature of risk Mitigation and progress Treasury Cash and bank deposits are held as follows: 2013 £’000 2012 £’000 Moody’s credit rating of bank as at 2 May 2013 Royal Bank of Scotland Plc 10,409 10,137 Lloyd’s TSB Bank plc Santander UK plc Clydesdale Bank Barclays Bank Plc 3,017 2,000 1,000 — 3,000 — — 1,003 16,426 14,140 A3 A2 A2 A2 A2 The Group’s facilities with RBS are renewed annually. During the year, the Group renewed its working capital facility with RBS for £7.5m. This facility is available to all of the Group’s entities through an offset arrangement. The current facility expires in October 2013 when it is expected to be renewed on broadly similar terms. The Group takes a very prudent approach to the management of its financial instruments, which are described in note 16. 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 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. Currency risk 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 2013 in respect of financial derivatives (forward foreign exchange contracts) was £9.0m of receivable only (2012: £9.8m of receivable). The financial derivatives at 30 April 2013 were all held with RBS. These are disclosed in detail in note 19 to the financial statements. 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 is to the Euro (€) through SEA’s Aerospace division which has most of its contracts denominated in €. 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 72) and Critical Accounting Judgements (pages 74 to 75) and as such may from time to time have a degree of risk. The 2013 bad debt charge was £Nil (2012: £78,000) on Group revenue of £70.9m (2012: £75.4m). Financial assets exposed to credit risk at 30 April: 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 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. Of the £78,000 charged in 2012, £68,000 was recovered in 2013. Trade receivables Other receivables Cash and bank deposits 2013 £m 10.6 8.8 16.4 2012 £m 12.6 7.9 14.1 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. Of the trade receivables, £3.0m was with the UK MOD at 30 April 2013 (2012: £5.1m). The risk to the major debtor of the Group, as a government department, is considered very low. 24 _0_COH_ar13_front_(PS.KC).indd 24 7/30/2013 4:11:10 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 Corporate governance Overview Business review Corporate governance Financial statements Untitled-1 25 7/30/2013 4:08:38 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Board of Directors and Executive Management 1. Nick Prest CBE Chairman 2. Stanley Carter Co-Chairman Term of office Nick Prest became Chairman of Cohort on flotation in March 2006. Background and experience After graduating from Oxford in 1974 Nick joined the UK MOD. In 1982 Nick moved to Alvis, the defence contractor, undertaking a variety of roles before becoming Chief Executive in 1989 and Chairman and Chief Executive in 1996. Nick left Alvis following its acquisition by BAE Systems in 2004, by which time the company had become a leading international business in military land systems. Nick was also Chairman of Aveva Group plc from 2006 until 2012. External appointments In addition to being Chairman of Cohort, Nick is also Chairman of Shephard Group, a privately owned media company specialising in defence and aerospace. Term of office Stanley Carter became Co-Chairman of Cohort in 2009 having previously been its Chief Executive since its formation. Background and experience Stanley jointly founded Cohort with Nick Prest in 2006 with SCS as the launch vehicle on flotation. Prior to that he was Managing Director of SCS, which he founded in 1992 on leaving the Regular Army. During his military service as a Royal Artillery officer he held a wide range of posts in the MOD, including the central staff, procurement and at government research establishments as well as representing the UK on NATO technical committees. He received an award for the invention of a missile launcher from the MOD. He has degrees in Technology and Behavioural Science from Loughborough and the Open University respectively, and an MSc in Information Systems from the Royal Military College of Science. 5. Sir Robert Walmsley KCB Independent Non-executive Director 6. Ashley Lane Managing Director of MASS Term of office Sir Robert joined the Board of Cohort on flotation in March 2006. Term of office Ashley was appointed as Managing Director of MASS in May 2009. Background and experience Sir Robert served in the Royal Navy from leaving school until his final appointment as a Vice Admiral. After retiring from the Navy, he was appointed as Chief of Defence Procurement, occupying that position from 1996 until 2003. He served on the British Energy Board from 2003 until 2009 and until recently was a senior adviser at Morgan Stanley International and Chairman of the Major Projects Association. External appointments Sir Robert is on the board of the General Dynamics Corporation and Ultra Electronic Holdings as well as holding a number of other advisory roles in the defence and energy sectors. Background and experience After graduating from Surrey University with a Masters Degree (Distinction) in Electronic and Electrical Engineering, Ashley joined Thorn EMI Electronics as a Systems Engineer working on countermeasures, radar and surveillance systems. He spent four years in technology development and licensing, building the successful wireless technology company UbiNetics. He has held key technical roles on a number of electronics, IT and real-time system projects, as well as positions as Business Manager, Consultancy Division Head, Programme Manager and, for five years, Systems Development and Technical Director for MASS. 26 Untitled-1 26 7/30/2013 4:08:43 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 Member of the Cohort plc Board Member of Remuneration & Appointments and Audit Committees Overview Business review Corporate governance Financial statements 3. Andrew Thomis Chief Executive 4. Simon Walther Finance Director and Company Secretary Term of office Andrew took over as Chief Executive of Cohort in May 2009. Term of office Simon Walther joined Cohort as Finance Director in May 2006. Background and experience Andrew graduated with an M.Eng degree in Electrical and Electronic Engineering from Imperial College, London in 1987. He spent nine years in science, technology and policy roles in the UK MOD. He left in 1996 and, after a period working with public and private sector clients at Capita plc’s management consultancy arm, he joined Alvis in a role covering strategy, M&A and business development. Following the acquisition of Alvis by BAE Systems in 2004, he worked with Nick Prest and Stanley Carter on the creation of Cohort plc, acting as Finance Director during the flotation and subsequently Corporate Development Director. From 2007 to 2009 he was Managing Director of MASS. Background and experience After graduating with a BSc in Toxicology and Pharmacology from University College, London, he went on to qualify as a chartered accountant with Touche Ross in 1992. Simon moved to the Peninsular and Oriental Steam Navigation Company (P&O) in 1993 where he was appointed a chief accountant for P&O European Ferries in 1995. He has over fifteen years’ industry relevant experience, with previous senior finance roles at Alvis and BAE Systems. 7. Bill Bird Managing Director of SCS 8. Stephen Hill Managing Director of SEA Term of office Bill was appointed as Managing Director of SCS in September 2010. Term of office Stephen was appointed as Managing Director of SEA in March 2011. Background and experience Bill graduated from Cambridge with an MA in Medical Science. Following an aircrew career in the Royal Air Force, when he was awarded an MBE for his work in the Intelligence community, Bill spent 10 years in general management, gaining an MBA from Reading University in 2000. He was the General Manager of Rockwell’s UK Defence business and spent three years as Managing Director of Boeing’s UK subsidiary, BDUK, which he set up in 1996. Bill joined KPMG in 2000 and left to develop Hedra’s defence and aerospace practice in October 2003. During his consulting career, Bill has had extensive experience of MOD procurement and support, outsourcing and commercial negotiations and is also a chartered IT Practitioner. Background and experience Stephen has over ten years’ senior managerial experience, predominantly in the international aerospace and defence sector. He began his career in 1983 at GEC Marconi as an electronics engineer, eventually becoming Business Director with responsibility for the land systems electro-optics business at Basildon. In 2000, he moved to Thales, where his roles included Managing Director of the Air Operations business at Wells, and Vice President with responsibility for the UK Air Systems Division. Prior to joining the Cohort Group, he was Chief Executive of CircleBath, a venture capital backed private hospital in Bath. Stephen has a first class honours degree in Electrical and Electronic Engineering and a Masters in Engineering Project Management. Untitled-1 27 27 7/30/2013 4:08:46 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Corporate governance report Corporate structure The Board Audit Committee Sir Robert Walmsley (Chairman) Nick Prest Stanley Carter Remuneration & Appointments Committee Sir Robert Walmsley (Chairman) Nick Prest Stanley Carter Nick Prest Chairman Introduction As Cohort plc is listed on AIM, it is neither required to comply with the UK Corporate Governance Code that was published in September 2012 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, the resources available to it and the interpretation of the Code in the Quoted Companies Alliance Corporate Governance Code for Small and Mid-sized Quoted Companies. 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 is aware that it is not compliant with the Code in respect of having at least two independent Non-executive Directors, but considers the size Attendance at Board and Committee meetings Board (8 meetings) Audit (3 meetings) Remuneration & Appointments (3 meetings) N Prest (Chairman) S Carter (Co-Chairman) Sir Robert Walmsley (Non-executive Director) A Thomis (Chief Executive) S Walther (Finance Director and Company Secretary) 8 8 8 8 8 3 3 3 — — 3 3 3 — — of the current Board does not justify the cost. The Board will keep this matter under review. 