TIDMCOB
RNS Number : 3196G
Cobham plc
01 March 2018
1 MARCH 2018
Legal Entity Identifier: 213800A41R9NL49E5632
PRELIMINARY RESULTS FOR THE YEARED 31 DECEMBER 2017
Encouraging first year of turnaround: increased focus and
reduced risk with agreed divestment, and a more resilient Balance
Sheet.
Note Statutory results Underlying
results(2)
GBPm 2017 2016 2017 2016
--------------------------- ----- ---------- ---------- -------- --------
Order intake 1,916.6 2,084.0 1,916.6 2,084.0
Revenue 2,052.5 1,943.9 2,052.5 1,943.9
Organic revenue
growth/(decline) 1% (8)%
Operating profit/(loss) 104.1 (779.1) 210.3 225.0
Operating margin 10.2% 11.6%
Earnings per share (1) 3.5p (45.9)p 6.0p 7.8p
Operating cash conversion (3) 103% 81%
Free cash flow 140.6 50.7
Net debt (4) 383.5 1,028.2
Net debt/EBITDA 1.3x 3.0x
Full year dividend
per share - 2.03p - 2.03p
=========================== ===== ========== ========== ======== ========
Underlying results are presented to assist with the
understanding of the Group's performance trends. These measures are
defined in the notes on page 3 and reconciled to GAAP measures in
this statement on page 23.
-- Revenue 6% higher, benefiting from favourable currency
translation. Organic(5) revenue growth of 1%
-- Underlying operating profit of GBP210.3m, slightly ahead of expectations
-- Progressing delivery on the onerous contracts provided for in
2016, including KC-46, although risks and challenges remain
-- Strong free cash flow generation as a result of management
focus, later phasing of 2016 onerous contract cash flows, lower
capital expenditure and GBP27m of advance customer receipts
-- More resilient Balance Sheet with year-end gearing ratio at
1.3x and US$545m revolving credit facilities refinanced for five
years or over
-- Agreed divestment of AvComm and Wireless test and measurement
for US$455m in cash; transaction will increase focus, reduce risk
and further strengthen Balance Sheet
-- Unchanged expectations for 2018 before divestment and currency translation
David Lockwood, Cobham Chief Executive Officer, said:
"We have completed an encouraging first year of Cobham's
turnaround with improvements to customer engagement, transparency
and control. I have seen early signs of progress against our
operational priorities, while risks and challenges remain. I
continue to have confidence in our medium term prospects."
ENQUIRIES
Cobham plc
Julian Wais, Director
of Investor Relations +44 (0)1202 857998
MHP Communications
Reg Hoare/Tim Rowntree/Nessyah
Hart +44 (0)20 3128 8100
PRELIMINARY RESULTS PRESENTATION INCLUDING WEBCAST AND DIAL-IN
DETAILS
There will be a preliminary results presentation at 9.30am UK
time on Thursday, 1 March 2018, with a live webcast on the Cobham
website (www.cobhaminvestors.com). The webcast will be available on
the website for subsequent viewing. There will also be a live
dial-in facility available which can be accessed in the UK and
internationally on +44 (0) 20 3003 2666, confirmation code Cobham
and in the US/Canada on +1 646 843 4608, confirmation code Cobham.
The published Annual Report will be available as a download file on
www.cobhaminvestors.com from 21 March 2018.
A PDF of this preliminary announcement is available for download
from www.cobhaminvestors.com/reports-and-presentations/2017.
The following notes apply throughout these preliminary
results:
1. EPS for the prior period has been restated to reflect the impact of the 2017 Rights Issue.
2. To assist with the understanding of earnings trends, the
Group has included within its published financial statements
non-GAAP alternative performance measures including underlying
operating profit and underlying profit. The non-GAAP measures used
are not defined terms under IFRS and therefore may not be
comparable to similar measures used by other companies. They are
not intended to be a substitute for, or superior to, GAAP
measures.
Management uses underlying measures to assess the operating
performance of the Group, having adjusted for specific items as
defined below. They form the basis of internal management accounts
and are used for decision making including capital allocation and a
subset also forms the basis of internal incentive arrangements. By
using underlying measures in segmental reporting, this further
ensures readers of the financial statements can recognise how
incentive performance is targeted. Underlying measures are also
presented in this report because the Directors believe they provide
additional useful information to shareholders on comparative trends
over time. Finally, this presentation allows for separate
disclosure and specific narrative to be included concerning the
adjusting items; this helps to ensure performance in any one year
can be more clearly understood by the user of the financial
statements.
All underlying measures include the operational results of all
businesses including those held for sale until the point of sale.
These definitions are applied consistently on a year to year
basis.
Underlying operating profit has been defined as operating profit
from continuing operations excluding the impacts of business
acquisition and divestment related activity and prior periods'
business restructuring costs. Also excluded are changes in the
marking to market of non-hedge accounted derivative financial
instruments, gains and losses arising on dividend related foreign
exchange contracts and other items deemed by the Directors to be of
a non-operating nature including the impairment of intangible
assets.
Underlying profit before taxation is defined as underlying
operating profit less net underlying finance costs, which exclude
business acquisition and divestment related items and specific
finance costs.
Further details of specific adjusting items can be found in note
2 on page 32.
A reconciliation of the statutory results to the respective
underlying measures is shown on page 23.
3. Free cash flow and operating cash flow are considered to
provide a consistent measure of the operating cash flow of the
Group's business. These alternative performance measures are used
in internal management accounts and for decision making, including
capital allocation. In addition to underlying profit measures,
underlying cash conversion is also used for internal incentive
arrangements, and presenting this information allows users of the
financial statements to better understand the way in which
performance is targeted.
Free cash flow is defined as net cash from operating activities
plus dividends received from joint ventures, less cash flow related
to the purchase or disposal of property, plant, equipment and
intangible assets but excluding payments relating to business
acquisition and divestment related activities. Operating cash flow
is free cash flow before payment of tax, interest and restructuring
costs. Operating cash conversion is defined as operating cash flow
as a percentage of underlying operating profit, excluding the share
of post-tax results of joint ventures and associates.
A reconciliation of underlying operating profit to operating
cash flow is shown on page 21.
4. Net debt is defined as the net of borrowings less cash and
cash equivalents at the balance sheet date.
5. Organic revenue is defined as revenue stated at constant
translation exchange rates, excluding the incremental effect of
acquisitions and divestments.
6. Private Venture (PV or company funded R&D - Research and
Development) measures exclude Aviation Services, where, due to the
nature of its business, there is no R&D activity. Total PV
investment excludes bid costs, which were previously included in
the total, with 2016 restated.
CHIEF EXECUTIVE OFFICER'S REVIEW
Overview
We are reporting financial results for 2017 which are slightly
ahead of expectations, with Group underlying trading profit of
GBP210.3m and organic revenue growth of 1%.
We delivered much improved cash generation in 2017, with
operating cash conversion of 103%, and net debt of GBP383.5m at the
year end. The Balance Sheet is now stronger than a year ago,
reflecting the May 2017 Rights Issue and the benefit of our cash
generation. The cash generation has been achieved from a
combination of management focus and a benefit from some deferred
cash phasing against the 2016 onerous contract charges and lower
capital expenditure. There was also some favourable working capital
timing, including GBP27m of advance customer receipts.