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, major contract bids and acquisitions. All Directors retire by rotation and are subject to election by shareholders at intervals of once every three years. 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 2013 is shown below. 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. Sir Robert Walmsley is Chairman of the Audit Committee. 28 Untitled-1 28 7/30/2013 4:08:48 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 Overview Business review Corporate governance Financial statements Committee consideration of the financial statements In making its recommendation to the Board that the financial statements be approved by the Board, the Audit Committee has taken account of the following significant issues and judgement areas: Areas of judgement Revenue recognition on fixed-price contracts The judgement applied in recognising revenue on a fixed-price contract is made by reference to the cost incurred, including contingency for risk and the demonstrable progress made on delivering key stages (often referred to as milestones) of the contract. The Group uses best estimates in applying this judgement and where uncertainty of progress on a stage exists, revenue is not recognised for that stage. Cost contingency on fixed-price contracts In addition to the judgement applied to revenue recognition, the cost of delivering a contract to a particular stage represents the actual costs incurred and committed, plus an estimate of cost contingency for risk still present in the contract at that stage. This cost contingency takes account of the stage that the contract has reached and any judgement and uncertainty remaining to deliver the remainder of the contract. It is usual for these cost contingencies to reduce as the contract progresses and risk and uncertainty reduces. Goodwill and other intangible assets The Group has recognised goodwill and other intangible assets in respect of the acquisition of MASS (including Abacus EW) and SEA. The other intangible assets are in respect of contracts acquired, intellectual property rights and specific opportunities and in each case are amortised over the expected life of the earnings associated with the other intangible asset acquired. The goodwill, which is not subject to amortisation but to annual impairment testing, arises from the intangible elements of the acquired businesses for which either the value or life is not readily derived. This includes, but is not limited to, reputation, customer relations, contacts and market synergies with existing Group members. The goodwill relating to the acquisitions of MASS (including Abacus EW) and SEA has been tested for impairment as at 30 April 2013. In both cases there was no impairment. The impairment test for the goodwill in respect of SEA is more sensitive, with no impairment at the Group’s post-tax WACC of 9.8% but impaired if the Group’s WACC increases to 14.6%. The Group’s 2013 post-tax WACC of 9.8% is higher than the 2012 equivalent of 6.9% which reflects slightly higher equity risk. The Group’s pre-tax WACC is 14.1% (2012: 12.6%). The sensitivity of the SEA goodwill to impairment has increased since last year due to the lower growth rates (1.5% compared with 2.25% in 2012) used to discount the future cash flows of SEA. Provisions The Group makes estimates of provisions for existing commitments arising from past events. In estimating these provisions, the Group makes judgements as to the quantity and likelihood of the liability arising. Certain provisions require more judgement than others. In particular warranty provisions and contract loss provisions have to take account of future outcomes arising from past deliveries of products and services. In estimating these provisions, the Group makes use of management experience, precedents and specific contract and customer issues. Accounting policies There were no significant changes in accounting policies applying to the Group for the year ended 30 April 2013. Independent auditor 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. Prior to commencing its audit work, the independent auditor confirmed 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 independent auditor presented its audit plan to the Audit Committee prior to the Audit Committee meeting of March 2013. The plan was reviewed and approved at that meeting with specific areas of focus by the independent auditor discussed in detail for the ensuing audit. The independent auditor (KPMG) was appointed in March 2010 and this financial year end is its fourth annual audit of the Group. The analysis of the auditor’s, KPMG Audit Plc (2012: KPMG Audit Plc), remuneration is shown in the table below. Audit related assurance services include £7,000 in respect of a review of the Group’s payroll processes. Fees payable to KPMG Audit Plc and its 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. 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. Auditor’s remuneration 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 2013 £’000 2012 £’000 19 66 85 6 7 13 98 98 19 63 82 6 3 9 91 91 29 Untitled-1 29 7/30/2013 4:08:48 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Corporate governance report continued 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 the Remuneration & Appointments Committee. 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 a 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 X Cohort plc Board meeting at least eight times per year. X Group Executive Committee meeting at least four times per year, comprising Cohort plc Executive Directors and subsidiary Managing Directors. Subsidiary management X 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, website (www.cohortplc.com) and increasing use of social media, webcasts and email news alerts 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 reviews 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. Anti-bribery The Group has an anti-bribery policy and each of its businesses has implemented that policy and appropriate procedures described by the Bribery Act 2010 to prevent bribery. Each business within the Group reports annually to the Board 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. The Group’s anti-bribery policy is reviewed at least every two years or more often if necessary. The policy was last reviewed and updated in 2013. 30 Untitled-1 30 7/30/2013 4:08:48 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 Directors’ report Overview Business review Corporate governance Financial statements The Directors present their report and the audited financial statements (pages 31 to 75) of Cohort plc for the year ended 30 April 2013. 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 28 to 30 forms part of this report. 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: X Our business X Chairman’s statement X Our strategy X Business review Pages 2 to 3 4 to 5 6 to 7 8 to 24 Information about the use of financial instruments by the Company and its subsidiaries is given in note 19 to the financial statements and on pages 18 to 19 of the Business review. Post balance sheet event On 5 June 2013, the Group’s subsidiary SEA (Group) Limited acquired the freehold of one of its premises in the North Bristol Business Park for a total consideration of £1.9m. There have been no other significant events since the balance sheet date. Dividends The Directors recommend a final dividend of 2.30 pence (2012: 1.90 pence) per 10 pence ordinary share to be paid on 25 September 2013 to ordinary shareholders on the register on 30 August 2013 which, together with the interim dividend of 1.20 pence paid on 6 March 2013, makes a total of 3.50 pence for the year (2012: 2.90 pence). Research and development During the year ended 30 April 2013 the Group expenditure on research and development, both on behalf of customers and the Group’s own private venture expenditure, was £11.8m (2012: £10.4m). Going concern The Group’s financial statements have been prepared on the going concern basis. The reasons for this are set out on page 67 of the Accounting Policies. 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 20. 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 21. Shares held by the Cohort plc Employee Benefit Trust (see note 22) 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 28 to 30. 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 2013. 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 33 to 35. International Financial Reporting Standards (IFRS) The Group and parent company’s reported results for the year ended 30 April 2013 are in accordance with IFRS. 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 below. Table 1: Information in respect of the Directors of the Company Disclosure Report Directors who served throughout the year Remuneration & Appointments Committee report Directors retiring by rotation Remuneration & Appointments Committee report Directors’ biographies Directors’ interests Directors’ share options Board of Directors and Executive Management Remuneration & Appointments Committee report Remuneration & Appointments Committee report Pages 33 to 35 33 to 35 26 to 27 33 to 35 33 to 35 31 Untitled-1 31 7/30/2013 4:08:48 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Directors’ report continued Table 2: Substantial shareholdings and voting rights Percentage of voting rights and issued share capital % Number of ordinary shares 26.15 10,665,718 9.85 8.79 5.11 4,015,827 3,586,838 2,084,580 Nature of holding Direct Direct Direct Direct Donations During the year ended 30 April 2013 the Group made charitable donations of £6,292 (2012: £8,020), mainly in respect of military and local charities. The Group made no political donations during the year (2012: £Nil). Substantial shareholdings The Company has been notified as at 7 June 2013, 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. Our auditor, KPMG Audit Plc, is in the process of transferring its business to KPMG LLP. A resolution to appoint KPMG LLP 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 24 June 2013 and signed on its behalf by: Simon Walther Company Secretary S Carter Schroder Investment Management Hargreave Hale N Prest Supplier payment policy In respect of all of its suppliers, the Group’s policy is: X to agree the terms of payment when contracting with suppliers; X to ensure suppliers are made aware of the terms of payment; and X 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 2013, the trade creditors of the Group represented 35 days (2012: 39 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. 32 Untitled-1 32 7/30/2013 4:08:49 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 Remuneration & Appointments Committee report Overview Business review Corporate governance Financial statements Table 1: Directors’ interests S Carter N Prest A Thomis Sir Robert Walmsley S Walther At 30 April 2013 number of 10p ordinary shares At 30 April 2012 number of 10p ordinary shares 10,665,718 10,665,718 2,084,580 2,084,580 35,230 25,035 25,601 35,230 25,035 25,601 Introduction The Remuneration & Appointments Committee of the Board is responsible for considering Directors’ remuneration packages and makes recommendations to the Board. A bonus of £54,000 was payable to the Executive Directors for the year ended 30 April 2013 (2012: £99,494) as determined by the Remuneration & Appointments Committee on 13 June 2013. Remuneration policy Remuneration packages are designed to be competitive and to both incentivise and reward good performance. Executive Directors receive salary, medical cover, pension contribution, annual bonuses, shares 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 table 1 above. Performance incentives The Group operated a cash bonus scheme and granted share options in the year ended 30 April 2013. Ordinary shares under option granted during the year ended 30 April 2013 and outstanding at 30 April 2013 were as shown in table 2 overleaf. The mid-market price of Cohort plc 10 pence ordinary shares at 30 April 2013 was 130.5 pence (2012: 98.5 pence); the lowest and highest market prices in the year were 88.5 pence and 151.0 pence respectively. For the year ending 30 April 2014, 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 and cash and will be payable up to a maximum of 15% of salary. On 19 June 2013, the Board adopted a Restricted Share Scheme enabling it to award shares in Cohort plc (“Restricted Shares”) as incentive payments to members of the top management group. Full beneficial ownership of Restricted Shares (including voting and dividend rights) will accrue to the recipients in stages over a three-year period from the date of award. Recipients may only sell Restricted Shares with the approval of the Chairman of the Remuneration & Appointments Committee while they remain in employment with the Company. Income tax and National Insurance payable in relation to Restricted Shares will be borne by the Company. In a change to previous years’ incentive schemes, the Executive Directors of Cohort plc will (in addition to the annual bonus described above) be eligible to receive the following based upon achieving annualised profit growth targets: Sir Robert Walmsley KCB Chairman of the Remuneration & Appointments Committee i. up to 20% of salary as a cash bonus; ii. up to 20% of salary as Restricted Shares; and iii. up to 20% of salary as share options (calculated as the number of shares under option at the market price on the day of grant). The above rewards are payable on a linear basis from zero to 20% of salary as the growth in adjusted profit before interest and tax per share over a period starting 1 May 2013 goes from zero to 10%. The Remuneration & Appointments Committee intends that in future years these elements of bonus will be based on annualised profit growth over successively longer intervals, ultimately moving to a rolling four-year period. The Committee considers this long term incentive plan better aligns the objectives of the Executive Directors with the shareholders. No bonuses are payable or share options awardable to the Non-executive Directors. The subsidiary Managing Directors’ incentive schemes for the year ended 30 April 2014 are the same as those of the Executive Directors of Cohort plc, except the annualised profit growth target is based predominantly (60%) upon the respective subsidiary’s profit performance. Cash bonus schemes for other senior management of the subsidiary companies have been established for the year ending 30 April 2014, 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 cash bonus paid or shares received in respect of a reporting period where a material adverse restatement is made. Untitled-1 33 33 7/30/2013 4:08:49 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Remuneration & Appointments Committee report continued Table 2: Directors’ share options At 1 May 2012 or date of appointment Number Granted Number Exercised Number Lapsed/ forfeited Number At 30 April 2013 Number Date from which option can be exercised Date of grant Exercise period Years A Thomis Cohort plc 2006 share option scheme under the Enterprise Management Incentive (EMI) scheme – Option price of £1.23 per share 40,650 Cohort plc 2006 share option scheme (unapproved) – Option price of £0.835 per share 66,995 – Option price of £0.915 per share 76,546 — — — – Option price of £1.165 per share — 75,000 Save as you earn (SAYE) scheme – Option price of £0.97 per share 3,711 — 187,902 75,000 S Walther Cohort plc 2006 share option scheme (approved) – Option price of £0.915 per share 32,786 Cohort plc 2006 share option scheme (unapproved) – Option price of £0.835 per share 55,172 – Option price of £0.915 per share 30,252 — — — – Option price of £1.165 per share — 65,000 Save as you earn (SAYE) scheme – Option price of £0.97 per share 9,278 — 127,488 65,000 — — — — — — — — — — — — — — — — — — — — — — — — 40,650 8 Mar 2006 9 Mar 2009 66,995 23 Jul 2010 24 Jul 2013 76,546 26 Jul 2011 27 Jul 2014 75,000 2 Aug 2012 3 Aug 2015 3,711 27 Jul 2010 1 Sep 2013 262,902 32,786 26 Jul 2011 27 Jul 2014 55,172 23 Jul 2010 24 Jul 2013 30,252 26 Jul 2011 27 Jul 2014 65,000 2 Aug 2012 3 Aug 2015 9,278 27 Jul 2010 1 Sep 2013 192,488 7 7 7 7 7 7 7 7 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. Table 3: Directors’ remuneration Executive Directors A Thomis S Walther Non-executive Directors N Prest S Carter Sir Robert Walmsley Total 34 Untitled-1 34 Salary 2013 £ Bonus 2013 £ Benefits in kind 2013 £ Emoluments 2013 £ Pension contributions 2013 £ Total 2013 £ Total 2012 £ 185,000 150,000 30,000 24,000 419 419 215,419 174,419 1,994 1,300 217,413 175,719 232,179 190,931 60,000 45,000 30,000 — — — — — — 60,000 45,000 30,000 — — — 60,000 45,000 30,000 60,000 45,000 30,000 470,000 54,000 838 524,838 3,294 528,132 558,110 7/30/2013 4:08:49 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 Overview Business review Corporate governance Financial statements 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. The following Director is due to retire by rotation and, being eligible, offers himself for re-election at the forthcoming Annual General Meeting on 18 September 2013: X S Carter. Directors’ remuneration Details of Directors’ remuneration are set out in table 3 opposite. Salaries for Andrew Thomis and Simon Walther have been increased to £191,000 and £154,000 per annum respectively for the year ended 30 April 2014. The fees payable to the Chairman and Non-executive Directors for the year ended 30 April 2014 are the same as for the year ended 30 April 2013. Statement of Directors’ responsibilities in respect of the Annual Report and financial statements 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. 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. By order of the Board on 24 June 2013. 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. Under that law they have elected to prepare both the group and the parent company financial statements in accordance with IFRSs as adopted by the EU and applicable law. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and 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: X select suitable accounting policies and then apply them consistently; X make judgements and estimates that are reasonable and prudent; X state whether they have been prepared in accordance with IFRSs as adopted by the EU; and X 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. Untitled-1 35 35 7/30/2013 4:08:49 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Financial statements for the year ended 30 April 2013 Untitled-1 36 7/30/2013 4:08:51 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 Independent auditor’s report to the members of Cohort plc Overview Business review Corporate governance Financial statements We have audited the financial statements of Cohort plc for the year ended 30 April 2013 set out on pages 38 to 75. 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 35, 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 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 Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate. Opinion on financial statements In our opinion: X 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 2013 and of the group’s profit for the year then ended; X the group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU; X 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 X 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: X 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 X the parent company financial statements are not in agreement with the accounting records and returns; or X certain disclosures of directors’ remuneration specified by law are not made; or X we have not received all the information and explanations we require for our audit. Matthew Lewis (Senior Statutory Auditor) for and on behalf of KPMG Audit Plc, Statutory Auditor Chartered Accountants Arlington Business Park Theale Reading RG7 4SD 24 June 2013 _0_COH_ar13_back_(PS.KC).indd 37 37 7/30/2013 1:23:50 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Consolidated income statement for the year ended 30 April 2013 Revenue Cost of sales Gross profit Administrative expenses Operating profit Comprising: Adjusted operating profit Amortisation of other intangible assets (included in administrative expenses) Income/(charge) on marking forward exchange contracts to market value at the year end (included in cost of sales) Exceptional items (included in administrative expenses) Finance income Finance costs Profit before tax Income tax (charge)/credit Profit for the year attributable to the equity shareholders of the parent Earnings