During my first year, I have been impressed with the Group's
technology and capabilities and its people and I have also had
regular contact with many of our customers. This has reinforced my
early conviction that Cobham has a number of high quality
businesses with differentiated technology and know-how and leading
positions in a number of attractive markets. Taken together, this
gives me confidence in the Group's medium term prospects.
Encouraging first year of our turnaround plan
Last year we identified a number of significant opportunities
for improvement. These included improved execution, better
first-pass quality, a reduction in organisational complexity and
duplication and improved capital allocation decision making. We
continue to believe that these should enable Cobham to deliver
underlying operating margins 2-3% higher over the medium term, all
else being equal. I also identified three operational priorities
comprising (1) customer focus, (2) leadership and simplification
and (3) control and execution. It was clear at the time that the
improvement process would be iterative and would take at least two
years before we saw the benefits, while business units were also
likely to respond at different speeds, giving potential for an
uneven recovery.
Operational environment
Driven by heightened security threats, we are beginning to see
an increase in global defence budgets overall, although these are
not without political risk. In addition, the US National Defense
Strategy document, published in early 2018, makes technology
modernisation one of its main themes, with favourable implications
for Cobham. Commercial aerospace markets continue to see overall
volume growth, although there remain areas of commercial market
weakness, including maritime and flying services in Australia.
Across all our markets customers demand value-for-money, driving
the need to be competitive on price; this alongside flawless
execution and enhanced capability. It is to prosper in this
environment that we are pursuing our turnaround strategy.
Progress against operational priorities
We have made progress on the three operational priorities which
I originally set out and these will continue to be a focus for
2018. The key achievements are set out below:
Customer Focus
There has been emphasis on customers and enhancing our delivery
to them, including:
-- Significantly increasing the level of CEO and senior
management engagement with customers, supplementing business unit
level engagement. Customer score cards are reviewed by the Group
Executive every month and we are prioritising our on-time delivery
performance;
-- Improving co-ordination between our businesses to deliver
greater customer-facing collaboration and participation in joint
customer presentations;
-- Increasing training on root cause problem solving as well as
on lean manufacturing. This will enhance our ability to deliver to
customers.
Leadership and Simplification
We are simplifying processes and procedures which will provide
more time to focus on customers, including:
-- A further gathering of the top 200 senior managers in January
2018, to reinforce the growing sense of purpose and collaboration
and to explore how we remove internal inefficiencies that hinder
delivery;
-- The new streamlined and updated Group policy framework is
being rolled out to enable clear governance;
-- Monthly operating reviews at the business unit level enabling
a more constructive and forward-looking dialogue with our leaders.
The revised strategic planning cycle is more closely aligned to
budget setting, bringing together two linked processes.
I have also strengthened the management team, focusing on
capability gaps, including the appointments of:
-- Air Marshall Greg Bagwell as Strategic Advisor;
-- Chris Shaw as Chief Operations Officer;
-- Paul Kahn as President of the Communications and Connectivity Sector; and
-- Gillian Duggan as Executive Vice President Human Resources and Communications.
These individuals bring strong operational track records, with
considerable energy and ideas. I will continue to selectively
strengthen the broader management team.
Control and Execution
Underpinning our performance expectations is a need to improve
our ability to forecast and enhance operational controls,
including:
-- Strengthening the supply chain and quality management
functions, consolidating them under one leader, to drive improved
performance and standardisation across the Group;
-- Making significant investments to improve manufacturing
performance and appointing the first dedicated manager to drive a
Group-wide manufacturing strategy;
-- Definition and clarity over the minimum standards of
financial control for all our businesses - delineating those that
are mandatory and those that are expected.
In conclusion, we are beginning to see early signs of progress
across the business. I am proud of how most of Cobham's employees
have responded to the challenge and, in particular, their
demonstration of real commitment to customers. However, while we
have many improvement actions in-train and we have started to build
the foundations of future success, there is much that is
work-in-progress and a lot left to do.
Update on onerous contracts and other 2016 charges
We are progressing delivery on our contracts against which we
took significant charges in 2016, including on the largest of them,
the KC-46 US tanker programme. KC-46 qualification is ongoing as
part of the overarching US Federal Aviation Administration
certification process. The work is being carried out according to
the terms of the original development contract signed in 2011,
which contains some significant terms including relating to delayed
performance. The Centreline Drogue System (CDS) qualification is
nearing completion and the Wing Aerial Refuelling Pod (WARP)
qualification will be ongoing into the second half of 2018.
We continue to support delivery of the first 18 KC-46 production
aircraft to the US Air Force during 2018. A number of challenges
remain, and the focus continues to be on achieving improvements in
the supply chain and quality management.
On other programmes, we have taken some additional charges at
the 2017 year end within Group underlying operating profit but
overall our estimates for the 2016 onerous contract provisions are
still appropriate. 2018 will be a critical year for delivering
against these contracts.
We have also adjusted our assessment of the legal,
environmental, warranty and other regulatory matters charged to
specific adjusting items in 2016, and this has given rise to a
credit adjustment of GBP8m, relating to a number of items which
have been resolved within their original cost estimates. The credit
adjustment is excluded from underlying operating profit consistent
with the treatment of the original provisions.
Balance Sheet
Our year end gearing ratio was 1.3x (31 December 2016: 3.0x)
with the improved position due primarily to the May 2017 Rights
Issue, which raised GBP497m net of expenses. This was enhanced by a
greater level of focus on our cash position, enabling us to deliver
cash conversion of 103% in the year. We will continue the focus on
cash.
In December 2017 we successfully completed a scheduled
refinancing of revolving credit facilities maturing in October
2018, replacing these at a similar cost with US$545m of new bank
facilities with maturities of five years or over, thus removing
refinancing risk from the Group turnaround.
The expected completion of the AvComm and Wireless test and
measurement divestment will add resilience to the Balance Sheet,
and reduce the net debt/EBITDA ratio by approximately 1.0x on a
proforma basis. It is our intention to take a conservative approach
to the capital structure in 2018, as we strive to retire the
remaining major risks and exposures. The Board therefore intends to
use the net divestment proceeds, in addition to existing cash, to
pay down approximately GBP440m of debt. This will include repaying
private placement debt (senior notes), giving rise to estimated
accelerated interest costs (make-whole payments) of up to GBP30m.
The debt repayment will de-risk the Group's Balance Sheet with the
future interest expense reduced by approximately GBP18m per full
year.
One year ago the Board set a net debt/EBITDA threshold of 1.5x
in response to the immediate need to strengthen the Balance Sheet.
This was necessary to give our customers, employees and
shareholders confidence in the financial position of the Group. We
will review Cobham's Balance Sheet structure as the risk profile of
the Group reduces and we will set out a capital allocation policy
at the end of 2018.
Strategy
Our three operational priorities are only the first step in
delivering an improvement in Cobham's fortunes. We announced at our
2017 interim results that Cobham is best placed to generate value
when it focuses on its defence, aerospace and space markets. We can
add value where we serve markets we know with technology and
capabilities, where we have real depth in skill and
understanding.
We announced in February 2018 that we had agreed to divest the
AvComm and Wireless test and measurement businesses for US$455m
cash consideration, following an auction, with the businesses
comprising approximately 8% of Group revenue in 2017. We are
retaining the distributed antenna systems business, which has been
managed within the Wireless business unit. On completion of the
divestment, we will have increased the coherency of the portfolio,
reducing risk by exiting businesses with little commonality with
the Group. Completion is subject to US anti-trust clearance and
other customary conditions, and is anticipated within the first
half of 2018.
Our strategy is focused on organic growth and is aligned to our
operational improvement priorities, as it will succeed when we
combine our high value-add technology and capabilities with
improved execution and delivery. Future growth will be driven by
increasing the number of products and services we supply to our
customers, as well as selling more of our technology and
capabilities into attractive geographies. We will avoid higher
risk, unrelated diversification.
Technology investment
A technology focused company like Cobham needs to fund Private
Venture(6) (PV or company funded R&D - Research and
Development) investment. This keeps our products and technology
fresh, by delivering the cost-savings customers want and the
capability enhancements they need. We are moving Cobham towards an
appropriate methodology to ensure we are consistently allocating
this investment for optimal return. In 2017, PV investment,
excluding bid costs, was GBP121.9m (2016: GBP123.9m), representing
7.2% of revenue (2016: 7.8%).
In the Communications and Connectivity Sector, we are continuing
the development of the Aviator 'S' SATCOM product for Airbus single
aisle and long range aircraft families, as well as the new digital
Radio and Audio Integrated Management System for the Airbus
A320neo. The Mission Systems Sector has continued to invest in next
generation On-Board Oxygen Generating Systems (OBOGS). The OBOGS
permits production of aircraft oxygen during flight, with the new
product securing a launch customer. The Advanced Electronics
Solutions Sector has been investing in gallium arsenide (GaAs) and
gallium nitride (GaN) technology for monolithic microwave
integrated circuits, providing a competitive advantage in missile
and electronic warfare markets, with increasing participation on a
number of military platforms.
Dividend
It was previously announced that the Board would not announce a
dividend in respect of the financial year 2017. The Board
recognises the importance of dividend payments to shareholders and
will review its dividend policy as the turnaround progresses and
the risk profile improves, seeking to resume a dividend when it is
appropriate to do so.
Financial Conduct Authority
We previously reported that the Financial Conduct Authority had
notified us that it had appointed investigators to ascertain
whether the company had breached the Listing Rules and the
Disclosure and Transparency Rules between April 2016 and February
2017, and the Market Abuse Regulations between July 2016 and
February 2017. It is currently not possible to predict what the
outcome of this investigation will be.
Outlook
The Group is one year into its turnaround programme. Whilst
early progress is encouraging, there remains much to do in order to
improve operational execution and efficiency and return the Group
to strength. Risks and challenges remain in our business and the
necessary actions to complete the turnaround are expected to take
time and have associated costs. Overall for the Group, the Board's
expectations for 2018 remain unchanged with a range of potential
outcomes. Reported performance for 2018 will be affected by the
timing of completion of the AvComm and Wireless test and
measurement divestment, as well as foreign exchange rates impacting
the translation of overseas business results. The Board has
confidence in the medium term outlook for the Group.
David Lockwood, OBE
Chief Executive Officer
BOARD
The Board has undergone a number of changes during the year,
consistent with the rolling succession plan agreed by the Board at
the time of the Rights Issue in early 2017. Cobham previously
announced in July 2017 the appointment of John McAdam as a
Non-executive Director and Senior Independent Director, replacing
Jonathan Flint who retired from the Board in August 2017.
In addition, Cobham previously announced the appointment of René
Médori as a Non-executive Director from 1 January 2018. He has
joined the Board's Audit and Risk Committees, and will become
Chairman of the Audit Committee in April 2018 when Alan Semple will
retire from the Board. Cobham also previously announced the
appointment of General Norton Schwartz (retired) as a Non-executive
Director from 1 January 2018. He has joined the Board's
Remuneration and Risk Committees.
Cobham also today announces that General Michael Hagee (retired)
and Birgit Nørgaard will retire from the Board in April 2018.
General Hagee will remain on the Cobham Advanced Electronic
Solutions Sector Board, to which he was appointed in the first half
of 2017.
FINANCIAL OVERVIEW OF THE PERIOD
Order intake was GBP1,916.6m (2016: GBP2,084.0m). Order intake
in 2016 benefited from an initial net AUS$719m order booked
relating to the significant, repriced and multi-year Qantas
contract in the Aviation Services Sector. Excluding this, and at
constant currency, 2017 order intake was 8% higher. The Group's
book-to-bill was 0.93x (2016: 1.07x); excluding Aviation Services
book-to-bill was 1.06x (2016: 0.99x).
Group revenue increased to GBP2,052.5m (2016: GBP1,943.9m),
driven by favourable currency translation and organic revenue
growth of 1%. Organic revenue was driven by growth of 6% (GBP25.5m)
in the Mission Systems Sector and 6% (GBP31.0m) in the Advanced
Electronic Solutions Sector, partly offset by a 3% (GBP22.7m)
organic decline in the Communications and Connectivity Sector and a
2% (GBP9.0m) decline in the Aviation Services Sector.
The Group's statutory operating profit was GBP104.1m (2016:
GBP779.1m loss). The improved statutory operating profit included
lower amortisation of intangible assets arising on business
combinations of GBP138.9m (2016: GBP161.2m), favourable movements
in non-hedge accounted derivative financial instruments of GBP28.9m
(2016: GBP39.3m adverse) and lower net impairment of goodwill and
other intangible assets of GBP1.7m (2016: GBP573.8m). There was
also a credit adjustment of GBP1.4m (2016: GBP33.3m charge)
relating to revisions to the carrying value of other assets, a
credit adjustment of GBP8.0m (2016: GBP24.4m charge) relating to
adjustments to the assessment of legal and other provisions and a
credit adjustment relating to other business acquisition and
divestment related items of GBP0.8m (2016: GBP1.7m charge). In
addition, in 2016 the Group took charges of GBP179.1m against
contract loss provisions, including GBP150.0m against the KC-46 US
tanker programme. Partially offsetting these items were amounts
relating to prior period restructuring of GBP4.7m (2016: GBP8.7m
credit) and the lower underlying operating profit.
Group underlying operating profit was GBP210.3m (2016:
GBP225.0m), including the impact of a favourable currency
translation movement of GBP13.0m. Excluding the currency impact,
there was a reduction of GBP27.7m, with the most significant
movements as follows:
-- A GBP19.1m reduction in the Aviation Services Sector at
constant currency which primarily reflected the first year of the
repriced Qantas contract, as well as the wind-down and
demobilisation of helicopter contracts in Trinidad and Tobago and
Qatar. There were also GBP3.2m of non-recurring charges, relating
to the settlement of legacy issues largely provided for in the
first half;
-- An GBP8.8m reduction in the Mission Systems Sector at
constant currency which was adversely impacted by costs incurred on
additional resources to improve quality and supply chain
management, as well as some additional charges taken against
development programmes. This was partially offset by increased
revenue including from actuation control subsystems.