per share Basic Diluted Notes 1 1 1 19 3 5 6 7 4 9 9 2013 £’000 70,866 (47,646) 23,220 (14,837) 2012 £’000 75,408 (53,386) 22,022 (17,828) 8,383 4,194 7,336 (727) 374 1,400 8,383 128 — 8,511 (168) 8,343 Pence 20.76 20.46 6,513 (1,364) (955) — 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 2013 Profit for the year attributable to the equity shareholders of the parent Cash flow hedges – expense taken to equity (net of tax credit) Total comprehensive income for the year attributable to the equity shareholders of the parent Notes 19 2013 £’000 8,343 — 8,343 2012 £’000 4,567 (24) 4,543 38 _0_COH_ar13_back_(PS.KC).indd 38 7/30/2013 1:23:50 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 Consolidated statement of changes in equity for the year ended 30 April 2013 Overview Business review Corporate governance Financial statements Group 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 At 30 April 2012 Profit for the year Equity dividends Own shares acquired Own shares sold Net loss on selling own shares Share-based payments Transfer of share option reserve on vesting of options Share capital £’000 4,079 Share premium account £’000 29,519 — — — — — — — — — — — — Own shares £’000 (302) — — — — — — 4,079 29,519 (302) — — — — — — — — — — — — — — — — (532) 91 12 — — At 30 April 2013 4,079 29,519 (731) Share option reserve £’000 555 — — — — 353 (205) 703 — — — — — 292 (424) 571 Hedge reserve £’000 24 — (24) (24) — — — — — — — — — — — — Retained earnings £’000 14,380 4,567 — 4,567 (1,051) — 205 18,101 8,343 (1,247) — — (12) — 424 Total £’000 48,255 4,567 (24) 4,543 (1,051) 353 — 52,100 8,343 (1,247) (532) 91 — 292 — 25,609 59,047 _0_COH_ar13_back_(PS.KC).indd 39 39 7/30/2013 1:23:50 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Company statement of changes in equity for the year ended 30 April 2013 Company 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 At 1 May 2012 Profit for the year Equity dividends Own shares acquired Own shares sold Net loss on selling own shares Share-based payments Transfer of share option reserve on vesting of options Share capital £’000 4,079 — — — — — — Share premium account £’000 29,519 — — — — — — Own shares £’000 (302) — — — — — — 4,079 29,519 (302) — — — — — — — — — — — — — — — — (532) 91 12 — — At 30 April 2013 4,079 29,519 (731) The reserves of the Group and the Company are described in note 23. Share option reserve £’000 555 — — — — 353 (205) 703 — — — — — 292 (424) 571 Retained earnings £’000 4,211 1,801 — 1,801 (1,051) — 13 4,974 2,553 (1,247) — — (12) — 43 Total £’000 38,062 1,801 — 1,801 (1,051) 353 (192) 38,973 2,553 (1,247) (532) 91 — 292 (381) 6,311 39,749 40 _0_COH_ar13_back_(PS.KC).indd 40 7/30/2013 1:23:51 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 Consolidated and Company statements of financial position as at 30 April 2013 Overview Business review Corporate governance Financial statements 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 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 Total equity attributable to the equity shareholders of the parent Group 2013 £’000 Notes Company 2012 £’000 2013 £’000 2012 £’000 10 10 11 12 18 13 14 15 19 16 17 16 18 17 20 22 21 19 31,395 64 6,892 — 479 31,395 791 7,252 — 157 — — 4 — — 11 42,692 42,825 7 7 38,830 39,595 42,703 42,843 228 19,385 16,426 36,039 74,869 (13,075) (1,101) (39) — (911) 215 20,468 14,140 34,823 74,418 (16,492) (1,086) (413) — (3,318) — 90 6,017 6,107 — 80 4,003 4,083 48,810 46,926 (365) (31) — (450) (4) — (8,665) (7,499) — — (15,126) (21,309) (9,061) (7,953) — (696) — (696) — (953) (56) (1,009) — — — — — — — — (15,822) (22,318) (9,061) (7,953) 59,047 52,100 39,749 38,973 4,079 29,519 (731) 571 — 25,609 59,047 4,079 29,519 (302) 703 — 18,101 52,100 4,079 29,519 (731) 571 — 6,311 39,749 4,079 29,519 (302) 703 — 4,974 38,973 The financial statements on pages 38 to 75 were approved by the Board of Directors and authorised for issue on 24 June 2013 and are signed on its behalf by: Andrew Thomis Chief Executive Simon Walther Finance Director Company number 05684823 _0_COH_ar13_back_(PS.KC).indd 41 41 7/30/2013 1:23:51 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Consolidated and Company cash flow statements for the year ended 30 April 2013 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 Net cash (used in)/received from investing activities Cash flow from financing activities Dividends paid Repayment of borrowings Purchase of own shares Sale of own shares Net cash used in financing activities Net increase/(decrease) in cash and cash equivalents Represented by: Cash and cash equivalents and short term borrowings brought forward Cash flow Exchange Notes 24a 11 8 16 22 22 Group Company 2013 £’000 4,090 128 3 (256) (125) (1,247) — (532) 91 2012 £’000 8,424 77 2 (141) (62) (1,051) (3,444) — — 2013 £’000 2,410 128 — (2) 126 (1,247) — (532) 91 (1,688) (4,495) (1,688) 2,277 3,867 848 14,140 2,277 9 10,177 3,867 96 (3,496) 848 — 2012 £’000 2,183 69 — (3) 66 (1,051) (3,000) — — (4,051) (1,802) (1,694) (1,802) — Cash and cash equivalents and short term borrowings carried forward 24b 16,426 14,140 (2,648) (3,496) 42 _0_COH_ar13_back_(PS.KC).indd 42 7/30/2013 1:23:52 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 Notes to the financial statements for the year ended 30 April 2013 Overview Business review Corporate governance Financial statements 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 2 to 7) and in the Business review (pages 8 to 24). Business segment information about these subsidiaries is presented below: MASS £’000 SCS £’000 SEA £’000 Eliminations £’000 Group £’000 2013 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 Exceptional item Amortisation of other intangible assets Operating profit Finance income (net of cost) Profit before tax Income tax charge Profit after tax 24,843 14,098 31,925 — 113 — 24,843 14,211 31,925 — (113) (113) 5,033 — 5,033 — 1,400 (727) 5,706 — 5,706 517 — 517 — — — 517 — 517 3,118 — 3,118 374 — — 3,492 — 3,492 — — — — — — — — — 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 Current tax liabilities Deferred tax liability Central £’000 2 9 Eliminations (873) MASS £’000 53 229 SCS £’000 20 71 SEA £’000 181 301 6,528 12,500 64 3,154 — — 17,696 18,895 — 19,092 3,154 36,591 (3,745) (3,115) (8,351) 1,186 (14,025) Consolidated total liabilities (3,745) (3,115) (8,351) _0_COH_ar13_back_(PS.KC).indd 43 70,866 — 70,866 8,668 (1,332) 7,336 374 1,400 (727) 8,383 128 8,511 (168) 8,343 Group £’000 256 610 26,505 31,395 64 479 16,426 74,869 (1,101) (696) (15,822) 43 7/30/2013 1:23:52 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Notes to the financial statements continued for the year ended 30 April 2013 1. Segmental analysis continued 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 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 MASS £’000 SCS £’000 SEA £’000 Eliminations £’000 Group £’000 26,117 17,508 31,783 2 26,119 4,831 — 4,831 — (1,219) 3,612 — 3,612 53 17,561 1,320 — 1,320 — — 1,320 8 1,328 14 31,797 1,723 — 1,723 (955) (145) 623 (66) 557 — (69) (69) — — — — — — — — Central £’000 3 12 Eliminations (1,386) MASS £’000 5 228 SCS £’000 49 61 SEA £’000 84 398 7,699 12,500 791 4,054 — — 17,568 18,895 — 20,990 4,054 36,463 (6,449) (4,503) (10,247) 920 (20,279) 75,408 — 75,408 7,874 (1,361) 6,513 (955) (1,364) 4,194 (38) 4,156 411 4,567 Group £’000 141 699 27,935 31,395 791 157 14,140 74,418 (1,086) (953) (22,318) 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. Consolidated total liabilities (6,449) (4,503) (10,247) 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 10. 44 _0_COH_ar13_back_(PS.KC).indd 44 7/30/2013 1:23:52 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 Overview Business review Corporate governance Financial statements 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 Group 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 2013 £’000 2012 £’000 60,215 64,740 5,666 4,253 732 6,085 4,274 309 70,866 75,408 2013 £’000 59,312 5,138 4,333 2,083 2012 £’000 61,003 7,562 2,763 4,080 70,866 75,408 Major customers Revenue from major customers included in the Group’s business segments for the year ended 30 April 2013 is as follows: MASS SCS SEA 2013 UK MOD £’000 10,816 6,877 11,234 28,927 2013 Customer A £’000 2013 Customer B £’000 2013 Customer C £’000 2,712 278 7,280 10,270 — — 2,412 2,412 2,838 91 — 2,929 2012 UK MOD £’000 9,966 9,167 11,606 30,739 2012 Customer A £’000 2012 Customer B £’000 2012 Customer C £’000 2,474 526 6,402 9,402 — — 4,019 4,019 1,553 96 — 1,649 2. Employee benefit expense (including Directors) Wages and salaries Social security costs Defined contribution pension plan costs Share-based payments _0_COH_ar13_back_(PS.KC).indd 45 2013 £’000 2012 £’000 22,992 23,505 2,613 1,998 292 2,644 1,924 353 27,895 28,426 45 7/30/2013 1:23:53 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Notes to the financial statements continued for the year ended 30 April 2013 2. Employee benefit expense (including Directors) continued Average number of employees (including Directors) Other operational Managed services Total operational Administration and support 2013 Number 2012 Number 316 77 393 120 513 331 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 33 to 35. 3. Exceptional items The net exceptional income comprises: Release of earn out provision in respect of the acquisition of Abacus EW Consultancy Limited All exceptional items are in respect of continuing operations. The tax charge in respect of exceptional items is £Nil (2012: £Nil). 4. Profit for the year The profit for the year has been arrived at after charging/(crediting): Net foreign exchange (gains)/losses 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. 5. Finance income Interest on bank deposits Other interest receivable All finance income is in respect of continuing operations. Notes 19 11 10 2 21 2013 £’000 1,400 2012 £’000 — 2013 £’000 (420) 11,800 610 727 21,688 27,603 292 2013 £’000 128 — 128 2012 £’000 857 10,398 699 1,364 22,963 28,073 353 2012 £’000 69 8 77 46 _0_COH_ar13_back_(PS.KC).indd 46 7/30/2013 1:23:53 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 6. Finance costs Bank and short term interest All finance costs are in respect of continuing operations. 