The Group's net finance charge was GBP37.2m (2016: GBP68.8m -
including GBP19.0m of make-whole payments relating to the pay down
of senior notes). Included within the underlying net finance charge
was a net expense on cash and debt holdings of GBP34.9m (2016:
GBP48.0m). This benefited from lower average net debt following the
2016 and 2017 Rights Issues, as well as from the Group's free cash
flow generation. The non-cash finance charge from pension schemes
was GBP2.3m (2016: GBP1.8m).
The Group's overall tax credit was GBP11.9m (2016: GBP52.8m), in
part reflecting an improvement over prior year Group profit after
specific adjusting items. The Group's underlying tax rate increased
to 23.0% (2016: 22.6%) from an underlying tax charge of GBP39.8m
(2016: GBP39.6m). The increased rate was primarily a result of the
geographic profit mix in the year.
Basic EPS was 3.5p (2016: (45.9)p), including the restatement of
the prior year figure following the 2017 Rights Issue. Underlying
EPS was 23% lower at 6.0p (2016: 7.8p, restated), primarily due to
the higher average share count following the 2017 Rights Issue.
Operating cash flow, which is stated after net capital
expenditure, but before interest and tax payments was GBP217.6m
(2016: GBP181.8m). Operating cash conversion was 103% (2016: 81%).
This was driven by a cash inflow from working capital, including
improvements due to advance customer receipts of GBP27m. Cash
conversion was also assisted by lower capital expenditure of
GBP79.8m (2016: GBP92.2m), before proceeds from asset disposals of
GBP5.1m (2016: GBP6.1m). Operating cash flow included GBP66.6m of
net utilisation against the charges taken at 31 December 2016.
Free cash flow is stated after net interest payments of GBP34.9m
(2016: GBP71.2m - including GBP19.0m of make-whole payments on
senior notes paid down) and tax payments of GBP32.2m (2016:
GBP20.1m). There were also payments relating to prior periods'
restructuring programmes of GBP9.9m (2016: GBP39.8m).
Below free cash flow, there was a net inflow of GBP497.2m
primarily relating to the proceeds of the Rights Issue completed in
the first half (2016: GBP492.9m - primarily Rights Issue).
The Group's net debt decreased to GBP383.5m (31 December 2016:
GBP1,028.2m). Consistent with the Group's borrowing agreements, the
net debt/EBITDA gearing ratio was 1.3x at the year end (31 December
2016: 3.0x). Interest cover improved to 6.8x (2016: 5.1x).
In December 2017, the Group completed a scheduled refinancing of
its bank facilities maturing in October 2018, with new facilities
totaling US$545m and maturities of five years or over at a similar
cost.
SECTOR REVIEW
Restatement of Segmental Results
As previously announced, Cobham has changed its segmental
reporting of underlying operating profit to eliminate the profit
previously reported within the 'Head Office and Other' line. The
2017 underlying operating profit numbers and the 2016 comparatives
include these changes in the following Sector Review.
To facilitate analysis, a five year history incorporating this
change was published in December 2017 at
www.cobhaminvestors.com/reports-and-presentations/2017.
Cobham Communications and Connectivity
Provides high performance equipment and solutions to enable
reliable connectivity across a range of demanding environments in
aerospace, avionics, satellite and radio and mobile connectivity
markets.
GBPm 2016 FX Translation Organic(5) 2017
------------------- ------ --------------- ----------- ------
Order intake 647.3 30.6 37.3 715.2
Revenue 690.2 33.2 (22.7) 700.7
Operating profit* 58.2 6.1 4.7 69.0
Operating margin* 8.4% 9.8%
Order book 255.1 266.8
=================== ====== =============== =========== ======
(5) See page 3 for definition of organic revenue
*Underlying measures are defined in note 2 on page 3
Organic revenue was 3% lower, principally impacted by lower
volumes in the AvComm and SATCOM business units. This was partially
offset by higher organic revenue in the Antenna Systems and
Wireless business units.
Within AvComm revenue was impacted by the previously announced
transition between master distributors in the first half, albeit
with a half-on-half improvement. The SATCOM business had lower
revenue in its maritime markets, with the environment continuing to
be challenging. Revenue in Antenna Systems was driven by increased
antenna shipments on US defence/security programmes and, in
Wireless, revenue reflected increased shipments of 5G related test
and measurement products, including the TM/E-500 family.
In February 2018 the agreed divestment of the Sector's AvComm
and Wireless test and measurement businesses to Viavi Solutions
Inc. was announced for US$455m in cash, payable on completion. In
2017, the businesses recorded aggregate revenue of GBP169.6m and
underlying operating profit of GBP13.6m (a GBP24.8m contribution
before the allocation of central charges and GBP2.4m of
restructuring costs). The transaction is expected to complete
within the first half of 2018.
Underlying operating profit increased by GBP4.7m after the
impact from exchange rates, reflecting improved sales volumes and a
restructured cost base in the Wireless business as well as higher
sales volumes in Antenna Systems. In 2016, Wireless profit was also
reduced by GBP9m due to accounting adjustments related to
operational issues. These movements were partially offset by lower
trading in the AvComm and SATCOM businesses, as well as increased
PV investment in next generation aerospace SATCOM products.
The Sector has won some significant awards during the year,
including the conformal antenna suite and an initial order for the
anti-jam GPS system on the next generation South Korean K-FX
fighter aircraft programme. In addition, the Sector has received
initial orders for its Flightline radio for an upgrade of the
Boeing T-38 trainer aircraft in the US, with further orders
expected. Having also completed the development of its next
generation panel mounted RT-7000 radio, the Sector made initial
shipments in the first half, with a strong pipeline of orders for
the product from government and commercial aviation customers.
Cobham Mission Systems
Provides safety and survival systems for extreme environments,
nose-to-tail aerial refuelling systems and wing-tip to wing-tip
mission systems for fast jets, transport aircraft and rotorcraft.
The Sector's primary focus is serving niche areas of the defence
and security market globally, which is supplemented with an
expanding presence in commercial aviation markets by applying its
differentiated technology, particularly in pneumatic and actuation
systems.
GBPm 2016 FX Translation Divestment Organic(5) 2017
-------------- ------ --------------- ----------- ----------- ------
Order intake 381.6 14.0 (9.9) 132.5 518.2
Revenue 386.4 14.8 (7.7) 25.5 419.0
Operating
profit* 60.0 2.5 1.5 (8.8) 55.2
Operating
margin* 15.5% 13.2%
Order book 649.1 709.1
============== ====== =============== =========== =========== ======
(5) See page 3 for definition of organic revenue
*Underlying measures are defined in note 2 on page 3
The 6% increase in organic revenue reflected continuing growth
in actuation control subsystems for air-to-ground munitions, with a
significant production increase during the year. Aerial refuelling
revenue increased on the KC-46 and V-22 Aerial Refuelling System
development programmes, partially offset by lower Airbus A400M
revenue. There were also increased shipments of the Sector's long
life Air Separation Module for the Boeing 737 NG, which reduces the
flammability of its fuel tanks, with a further airline customer
signed in the year.
Underlying operating profit decreased by GBP8.8m after the
impact from exchange rates and the 2016 divestment. Underlying
operating profit was adversely impacted by costs incurred on
additional resource to improve quality and supply chain management,
as well as some additional charges taken against development
programmes. However, there was a benefit from increased volumes,
including from actuation control subsystems.
A comprehensive business change programme is underway in the
Sector's Wimborne, UK facility, where a number of development
programmes are moving into production. The programme, which
commenced in 2017, comprises all areas of the business, including a
reorganisation of the shop floor to accommodate a ramp up in
production rate, a streamlining of business processes, and an
investment in continuous improvement activities. There is also
renewed focus on subsystems and components which have the potential
to provide critical technology differentiation, with a view to
achieving the required rates of delivery, quality and
reliability.
Order intake increased on the prior year in part through strong
demand for actuation control subsystems for air-to-ground and laser
guided munitions, with multi-year contracts secured from two major
US primes for domestic and export markets. There was also continued
strength in air separation products and technologies.
In addition, 808E Hose Drum Unit (HDU) certification flight
tests were completed in December for the A400M programme. This
latest series of flight tests were conducted by day and night with
F/A-18 and A400M receiver aircraft. Final type approval for the HDU
is continuing. The Sector has also secured customer funding to
develop a Helicopter Refuelling capability for the A400M, a
significant enhancement for this aircraft.
Cobham has accumulated over 15,000 CRU-123 (oxygen sensor)
flight hours on the Boeing T-45 aircraft. The CRU123 records oxygen
concentration and pressure and has been instrumental in supporting
the US Navy's Physiologic Events (hypoxia) investigation.
Furthermore, the Sector's new VigilOX (breathing sensor suite) is
currently undergoing US Navy flight testing, to demonstrate its
ability to enhance diagnostic capability. The unique combination of
both systems provides a comprehensive picture of aircraft and pilot
physiological interaction, benefiting flight crew safety.
Cobham Advanced Electronic Solutions
Provides critical solutions for communication on land, at sea,
in the air and in space through off-the-shelf and customised
products including radio frequency, microwave and high reliability
microelectronics, antenna subsystems and motion control solutions.
This addresses defence and commercial markets, including missiles,
radars, electronic warfare, satellite electronics and select
industrial applications.
GBPm 2016 FX Translation Organic(5) 2017
------------------- ------ --------------- ----------- ------
Order intake 542.1 27.5 (6.6) 563.0
Revenue 511.6 25.8 31.0 568.4
Operating profit* 66.2 3.0 (5.9) 63.3
Operating margin* 12.9% 11.1%
Order book 673.9 610.4
=================== ====== =============== =========== ======
(5) See page 3 for definition of organic revenue
*Underlying measures are defined in note 2 on page 3
The Sector's 6% organic revenue performance reflected increases
across a number of product areas including space related actuation,
power distribution modules for satellite programmes and the Low
Band Consolidation (LBC) electronic warfare programme, which passed
its preliminary design review. Additionally there were increased
volumes on the F-35 Joint Strike Fighter programme, with the Sector
having significant electronic warfare and radar subsystem content,
with further content won.
Underlying operating profit decreased by GBP5.9m after the
impact from exchange rates. As previously reported, there was an
adverse impact from investments made to strengthen the Sector's
functional infrastructure and this included the build out and
deployment of various IT and compliance systems.
During 2017 and 2018 a significant investment is also being made
in the San Diego facility, which is currently increasing
production, to improve on-time delivery and quality management. The
work, which includes some US$30m of capital investment, covers
engineering, manufacturing and testing operations and will also
result in increased manufacturing space and more efficient use.
The Sector has received a number of Low Rate Initial Production
awards for air and missile defence programmes. The Advanced
Off-board Electronic Warfare (AOEW) pod programme also successfully
passed its preliminary design review. This is a major milestone for
this long-term programme, which will provide US Navy MH-60
helicopters with enhanced electronic warfare surveillance and
countermeasure capabilities against anti-ship missile threats,
extending the detection range of existing ship-based electronic
warfare systems. The Sector also worked with partners on the
European Space Agency (ESA)'s Next Generation Microprocessor (NGMP)
development to bring to market a space-qualified quad-core
processor, providing faster processing power.
The Sector continues to operate under a Special Security
Agreement, with the Sector Board critical to Sector governance and
performance. As previously announced, the Board was significantly
strengthened in the first half with the appointments of Admiral
Steve Abbot USN (retired), General Mike Hagee USMC (retired), Cindy
Moran and Scott Webster.
Cobham Aviation Services
Delivers outsourced aviation services for customers worldwide,
including military training, special mission flight operations,
outsourced commercial aviation, including fly-in fly-out services
to the natural resources industry and aircraft engineering.
GBPm 2016 FX Translation Organic(5) 2017
------------------- -------- --------------- ----------- --------
Order intake 513.4 38.5 (429.5) 122.4
Revenue 357.2 18.4 (9.0) 366.6
Operating profit* 40.6 1.3 (19.1) 22.8
Operating margin* 11.4% 6.2%
Order book 1,368.6 1,114.9
=================== ======== =============== =========== ========
(5) See page 3 for definition of organic revenue
*Underlying measures are defined in note 2 on page 3
Organic revenue was 2% lower, reflecting a reduction in revenue
from commercial markets, attributable to lower flying activity for
Australian natural resources customers and the adverse impact from
the first full year of the repriced contract with Qantas. In
addition, Helicopter Services revenue was lower, being impacted by
the completion of certain overseas contracts, including search and
rescue operations in Trinidad and Tobago and maintenance activity
in Qatar. However, there was a benefit from an increase in fixed
wing special mission revenue, primarily relating to the
commencement of the Australian Maritime Safety Authority (AMSA)
contract.
Operating profit was GBP19.1m lower after the impact of exchange
rates. This primarily reflected the Qantas contract, with some
other smaller adverse trading impacts in the Sector's commercial
markets, and also the wind-down and demobilisation of helicopter
operations in Trinidad and Tobago and Qatar. The results also
reflected GBP3.2m of non-recurring charges, relating to the
settlement of legacy issues largely provided for in the first
half.
In order to enhance customer focus as well as reduce overheads,
the Sector is being restructured into two regionally based
businesses, one based in Australia and one focused on the UK and
EMEA. This will shorten decision chains and remove a layer of
management. This restructuring will happen during 2018.
The Sector's order intake was lower than the prior year, which
included receipt of the net initial order for AUS$719m relating to
the multi-year Qantas contract extension.
The Australian natural resources market is showing some early
signs of recovery and Aviation Services won a number of contract
awards in 2017, including the commencement of operations for the Oz
Minerals fly-in, fly-out mine at Prominent Hill. Significantly, the
Sector also secured a five year contract extension to continue its
operations for Chevron, albeit at a lower rate of flying activity.