7. Income tax charge/(credit) Corporation tax: in respect of this year Corporation tax: in respect of prior years Deferred tax: in respect of this year Overview Business review Corporate governance Financial statements 2013 £’000 — 2012 £’000 115 2013 £’000 1,158 (411) 747 (579) 168 2012 £’000 1,268 (1,001) 267 (678) (411) The corporation tax is calculated at 23.92% (2012: 25.83%) of the estimated assessable profit for the year, as disclosed below. The current tax in respect of the year ended 30 April 2013 includes £Nil charge (2012: £Nil charge) in respect of exceptional items. The deferred tax includes a credit of £175,000 in respect of amortisation of other intangible assets (2012: £370,000) and a charge of £90,000 (2012: £240,000 credit) in respect of marking forward exchange contracts to market at the year end. The deferred tax is further explained in note 18. The tax charge for the year is reconciled to the profit per the Consolidated income statement for the year ended 30 April 2013 as follows: Profit before tax on continuing operations Tax at the UK corporation tax rate of 23.92% (2012: 25.83%) 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 24% to 23% (2012: 26% to 24%) Tax effect of recognising unutilised trading losses at SEA Tax effect of prior year R&D tax credits Tax charge/(credit) for the year 2013 £’000 8,511 2,036 30 (677) (335) (31) (444) (411) 168 2012 £’000 4,156 1,074 118 (534) — (68) — (1,001) (411) The UK corporation tax rate for the year ended 30 April is calculated at 23.92%, based upon eleven months at 24% and one month at 23%. In addition to the amount charged to the income statement, the following amounts relating to tax have been recognised for the year ended 30 April 2013 directly in other comprehensive income: Deferred tax credit arising on income and expenses recognised in other comprehensive income: Revaluations of financial instruments treated as cash flow hedges 2013 £’000 2012 £’000 — (9) _0_COH_ar13_back_(PS.KC).indd 47 47 7/30/2013 1:23:53 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Notes to the financial statements continued for the year ended 30 April 2013 8. Dividends Amounts recognised as distributions to equity holders in the period: Final dividend in respect of the year ended 30 April 2012 at 1.90 pence per ordinary share (2011: 1.60 pence per ordinary share) Interim dividend in respect of the year ended 30 April 2013 at 1.20 pence per ordinary share (2012: 1.00 pence per ordinary share) Proposed final dividend for the year ended 30 April 2013 at 2.30 pence per ordinary share (2012: 1.90 pence per ordinary share) 2013 £’000 2012 £’000 766 481 1,247 647 404 1,051 922 768 The proposed final dividend is subject to approval by shareholders at the AGM to be held on 18 September 2013 and has not been included as a liability in these financial statements. If approved, this dividend will be paid on 25 September 2013 to shareholders on the register as at 30 August 2013. The Cohort plc Employee Benefit Trust, which holds ordinary shares in Cohort plc, representing 1.73% (2012: 0.89%) 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. 9. Earnings per share The earnings per share are calculated as follows: Basic earnings (net profit attributable to equity holders of Cohort plc) Share options Diluted earnings 2013 2012 Weighted average number of shares Number 40,195,916 582,251 40,778,167 Earnings per share Pence Weighted average number of shares Number 20.76 40,425,342 — 70,022 20.46 40,495,364 Earnings £’000 8,343 — 8,343 Earnings £’000 4,567 — 4,567 Earnings per share Pence 11.30 — 11.28 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 2013 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: 2013 2012 Basic earnings (Income)/charge on marking forward exchange contracts to market value at the year end (net of income tax of £90,000; 2012: £240,000) Exceptional items (net of income tax of £Nil; 2012: £Nil) Amortisation of other intangible assets (net of income tax of £175,000; 2012: £370,000) Adjusted earnings Share options Diluted adjusted earnings Notes 19 3 10 Weighted average number of shares Number 40,195,916 — — — 40,195,916 582,251 40,778,167 Earnings £’000 8,343 (284) (1,400) 552 7,211 — 7,211 Earnings per share Pence Weighted average number of shares Number 20.76 40,425,342 — — — — — — 17.94 40,425,342 — 70,022 Earnings £’000 4,567 715 — 994 6,276 — Earnings per share Pence 11.30 — — — 15.52 — 17.68 40,495,364 6,276 15.50 The adjusted earnings are in respect of continuing operations. 48 _0_COH_ar13_back_(PS.KC).indd 48 7/30/2013 1:23:54 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 Overview Business review Corporate governance Financial statements 10. Goodwill and other intangible assets Cost At 1 May 2011 At 1 May 2012 At 30 April 2013 Amortisation At 1 May 2011 Charge for the year ended 30 April 2012 At 1 May 2012 Charge for the year ended 30 April 2013 At 30 April 2013 Net book value At 30 April 2013 At 30 April 2012 Goodwill Other intangible assets SEA £’000 MASS £’000 Group £’000 SEA £’000 MASS £’000 Group £’000 18,895 18,895 18,895 12,500 12,500 12,500 31,395 31,395 31,395 — — — — — — — — — — — — — — — 18,895 18,895 12,500 12,500 31,395 31,395 1,160 1,160 1,160 1,015 145 1,160 — 1,160 — — 4,340 4,340 4,340 2,330 1,219 3,549 727 4,276 64 791 5,500 5,500 5,500 3,345 1,364 4,709 727 5,436 64 791 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 biannually 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 1.50% (2012: 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 14.1% (2012: 8.9%). 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 2013 in respect of either MASS or SEA. The goodwill of SEA is more sensitive with no impairment at the Group’s WACC of 14.1% but is impaired if the Group’s WACC increases to 26.7%. The other intangible assets arose on the acquisition of the subsidiaries and are disclosed above. _0_COH_ar13_back_(PS.KC).indd 49 49 7/30/2013 1:23:54 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Notes to the financial statements continued for the year ended 30 April 2013 10. Goodwill and other intangible assets continued The other intangible assets are amortised over the estimated lives of the specific other intangible asset, as follows: 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 Other intangible assets £’000 Estimated life Years Remaining period of amortisation at 30 April 2013 Years 4 7 3 2 3 — 0.25 0.10 — 0.10 1,060 280 1,340 1,446 1,074 480 3,000 4,340 The SEA other intangible asset which is now fully amortised was in respect of contracts acquired on the acquisition of SEA. 11. Property, plant and equipment Land and buildings £’000 Fixtures and equipment £’000 6,714 — — 6,714 48 — 6,762 616 110 — 726 109 — 835 5,927 5,988 4,654 141 (288) 4,507 208 (278) 4,437 2,932 589 (278) 3,243 501 (272) 3,472 965 1,264 Total £’000 11,368 141 (288) 11,221 256 (278) 11,199 3,548 699 (278) 3,969 610 (272) 4,307 6,892 7,252 Group Cost At 1 May 2011 Additions Disposals At 1 May 2012 Additions Disposals At 30 April 2013 Depreciation At 1 May 2011 Charge in the year Eliminated on disposal At 1 May 2012 Charge in the year Eliminated on disposal At 30 April 2013 Net book value At 30 April 2013 At 30 April 2012 50 _0_COH_ar13_back_(PS.KC).indd 50 7/30/2013 1:23:54 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 Overview Business review Corporate governance Financial statements 11. Property, plant and equipment continued The Company’s property, plant and equipment was £4,000 at 30 April 2013 (2012: £11,000). 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 2013 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. 12. Investment in subsidiaries and joint ventures Subsidiary undertakings Joint ventures Group 2013 £’000 — — — 2012 £’000 — — — Company 2013 £’000 2012 £’000 42,692 42,825 — — 42,692 42,825 A list of the significant investments in joint ventures and subsidiaries is as follows: Name of company Directly owned Country of registration Type of shares Proportion of shareholding and voting rights held Nature of business Systems Consultants Services Limited (SCS) MASS Limited SEA (Group) Limited (SEA) England England England Ordinary Ordinary Ordinary 100% Technical consultancy 100% Holding company of MASS Consultants Limited 100% Holding company of Systems Engineering & Assessment Limited, Beckington Castle Limited and various dormant subsidiaries Digital Millennium Map LLP (DMM) Advanced Geospatial Solutions Limited (AGS) England England Ordinary Ordinary 25% 50% 2D digital mapping – in administration Formerly 3D mapping technology (business of AGS sold 1 August 2009) Held through a subsidiary MASS Consultants Limited (MASS) England Ordinary 100% Electronic warfare, managed services, secure communications and IT support services Systems Engineering & Assessment Limited England Ordinary 100% Deliverer of systems engineering, software and Beckington Castle Limited England Ordinary 100% Abacus EW Consultancy Limited England Ordinary 100% electronic engineering services and solutions to defence, space and transport Property company holding freehold of Beckington Castle Electronic warfare training services and software applications 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. _0_COH_ar13_back_(PS.KC).indd 51 51 7/30/2013 1:23:55 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Notes to the financial statements continued for the year ended 30 April 2013 12. Investment in subsidiaries and joint ventures continued For information, the performance of DMM for the year ended 30 April 2013 was as follows: Unrecognised share of profit Revenues Expenses Profit/(loss) Total assets Total liabilities Year ended 30 April 2013 £’000 Cumulative to 30 April 2013 £’000 24 98 (2) 96 2013 £’000 17 (5) 87 3,018 (3,628) (610) 2012 £’000 17 (6) 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 2013 was as follows: Unrecognised share of (loss)/profit Revenues Expenses Loss Total assets Total liabilities Year ended 30 April 2013 £’000 Cumulative to 30 April 2013 £’000 (3) — (3) (3) 2013 £’000 — 24 901 (2,059) (1,158) 2012 £’000 — (1,117) (1,114) AGS sold its business on 1 August 2009. The Group retains its investment in AGS and received no further consideration in respect of the business disposal in the year ended 30 April 2013 (2012: £13,743, disclosed in the adjusted operating profit of the Group). The loss for the year ended 30 April 2013 was the tax charge in respect of prior year royalty income. Company The Company’s investments in subsidiaries are as follows: MASS £’000 SCS £’000 SEA £’000 Total £’000 14,515 1,723 26,480 42,718 117 (77) 81 (58) 103 (59) 301 (194) 14,555 1,746 26,524 42,825 101 (118) 63 (105) 84 (158) 248 (381) 14,538 1,704 26,450 42,692 At 1 May 2011 Share-based payments Vested in year At 1 May 2012 Share-based payments Vested in year At 30 April 2013 52 _0_COH_ar13_back_(PS.KC).indd 52 7/30/2013 1:23:55 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 13. Inventories Finished goods The inventory at 30 April 2013 is after a stock provision of £19,000 (2012: £141,000). The inventory has been pledged to secure the Group’s banking facilities. 