This agreement, along with the 10 year contract extension for
Qantas, provides a foundation on which to re-build the commercial
business, when demand increases.
In addition, all four specially modified Bombardier Challenger
CL-604 aircraft for the AMSA contract are now fully operational and
after the recent establishment of the Cobham Helicopter Academy,
based in Newquay, UK, a launch customer has been secured. The
Academy will allow the Sector to continue helicopter training
services when the UK Defence Helicopter Flying School contract
finishes at the end of March 2018.
The Sector signed a teaming agreement with Draken International
in the year, for jointly developing solutions for the delivery of
operational readiness training under the UK Ministry of Defence's
(MoD's) Air Support to Defence Operational Training (ASDOT)
programme. ASDOT will meet the training component of UK air support
from 2020, progressively replacing contracted and military service
provision as these expire, including Cobham's existing operational
readiness training for the UK MoD.
OTHER FINANCIAL ITEMS
Summary of Underlying Results
To assist with the understanding of earnings trends, the Group
has included within its published financial statements non-GAAP
alternative performance measures including underlying operating
profit and underlying profit.
The non-GAAP measures used are not defined terms under IFRS and
therefore may not be comparable to similar measures used by other
companies. They are not intended to be a substitute for, or
superior to, GAAP measures.
Management use underlying measures to assess the operating
performance of the Group, having adjusted for specific items as
detailed in note 2 on page 32. They form the basis of internal
management accounts and are used for decision making including
capital allocation and a subset also forms the basis of internal
incentive arrangements. By using underlying measures in segmental
reporting, this further ensures readers of the financial statements
can recognise how incentive performance is targeted. Underlying
measures are also presented in this announcement because the
Directors believe they provide additional useful information to
shareholders on comparative trends over time. Finally, this
presentation allows for separate disclosure and specific narrative
to be included concerning the adjusting items; this helps to ensure
performance in any one year can be more clearly understood by the
user of the financial statements. A reconciliation of statutory to
underlying profit numbers is set out on page 23.
A summary of the Group's underlying results is set out
below:
GBPm 2017 2016
----------------------------------- -------- --------
Revenue 2,052.5 1,943.9
----------------------------------- -------- --------
Operating profit 210.3 225.0
Operating margin 10.2% 11.6%
Net finance expense (37.2) (49.8)
----------------------------------- -------- --------
Profit before tax 173.1 175.2
Tax (39.8) (39.6)
Tax rate 23.0% 22.6%
----------------------------------- -------- --------
Profit after tax 133.3 135.6
Weighted average number of shares
(millions)* 2,231.8 1,732.2
EPS (pence)* 6.0 7.8
=================================== ======== ========
*Comparatives restated to reflect the bonus element of the
Rights Issue completed during 2017.
Currency Translation Exchange Rates
The following are the average and closing rates for the four
foreign currencies that have most impact on translation into pounds
sterling of the Group's Income Statement and Balance Sheet:
2017 2016
------------------------------ ----- -----
Income statement - average
rate
US$/GBP 1.29 1.35
AUS$/GBP 1.68 1.83
EUR/GBP 1.14 1.22
DKK/GBP 8.49 9.11
------------------------------ ----- -----
Balance sheet - closing rate
US$/GBP 1.35 1.24
AUS$/GBP 1.73 1.71
EUR/GBP 1.13 1.17
DKK/GBP 8.39 8.71
============================== ===== =====
The Group's approximate pro-rata Income Statement sensitivity to
currency translation is as follows, calculated as the impact of a
10 cent movement in the full year average rate against pound
sterling:
GBPm Revenue Underlying
Operating
Profit
------------------ -------- -----------
US$ 79 9
AUS$ 16 1
EUR/DKK 23 2
Other currencies 4 1
122 13
================== ======== ===========
Statutory Operating Profit
The Group made a statutory operating profit of GBP104.1m (2016:
GBP779.1m loss). In addition to the underlying operating profit
result, statutory profit includes items which have been accounted
for as specific adjusting items, consistent with prior years. The
net charge arising from these specific adjusting items is lower
than the prior year, principally due to the following:
-- Amortisation of intangible assets arising on business
combinations of GBP138.9m (2016: GBP161.2m);
Goodwill and other intangible assets arising on business
combinations are recognised as a result of the purchase price
allocation on acquisition of subsidiaries.
-- Favourable movements in non-hedge accounted derivative
financial instruments of GBP28.9m (2016: GBP39.3m adverse);
The impact of derivative financial instruments excluded from
underlying results includes changes in the marking to market of
non-hedge accounted derivative financial instruments. These amounts
relate to foreign currency exchange contracts and would not have
impacted the results had the Group chosen to comply with IAS 39
hedge accounting requirements.
-- Net impairment of goodwill and other intangible assets of GBP1.7m (2016: GBP573.8m);
The Group reviews its valuation of goodwill for potential
impairment at least annually. In 2017 the Group impaired its
Helicopter Services business unit by GBP33.5m. In addition,
following announcement of the divestment in February 2018, there
was a partial reversal of GBP31.8m against a previous impairment of
other intangible assets of the Wireless business. The reversal
related to the 2016 impairment of GBP573.8m against goodwill and
other intangible assets in the Wireless, Integrated Electronic
Solutions and Semiconductor Solutions business units.
-- Adjustments to revisions of the carrying values of other
assets provided at 31 December 2016 was a credit adjustment of
GBP1.4m (2016: GBP33.3m charge);
The credit adjustment, previously announced within the 2017
interims, related to a provision against receivables which was
considered doubtful at 31 December 2016, but which has now been
recovered. The 2016 charge relates in aggregate to inventory
balances, reflecting ageing stock and lower demand forecasts;
provisions against aged receivables and tangible and intangible
assets no longer expected to be used.
-- Adjustments to the assessment of legal and other provisions
was a credit adjustment of GBP8.0m (2016: GBP24.4m charge).
The credit adjustments relate to legal, environmental, warranty
and other regulatory matters that were provided for in 2016 and
which have been resolved within their original cost estimates.
-- Other business acquisition and divestment related items was a
credit of GBP0.8m (2016: GBP1.7m charge).
The credit adjustment predominantly relates to previous
divestment activity being concluded within the original cost
estimates.
In addition, in 2016 the Group also took aggregate charges of
GBP179.1m against contract loss provisions, including GBP150.0m
against the KC-46 programme.
Partially offsetting these was the following specific adjusting
item:
-- Amounts relating to prior periods' restructuring programmes
of GBP4.7m (2016: GBP8.7m credit).
The costs relate to prior periods' restructuring programmes
which have been accounted for as incremental to normal operations.
The 2016 credit included a reassessment of the level of provisions
required in respect of IT integration and remediation costs. There
will be no further charges relating to prior periods' restructuring
programmes.
Divestments
The Group announced in February 2018 that it had agreed to
divest its AvComm and Wireless test and measurement businesses for
US$455m in cash payable on completion, which is anticipated within
the first half of 2018. In the year ended 31 December 2017 the
businesses recorded aggregate revenue of GBP169.6m and underlying
operating profit of GBP13.6m (a GBP24.8m contribution, before the
allocation of central charges and restructuring costs of
GBP2.4m).
On completion, the coherency of the portfolio will be enhanced,
reducing risk by exiting businesses with little commonality with
the rest of the Group. The net divestment proceeds (which are
subject to certain post completion adjustments and expenses) will
be used to strengthen the Balance Sheet and, coupled with existing
cash, will pay down approximately GBP440m of debt. This will
include the repayment of private placement debt (senior notes),
which will result in estimated accelerated interest costs
(make-whole payments) of up to GBP30m. After the accelerated
interest costs, which it is expected will be incurred in the first
half of 2018, the Group's future interest expense will be reduced
by approximately GBP18m per full year.
Profit Before Tax
The Group made a statutory profit before tax of GBP66.9m (2016:
loss of GBP847.9m). The Group's underlying profit before tax was
GBP173.1m (2016: GBP175.2m).
Tax
The Group's overall tax credit was GBP11.9m (2016: GBP52.8m), in
part reflecting an improvement over prior year Group profit after
specific adjusting items. The Group's underlying tax rate increased
to 23.0% (2016: 22.6%) from an underlying tax charge of GBP39.8m
(2016: GBP39.6m). The increased rate was primarily a result of the
geographic profit mix in the year.
The Group is reviewing the implications of the US tax reform,
including the Base Erosion and Anti-abuse Tax (BEAT) provisions,
and resolving certain tax issues arising from prior years. Given
these, and the expected geographical mix of profit, the underlying
tax rate is anticipated to remain at approximately the current
level, subject to any future changes in tax legislation.
As stated above, the Group previously announced it is reviewing
its internal financing structures and is in the process of
resolving certain tax issues from prior years. These are set out in
more detail in note 6 on page 38 of this Announcement.
Earnings per Share (EPS)
Basic EPS was 3.5p (2016: (45.9)p - including the restatement of
the prior year figure for the 2017 Rights Issue bonus factor). In
addition to the underlying operating performance, basic EPS was
impacted by the specific adjusting items set out in the paragraphs
on statutory operating profit above, most notably a charge relating
to the amortisation of intangible assets arising on business
combinations, partially offset by favourable movements in non-hedge
accounted derivative financial instruments.
Underlying EPS was 6.0p, 23% lower than the prior year,
primarily due to the higher share count following the 2017 Rights
Issue, with underlying profit after tax broadly flat
year-on-year.
The Group's average share count in the year was 2,231.8m (2016:
1,506.3m or 1,732.2m restated to reflect the bonus element of the
Rights Issue completed during 2017). The share count at 31 December
2017, excluding shares held in treasury, was 2,391.0m (31 December
2016: 1,707.9m).
IFRS 15 (Revenue Recognition) and IFRS 9 (Financial
Instruments)
The Group is adopting the new revenue recognition standard, IFRS
15, from 1 January 2018. The standard impacts the timing of revenue
recognition on some Group development contracts and on some US
government product based contracts. It is estimated that the impact
of IFRS 15 is to increase Group revenue by GBP41m and underlying
operating profit by GBP3m in 2017. There is no impact on Cobham's
cash generation or net debt, and it has an immaterial impact on net
assets although there will be changes between amounts recoverable
on contracts and receivables and payables.
The Group will also adopt IFRS 9 on 1 January 2018. As a result,
the valuation of certain of Cobham's minority shareholding
investments will increase by approximately GBP30m, reflecting a
requirement to hold these at fair value, rather than at cost, with
the change also increasing Group reserves. There are no other
material changes arising from the adoption of IFRS 9.
Retirement Obligations
Cobham operates a number of defined benefit schemes, with the
largest being the Cobham Pension Plan in the UK. At 31 December
2017, the estimated deficit for accounting purposes, being the
difference between the aggregate value of the schemes' assets and
the present value of their future liabilities was GBP63.2m before
deferred tax (2016: GBP87.0m). The most significant movements in
the deficit were as follows:
-- An increase of GBP35m due to a reduction in the discount rate;
-- A reduction due to net investment returns of GBP31m;
-- A reduction of GBP11m due to changes to mortality assumptions;
-- A reduction of GBP17m due to net employer contributions.
Cash Flow
Operating cash flow, which is stated after net capital
expenditure, but before interest and tax payments was GBP217.6m
(2016: GBP181.8m). Operating cash conversion was 103% (2016: 81%).
This was driven by a cash inflow from working capital, including
improvements due to advance customer receipts of GBP27m. Cash
conversion was also assisted by lower capital expenditure of
GBP79.8m (2016: GBP92.2m), before proceeds from asset disposals of
GBP5.1m (2016: GBP6.1m). Operating cash flow included GBP66.6m of
net utilisation against the charges taken at 31 December 2016.
Free cash flow was GBP140.6m (2016: GBP50.7m). This included net
interest payments of GBP34.9m (2016: GBP71.2m - including GBP19.0m
of make-whole payments on senior notes paid down). Net tax payments
were GBP32.2m (2016: GBP20.1m), in part reflecting the Group's
increased underlying tax rate.
Also included in free cash flow were payments relating to prior
periods' restructuring programmes of GBP9.9m (2016: GBP39.8m). A
significant element relates to ongoing lease payments on vacated
premises provided for in previous years.
Below free cash flow, there was a net inflow of GBP497.2m
primarily relating to the proceeds of the Rights Issue completed in
the first half (2016: GBP492.9m - primarily Rights Issue).
The Group continues to anticipate that it will generate limited
free cash flow in 2018, after the impact of the cash utilisation of
its onerous contract and other provisions.
The table below sets out the Group's cash flows over the
period:
GBPm 2017 2016
---------------------------------------- ---------- ----------
Underlying operating profit 210.3 225.0
Less: share of post-tax results
of joint ventures 0.2 (0.2)
---------------------------------------- ---------- ----------
Underlying operating profit (excluding
joint ventures) 210.5 224.8
Depreciation and amortisation 84.8 80.5
Share based payments 5.5 3.8
Decrease in provisions (60.9) (16.3)
Pension contributions in excess
of pension charges (17.3) (16.7)
Decrease/(increase) in working
capital 69.7 (8.2)
Gross capital expenditure (79.8) (92.2)
Proceeds on disposal of property,
plant and equipment 5.1 6.1
---------------------------------------- ---------- ----------
Operating cash flow 217.6 181.8
Operating cash/operating profit
(excluding joint ventures) 103% 81%
---------------------------------------- ---------- ----------
Net interest paid (34.9) (71.2)
Taxation paid (32.2) (20.1)
Amounts related to prior periods'
restructuring programmes (9.9) (39.8)
---------------------------------------- ---------- ----------
Free cash flow 140.6 50.7
Dividends paid (0.1) (126.1)
Business acquisition and divestment
related costs paid (0.9) (2.5)
Net rights issue proceeds and
treasury shares allocation 497.2 492.9
Exchange movements 7.9 (236.4)
---------------------------------------- ---------- ----------
Decrease in net debt 644.7 178.6
Opening net debt (1,028.2) (1,206.8)
---------------------------------------- ---------- ----------
Closing net debt (383.5) (1,028.2)
======================================== ========== ==========
Net Debt, Gearing and 2017 Rights Issue
The Group's net debt decreased to GBP383.5m (31 December 2016:
GBP1,028.2m), including favourable exchange movements of GBP7.9m
(2016: GBP236.4m adverse), which were largely driven by the
translation of Cobham's US dollar denominated debt between the
opening and closing rates. At 31 December 2017 net debt comprised
gross debt of GBP835.4m (31 December 2016: GBP1,264.4m) and cash of
GBP451.9m (31 December 2016: GBP236.2m).