14. Trade and other receivables Trade receivables Allowance for doubtful debts Amounts recoverable on contracts Prepayments and accrued income Overview Business review Corporate governance Financial statements 2013 £’000 228 2012 £’000 215 Group 2013 £’000 Company 2012 £’000 2013 £’000 2012 £’000 10,598 12,688 — (78) 10,598 7,078 1,709 19,385 12,610 6,218 1,640 20,468 — — — — 90 90 — — — — 80 80 The average credit period taken on sales of goods is 42 days (2012: 51 days). Of the trade receivables balance, £3.5m was considered overdue at 30 April 2013 (2012: £2.4m) reflecting high levels of invoicing in March 2013, especially at SEA. 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 2013 is the UK MOD, with a balance outstanding of £3.0m (2012: £5.1m). Other customers who represent more than 5% of the total balance of trade receivables include: Customer A Customer B 2013 £m 1.3 1.4 2012 £m 0.9 1.5 Trade receivables include £2.6m (2012: £2.2m) 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 _0_COH_ar13_back_(PS.KC).indd 53 2013 £’000 3,085 226 210 3,521 2012 £’000 1,197 445 752 2,394 53 7/30/2013 1:23:55 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Notes to the financial statements continued for the year ended 30 April 2013 14. Trade and other receivables continued Movement in the allowance for 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 15. 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 2013 £’000 78 — (10) (48) (20) — Group Company 2013 £’000 757 4,284 — 1,849 6,185 — 2012 £’000 3,092 4,875 2 2,209 6,314 — 13,075 16,492 2013 £’000 — 21 2 82 260 — 365 2012 £’000 108 78 (27) (5) (76) 78 2012 £’000 — 45 2 74 329 — 450 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 35 days (2012: 39 days). The Group has financial risk management policies in place to ensure that all payables are paid within the pre-agreed credit terms (see Risk Management, pages 22 to 24). 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 (2012: £0.5m) denominated in foreign currency. 16. Bank borrowings Bank overdrafts Bank loans All borrowings are secured using the fixed and floating assets of the Group. Group 2013 £’000 — — — 2012 £’000 — — — Company 2013 £’000 8,665 — 8,665 2012 £’000 7,499 — 7,499 54 _0_COH_ar13_back_(PS.KC).indd 54 7/30/2013 1:23:56 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 16. Bank borrowings continued 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 Overview Business review Corporate governance Financial statements Group 2013 £’000 2012 £’000 — — — — — — — — — — — — Company 2013 £’000 8,665 — — 8,665 (8,665) — 2013 % — — 2012 £’000 7,499 — — 7,499 (7,499) — 2012 % — 4.50 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% (2012: 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. At 30 April 2013, 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 2013 of £16.4m are held with the following banks: Royal Bank of Scotland Plc Lloyds TSB Bank plc Santander UK plc Clydesdale Bank Barclays Bank Plc Moody’s credit rating of bank as at 2 May 2013 A3 A2 A2 A2 A2 2013 £’000 2012 £’000 10,409 10,137 3,017 2,000 1,000 — 16,426 — 3,000 — 1,003 14,140 _0_COH_ar13_back_(PS.KC).indd 55 55 7/30/2013 1:23:56 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Notes to the financial statements continued for the year ended 30 April 2013 17. Provisions Group At 1 May 2011 Charged/(credited) to the income statement Utilised At 1 May 2012 Charged/(credited) to the income statement Utilised At 30 April 2013 Provisions due less than one year Provisions due greater than one year At 30 April 2013 Provisions due less than one year Provisions due greater than one year At 30 April 2012 Abacus EW earn out £’000 1,400 — — 1,400 (1,400) — — — — — 1,400 — 1,400 Withdrawal from AGS £’000 Restructuring £’000 Onerous lease commitment £’000 Warranty £’000 22 (6) — 16 (16) — — — — — 16 — 16 62 — (62) — — — — — — — — — — 170 20 (67) 123 (50) (73) — — — — 67 56 123 289 50 (32) 307 68 (245) 130 130 — 130 307 — 307 Other contract related provisions £’000 1,499 677 (648) 1,528 (267) (480) 781 781 — 781 1,528 — 1,528 Total £’000 3,442 741 (809) 3,374 (1,665) (798) 911 911 — 911 3,318 56 3,374 The earn out provision in respect of the acquisition of Abacus EW was recognised at 14 May 2010. Following conclusion of the earn out period on 13 May 2013, the provision was no longer required and was released in full in the year ended 30 April 2013. The income was recognised as an exceptional item in the Consolidated income statement (see note 3). The provision in respect of the withdrawal from AGS was to cover existing commitments related to the period prior to the sale of the AGS business in August 2009. These commitments have now expired. The onerous lease commitment (including a provision for dilapidations) in respect of MASS’s obligations on its former operating property in St Neots, which it vacated in August 2011, expired in April 2013 following settlement with the landlord. The remainder of this provision was released in full and is reported within administration costs in the income statement. 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 respect of actual spend and the remaining obligations to be fulfilled. 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. Other contract related provisions also includes contract loss provisions in respect of contracts where the estimated cost at completion exceeds the total expected revenue of the contract. 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. 56 _0_COH_ar13_back_(PS.KC).indd 56 7/30/2013 1:23:56 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 Overview Business review Corporate governance Financial statements 18. Deferred tax At 1 May 2011 Credit/(charge) to the income statement Credit to equity Effect of change in tax rate in the income statement At 1 May 2012 Credit/(charge) to the income statement Effect of change in tax rate in the income statement At 30 April 2013 Accelerated tax depreciation £’000 Other intangible assets £’000 (337) 51 — 23 (263) 40 11 (212) (560) 354 — 16 (190) 173 2 (15) Revaluation of building £’000 (554) 12 — 42 (500) 10 21 (469) Other short-term timing differences £’000 Tax losses £’000 Derivatives £’000 118 (55) — (5) 58 (9) (3) 46 — — — — — 424 — 424 (150) 248 9 (8) 99 (90) — 9 Group £’000 (1,483) 610 9 68 (796) 548 31 (217) The deferred tax credit of £579,000 is a combination of the credit to the income statement (£548,000) and the effect of the change in tax rate from 24% to 23% on those items recognised in the income statement (£31,000 credit). The credit is disclosed as £579,000 (2012: £678,000 credit) in respect of the current year. 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 2013 £’000 479 (696) (217) 2012 £’000 157 (953) (796) The Group has recognised a deferred tax asset of £0.4m (2012: £Nil) for unutilised trading losses within its subsidiary SEA of £1.8m (2012: £1.9m). These are now considered recoverable in the foreseeable future which they were not in 2012. These tax losses can all be carried forward indefinitely. A deferred tax liability in respect of the revaluation of a 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. A deferred tax asset in respect of the share-based payments has not been recognised as any deferred tax asset is considered immaterial. The Company’s deferred tax balance at 30 April 2013 was an asset of £7,000 (2012: £7,000) being £3,000 (2012: £5,000) in respect of other short term timing differences and accelerated tax depreciation of £4,000 (2012: £2,000). On 21 March 2012, the Chancellor announced the reduction in the main rate of UK corporation tax to 23% with effect from 1 April 2013. This change became substantively enacted on 3 July 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 on 20 March 2013 to further reduce the main rate of corporation tax by 3% to 20% by 1 April 2015, 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 23% to 20%, if these applied to the deferred tax balance at 30 April 2013, would be to further reduce the net tax liability by £28,000. _0_COH_ar13_back_(PS.KC).indd 57 57 7/30/2013 1:23:57 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Notes to the financial statements continued for the year ended 30 April 2013 19. Derivative financial instruments The Group has derivative financial instruments as follows: Assets Foreign currency forward contracts Liabilities Foreign currency forward contracts 2013 £’000 — 2012 £’000 — (39) (413) The changes in marking the outstanding foreign currency forward contracts to fair value are credited or charged to the Consolidated income statement as “income/(charge) 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 credit (charge in 2012) to the Consolidated income statement for the year ended 30 April 2013 was as follows: Foreign currency forward contracts 2013 £’000 374 2012 £’000 (955) 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: 2013 At forward exchange rates At 1 May 2012 Transferred to the income statement in respect of matured contracts New contracts At 30 April 2013 Fair value adjustment At 30 April 2013 at closing spot rate Buy £’000 Sell €’000 Buy £’000 Sell US$’000 11,568 (2,980) 1,381 9,969 9,840 (2,708) 1,343 8,475 (51) 8,424 — (339) 819 480 12 492 — (539) 1,302 763 The total fair value adjustment is £39,000 credit (2012: £413,000) and the change in the forward exchange fair values for the year ended 30 April 2013 is £374,000 income (30 April 2012: £955,000 charge) which is included in the operating profit of the Group as a credit. 2012 At forward exchange rates Buy £’000 Sell €’000 Sell £’000 Buy €’000 Sell £’000 Buy US$’000 Sell €’000 Buy US$’000 At 1 May 2011 10,341 12,107 — — (543) (873) (1,699) (2,380) (14,032) 13,531 (16,242) 15,703 11,771 (11,771) 9,840 11,568 (413) 9,427 — — — 13,753 (13,753) — 543 — — — — 873 — — 1,699 2,380 — — — — — — 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 58 _0_COH_ar13_back_(PS.KC).indd 58 7/30/2013 1:23:57 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 19. Derivative financial instruments continued Currency derivatives continued The maturity of the outstanding contracts was as follows: At 30 April 2013 Within one year One to two years Greater than two years At 30 April 2013 at closing spot rate At 30 April 2012 Within one year One to two years Greater than two years Overview Business review Corporate governance Financial statements Buy £’000 5,792 2,645 38 8,475 Buy £’000 8,394 680 766 Sell €’000 6,813 3,111 45 9,969 Sell €’000 9,868 800 900 At 30 April 2012 at closing spot rate 9,840 11,568 The following significant exchange rates applied at 30 April: Buy £’000 480 — — 480 Sell £’000 — — — — Sell US$’000 763 — — 763 Buy US$’000 — — — — 2013 2012 US $ Euro US $ Euro 0.6455 0.8450 0.6149 0.8149 Sensitivity analysis A 10% strengthening of £ sterling against the above currencies at 30 April 2013 would have had no effect on profits (2012: decrease of £4,000), 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 in the prior year. The interest rate swap was settled in full during the prior year following 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: Nominal value of swap Fair value of swap Derivative financial asset The movement in the hedge reserve was as follows: At 1 May 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 and 30 April 2013 _0_COH_ar13_back_(PS.KC).indd 59 2013 £’000 — — — 2012 £’000 — — — £’000 24 (33) 9 — 59 7/30/2013 1:23:57 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Notes to the financial statements continued for the year ended 30 April 2013 20. 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 2011 Share options exercised At 30 April 2012 Share options exercised At 30 April 2013 2013 Number 2012 Number 40,786,788 40,786,788 Number 40,786,788 — 40,786,788 — 40,786,788 The Company has one class of ordinary shares which carry no right to fixed income. 21. 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 33 to 35. The following options were outstanding at 30 April 2013: Scheme and grant date Cohort plc 2006 share option scheme 8 Mar 2006 19 Feb 2007 11 Jul 2008 5 Aug 2009 23 Jul 2010 27 Oct 2010 26 Jul 2011 24 Jan 2012 2 Aug 2012 Exercise price £ Vesting date Expiry date Vested 30 April 2013 Not vested Total Vested 30 April 2012 Not vested 1.230 8 Mar 2009 8 Mar 2016 1.770 20 Feb 2010 19 Feb 2017 1.890 12 Jul 2011 11 Jul 2018 1.715 6 Aug 2012 5 Aug 2019 0.835 24 Jul 2013 23 Jul 2020 0.770 28 Oct 2013 27 Oct 2020 0.915 27 Jul 2014 26 Jul 2021 1.100 25 Jan 2015 24 Jan 2022 1.165 3 Aug 2015 2 Aug 2022 89,430 99,941 7,929 43,178 — — — — — — — — — 619,010 64,935 866,186 51,000 89,430 99,941 7,929 43,178 619,010 64,935 866,186 51,000 522,000 522,000 89,430 99,941 17,091 — — — — — — — — — 51,028 724,887 64,935 950,686 68,000 — Total 89,430 99,941 17,091 51,028 724,887 64,935 950,686 68,000 — Save As You Earn (SAYE) scheme 26 Jan 2006 12 Feb 2008 18 Aug 2009 27 July 2010 08 Aug 2011 15 Aug 2012 1.450 1.330 1.380 0.970 0.885 1.190 240,478 2,123,131 2,363,609 206,462 1,859,536 2,065,998 — 102,559 526 — — — — — 40,334 229,688 235,600 97,866 — 47,428 102,559 40,860 229,688 235,600 97,866 — — — — — — 112,663 125,810 275,921 272,448 — 47,428 112,663 125,810 275,921 272,448 — 103,085 603,488 706,573 47,428 786,842 834,270 343,563 2,726,619 3,070,182 253,890 2,646,378 2,900,268 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. 60 _0_COH_ar13_back_(PS.KC).indd 60 7/30/2013 1:23:58 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 21. 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 Overview Business review Corporate governance Financial statements 2013 2012 Weighted average exercise price £ 1.00 1.17 1.02 0.91 1.41 1.02 1.49 Options 3,015,013 1,365,737 (1,279,888) — (200,594) 2,900,268 253,890 Weighted average exercise price £ 1.28 0.92 1.52 — 1.31 1.00 1.53 Options 2,900,268 643,400 (252,051) (100,367) (121,068) 3,070,182 343,563 The weighted average share price at the date of exercise for share options exercised during the year was £0.91 (2012: £Nil). The options outstanding at 30 April 2013 had a weighted average exercise price of £1.02 (2012: £1.00) and a weighted average remaining contractual life of six years (2012: seven years). The exercised options in the year were all satisfied by shares from the Cohort plc Employee Benefit Trust (see note 22) and no new shares were issued (see note 20). In the year ended 30 April 2013, options were granted as follows: 540,000 on 2 August 2012 and 103,400 on 15 August 2012. The exercise prices of the options granted on those dates were £1.165 and £1.190 respectively. 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. 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 2013 £1.22 £1.02 37% 0.96%–5.75% 6.5%–10.0% 0.26%–1.96% 2012 £0.92 £1.00 20%–45% 0.96%–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 £292,000 (2012: £353,000) 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. _0_COH_ar13_back_(PS.KC).indd 61 61 7/30/2013 1:23:58 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Notes to the financial statements continued for the year ended 30 April 2013 22. Own shares Balance at 1 May 2011 Acquired in the year Balance at 30 April 2012 Acquired in the year Sold in the year Loss on shares sold in the year Balance at 30 April 2013 £’000 302 — 302 532 (91) (12) 731 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 (see note 21) and restricted share schemes (see Remuneration & Appointments Committee report on pages 33 to 35). The number of ordinary shares in Cohort plc held by the Employee Benefit Trust at 30 April 2013 was 706,079 (2012: 361,446). The ordinary shares in Cohort plc acquired in the year by the Employee Benefit Trust were as follows: 7 August 2012 3 October 2012 29 October 2012 16 November 2012 Number 100,000 100,000 200,000 45,000 445,000 Cost £’000 118 120 242 52 532 Ordinary shares in Cohort plc were sold by the Employee Benefit Trust for the purposes of satisfying the exercise of share options as follows: Exercise price per share Pence 83.5 88.5 91.5 97.0 119.0 133.0 138.0 Number of shares sold Proceeds £’000 (Loss)/gain on sale of shares £’000 51,000 2,262 35,000 3,298 336 5,052 3,419 100,367 42 2 32 3 1 7 4 91 (10) — (4) — — 1 1 (12) The market valuation of the ordinary shares in Cohort plc held by the Employee Benefit Trust at 30 April 2013 was £921,433 (2012: £356,024). The cost of operating the Employee Benefit Trust during the year ended 30 April 2013 was £11,605 (2012: £5,720) and this cost is included within the “administrative expenses” of the Consolidated income statement. 62 _0_COH_ar13_back_(PS.KC).indd 62 7/30/2013 1:23:59 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 Overview Business review Corporate governance Financial statements 23. Reserves The Group (consolidated) and Company statements of changes in equity are disclosed as primary statements on pages 39 and 40. Below is a description of the nature and purpose of the individual reserves: X Share capital represents the nominal value of shared issued, including those issued to the Employee Benefit Trust (see note 20). X 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. X Own shares held by the Group represent shares in Cohort plc. All the shares are held by the Employee Benefit Trust (see note 22). X Share option reserve represents the cumulative share-based payment charged to reserves less the transfer to retained earnings on vesting of options. X Hedge reserve represents the cumulative change in fair value of interest rate swaps net of tax charged to reserves (see note 19). X Retained earnings include the realised gains and losses made by the Group and the Company. 24. Cash flow a. Net cash from operating activities Profit for the year Adjustments for: Income tax expense/(credit) Depreciation of property, plant and equipment Amortisation of other intangible assets Net finance (income)/cost Derivative financial instruments Share-based payment Decrease in provisions Operating cash flows before movements in working capital (Increase)/decrease in inventories Decrease/(increase) in receivables (Decrease)/increase in payables Cash generated by operations Income taxes paid Interest paid Group Company 2013 £’000 8,343 168 610 727 (128) (374) 292 (2,463) 7,175 (13) 1,083 (3,092) (2,022) 5,153 (1,063) — 2012 £’000 4,567 (411) 699 1,364 38 955 353 (68) 2013 £’000 2,553 2012 £’000 1,801 29 9 — (128) — 43 — 2 12 — (20) — 53 — 7,497 2,506 1,848 141 (129) 1,236 1,248 8,745 (206) (115) — (10) (86) (96) — 335 49 384 2,410 2,232 — — — (49) Net cash inflow from operating activities 4,090 8,424 2,410 2,183 _0_COH_ar13_back_(PS.KC).indd 63 63 7/30/2013 1:23:59 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Notes to the financial statements continued for the year ended 30 April 2013 24. Cash flow continued b. Cash and cash equivalents at 30 April 2013 Cash and bank Short term deposits Total cash and cash equivalents Bank loans Total debt Net funds Group Company 2013 £’000 10,409 6,017 16,426 — — 2012 £’000 10,137 4,003 14,140 — — 16,426 14,140 2013 £’000 — 6,017 6,017 (8,665) (8,665) (2,648) 2012 £’000 — 4,003 4,003 (7,499) (7,499) (3,496) 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 approximates to their fair value. 25. Operating lease arrangements Group Minimum lease payments under operating leases recognised as an expense in the year: – land and buildings – other 2013 £’000 773 191 964 2012 £’000 773 172 945 At 30 April 2013 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 2013 £’000 2012 £’000 529 1,591 420 2,540 96 75 — 171 2,711 82 960 2,090 3,132 17 164 — 181 3,313 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) ceased in April 2013 and the remaining onerous lease commitment in respect of this lease was released to the income statement in the year ended 30 April 2013. 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. None of the significant operating leases entered into by the Group have any renewal or purchase options. 64 _0_COH_ar13_back_(PS.KC).indd 64 7/30/2013 1:23:59 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 Overview Business review Corporate governance Financial statements 25. Operating lease arrangements continued Company Minimum lease payments under operating leases recognised as an expense in the year: – land and buildings 2013 £’000 2012 £’000 38 38 At 30 April 2013 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 26. Commitments There was £42,262 of capital commitments at 30 April 2013 (2012: £1,200). 2013 £’000 2012 £’000 — — 27. Pension commitments The Group makes contributions to defined contribution stakeholder pension schemes. The contributions for the year of £1,998,000 (2012: £1,924,000) were charged to the income statement. Contributions outstanding at 30 April 2013 were £77,000 (2012: £162,000). 28. Contingent liabilities At 30 April 2013 the Group has in place an advance payment guarantee of £175,000 (2012: £175,000) with RBS. This guarantee is in respect of SCS’s leased property, Arlington House. 29. 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: 2013 2012 Transactions between the Group and its joint ventures are disclosed below: Advanced Geospatial Solutions (AGS) 2013 2012 Digital Millennium Map LLP (DMM) 2013 2012 Management fees received from subsidiaries £’000 1,300 1,300 Rent paid to subsidiaries £’000 38 40 Dividends received from subsidiaries £’000 2,500 1,850 Group relief received from subsidiaries £’000 — — Purchases £’000 Sales £’000 Changes in loans/current account/ sales ledger £’000 Investment in year £’000 — — — — — — — — — — — (23) 3 (21) — — _0_COH_ar13_back_(PS.KC).indd 65 65 7/30/2013 1:24:00 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Notes to the financial statements continued for the year ended 30 April 2013 29. Related party transactions continued 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. The relationships are described as follows: X 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. X 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. During the year ended 30 April 2013, the Directors of Cohort plc received dividends from the Company as follows: S Carter N Prest A Thomis Sir Robert Walmsley S Walther 2013 £ 330,637 64,622 1,092 776 794 2012 £ 277,309 54,199 916 651 666 397,921 333,741 Further details of the remuneration of the Directors are set out in the Remuneration & Appointments Committee report (pages 33 to 35). The aggregate remuneration (excluding share option costs) of the key management of the Group was as follows: Salary (including any allowances, benefits and employer’s NI) Employers pension contribution Long term benefits Termination payments or benefits (including employer’s NI) The key management of the Group is the Board of Cohort plc plus each subsidiary’s Managing Director. 2013 £ 883,836 79,917 — — 2012 £ 967,988 78,143 — — 963,753 1,046,131 66 _0_COH_ar13_back_(PS.KC).indd 66 7/30/2013 1:24:00 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 Accounting policies Overview Business review Corporate governance Financial statements 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 16 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 2013. 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 24. The financial position of the Company, its cash flows, liquidity position and borrowing facilities are also described in the Business review on pages 17 to 19. In addition, the Business 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 2013. Subsidiaries acquired during the year are consolidated from the date of acquisition, using the purchase method (see business combinations below). Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into 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 2013 which have had no significant impact on the amounts reported in these financial statements by the Group. These include IFRS 10 ‘Consolidated Financial Statements’, IFRS 11 ‘Joint Arrangements’, IFRS 12 ‘Disclosure of Interests in Other Entities’ and IFRS 13 ‘Fair Value Measurement’. 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. 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 Consolidated income statement as an exceptional item in accordance with IFRS 3 (Revised). _0_COH_ar13_back_(PS.KC).indd 67 67 7/30/2013 1:24:00 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Accounting policies continued Business combinations continued 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 forecast 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 and are disclosed separately in deriving the Group’s adjusted operating profit. 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. 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. 68 _0_COH_ar13_back_(PS.KC).indd 68 7/30/2013 1:24:00 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 Overview Business review Corporate governance Financial statements 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 opposite. 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 biannually. 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 biannually, 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 biannually 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. _0_COH_ar13_back_(PS.KC).indd 69 69 7/30/2013 1:24:00 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Accounting policies continued 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 of which are 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. 70 _0_COH_ar13_back_(PS.KC).indd 70 7/30/2013 1:24:01 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 Overview Business review Corporate governance Financial statements Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) which arises 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: X an asset is created that can be identified (such as software, product and new processes) and is technically and commercially feasible; X 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 X 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. _0_COH_ar13_back_(PS.KC).indd 71 71 7/30/2013 1:24:01 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Accounting policies continued 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: X separate proposal for each element; X each element was subject to separate negotiations; and X 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. 72 _0_COH_ar13_back_(PS.KC).indd 72 7/30/2013 1:24:01 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 Overview Business review Corporate governance Financial statements 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. _0_COH_ar13_back_(PS.KC).indd 73 73 7/30/2013 1:24:01 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Accounting policies continued 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”. 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. 1. Critical accounting judgements Revenue recognition The revenue recognition policy of the Group is described in detail on page 72. 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”: X 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. X These contracts generally are not capable of segmentation and the percentage of completion method is applied to the contract as a whole. X In advance of completion of key stages (or deliverables) of contracts, there is additional uncertainty in the estimated total contract costs and accordingly this additional uncertainty is reflected in increased estimates of the total contract costs, i.e. a contingency is added. X 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. 74 _0_COH_ar13_back_(PS.KC).indd 74 7/30/2013 1:24:02 PM www.cohortplc.com Cohort plc Annual Report and Accounts 2013 Overview Business review Corporate governance Financial statements Critical accounting judgements and key sources of estimation uncertainty continued 2. Key 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 biannually 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. 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. 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 an impairment provision being required. 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 10. Standards and interpretations issued at 30 April 2013 not applied to these financial statements A number of other standard amendments and International Financial Reporting Interpretation Committee (IFRIC Interpretations) have been issued and are yet to be applied by the Group. There are three proposed changes to international standards proposed by the International Accounting Standards Board. These have an effective date of implementation of on or after 1 January 2014. 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; and ii. Leases. The full impact for the Group has not been assessed at this stage. _0_COH_ar13_back_(PS.KC).indd 75 75 7/30/2013 1:24:02 PM Cohort plc Annual Report and Accounts 2013 www.cohortplc.com Shareholder information, financial calendar and advisers Advisers 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 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: Capita Registrars The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Financial calendar Annual General Meeting X 18 September 2013 Final dividend payable X 25 September 2013 Expected announcements of results for the year ending 30 April 2014: Preliminary half year announcement X December 2013 Preliminary full year announcement X June 2014 Registered office Cohort plc Arlington House 1025 Arlington Business Park Theale Reading RG7 4SA 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. Registered company number of Cohort plc 05684823 Cohort plc is a company registered in England and Wales Facsimile: +44 (0) 20 8639 2220 Email: 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. Daily share price listings X The Financial Times – AIM, Aerospace and Defence X The Times – Engineering X Daily Telegraph – AIM section X London Evening Standard – AIM section 76 _0_COH_ar13_back_(PS.KC).indd 76 7/30/2013 1:24:02 PM Photography credits Images on the front cover and page 12 of this report are courtesy of Lockheed Martin. This document contains public sector information licensed under the Open Government Licence v1.0. _0_COH_ar13_cover_(PS.KC).indd 6 7/30/2013 1:23:23 PM 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 3 Arlington House 1025 Arlington Business Park Theale Reading RG7 4SA www.cohortplc.com _0_COH_ar13_cover_(PS.KC).indd 1 7/30/2013 1:23:23 PM 

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