As previously announced, following its May 2017 2 for 5 Rights
Issue, Cobham paid down certain debt as it matured, principally
GBP183m of variable rate bank debt. It also paid down a US$44m
fixed rate senior note, without incurring make-whole charges.
In December 2017, the Group completed a scheduled refinancing of
its revolving credit facilities maturing in October 2018, with new
bank facilities totalling US$545m and maturities of five years or
over at a similar cost.
Consistent with the Group's borrowing agreements, the net
debt/EBITDA gearing ratio was 1.3x at the year end (31 December
2016: 3.0x). Interest cover improved to 6.8x (2016: 5.1x).
Reconciliation of Underlying Measures
To assist with the understanding of earnings trends, the Group
has included within its published financial statements non-GAAP
alternative performance measures including underlying operating
profit and underlying profit. The non-GAAP measures used are not
defined terms under IFRS and therefore may not be comparable to
similar measures used by other companies. They are not intended to
be a substitute for, or superior to, GAAP measures.
Management uses underlying measures to assess the operating
performance of the Group, having adjusted for specific items as
detailed in note 2 on page 3. They form the basis of internal
management accounts and are used for decision making including
capital allocation and a subset also forms the basis of internal
incentive arrangements. By using underlying measures in segmental
reporting, this further ensures readers of the financial statements
can recognise how incentive performance is targeted. Underlying
measures are also presented in this announcement because the
Directors believe they provide additional useful information to
shareholders on comparative trends over time. Finally, this
presentation allows for separate disclosure and specific narrative
to be included concerning the adjusting items; this helps to ensure
performance in any one year can be more clearly understood by the
user of the financial statements.
The table below provides a reconciliation between the statutory
operating profit (2016: loss) and underlying operating profit, as
well as between the statutory profit before tax (2016: loss) and
underlying profit before tax.
GBPm 2017 2016
-------------------------------------- ------- --------
Operating profit/(loss) 104.1 (779.1)
Adjusted to exclude:
Amortisation of intangible assets
arising on business combinations 138.9 161.2
Derivative financial instruments (28.9) 39.3
Impairment of goodwill and other
intangible assets 33.5 573.8
Reversal of impairment of intangible (31.8) -
assets
Carrying values of other assets
provided at 31 December 2016 (1.4) 33.3
Legal and other provisions provided
at 31 December 2016 (8.0) 24.4
Estimates of fixed price contract
profitability - 179.1
Amounts relating to prior periods'
restructuring programmes 4.7 (8.7)
Other business acquisition and
divestment related items (0.8) 1.7
-------------------------------------- ------- --------
Total operating reconciling items 106.2 1,004.1
-------------------------------------- ------- --------
Underlying operating profit 210.3 225.0
====================================== ======= ========
GBPm
-------------------------------------- ------- --------
Underlying profit before tax
is calculated as follows:
Profit/(loss) before taxation 66.9 (847.9)
Total operating reconciling items
as above 106.2 1,004.1
Non-underlying finance costs - 19.0
-------------------------------------- ------- --------
Underlying profit before taxation 173.1 175.2
Taxation charge on underlying
profit (39.8) (39.6)
-------------------------------------- ------- --------
Underlying profit after taxation 133.3 135.6
Underlying EPS (pence) 6.0 7.8
====================================== ======= ========
The information contained within this announcement is considered
to constitute inside information as stipulated under the Market
Abuse Regulations (EU) No.596/2014 ("MAR"). Upon the publication of
this announcement via a Regulatory Information Service, this inside
information will be considered to be in the public domain.
Cautionary Statements
This announcement contains 'forward-looking statements' with
respect to the financial condition, results of operations and
business of Cobham and to certain of Cobham's and objectives with
respect to these items.
Forward-looking statements are sometimes but not always
identified by the use of a date in the future or such words as
'anticipates', 'aims', 'due', 'could', 'may', 'should', 'expects',
'believes', 'intends', 'plans', 'targets', 'goal', or 'estimates'
(or the negative thereof). By their very nature forward-looking
statements are inherently unpredictable, speculative and involve
risk and uncertainty because they relate to events and depend on
circumstances that may or will occur in the future.
There are various factors that could cause actual results and
developments to differ materially from those expressed or implied
by these forward-looking statements. These factors include, but are
not limited to, changes in economies, political situations and
markets in which the group operates; changes in government
priorities due to programme reviews or revisions to strategic
objectives; changes in regulatory or competition frameworks in
which the Group operates; the impact of legal or other proceedings
against or which affect the Group; changes to or delays in
programmes in which the Group is involved; the completion of
acquisitions and divestitures and changes in commodity prices,
inflation or exchange rates.
All written or verbal forward-looking statements, made in this
document or made subsequently, which are attributable to Cobham or
any other member of the Group or persons acting on their behalf,
are expressly qualified in their entirety by the factors referred
to above. Neither Cobham nor any other person intends to update
these forward-looking statements.
No statement in this announcement is intended as a profit
forecast and no statement in this announcement should be
interpreted to mean that underlying operating profit for the
current or future financials years would necessarily be above a
minimum level, or match or exceed the historical published
operating profits or set a minimum level of operating profit.
Consolidated Income
Statement
For the year ended 31
December 2017
2017 2016
----------- ----------- ---------- ----------- ----------- ----------
Specific Specific
adjusting adjusting
GBPm Note Underlying items Total Underlying items Total
------------------ ----- ----------- ----------- ---------- ----------- ----------- ----------
Revenue 4 2,052.5 - 2,052.5 1,943.9 - 1,943.9
Cost of sales (1,457.9) - (1,457.9) (1,358.6) (208.7) (1,567.3)
------------------ ----- ----------- ----------- ---------- ----------- ----------- ----------
Gross profit 594.6 - 594.6 585.3 (208.7) 376.6
Operating
costs (384.3) (106.2) (490.5) (360.3) (795.4) (1,155.7)
-----------
Operating
profit/(loss) 210.3 (106.2) 104.1 225.0 (1,004.1) (779.1)
Finance income 5 6.1 - 6.1 4.1 - 4.1
Finance costs 5 (43.3) - (43.3) (53.9) (19.0) (72.9)
-----------
Profit/(loss)
before taxation 173.1 (106.2) 66.9 175.2 (1,023.1) (847.9)
Taxation 6 (39.8) 51.7 11.9 (39.6) 92.4 52.8
------------------ ----- ----------- ----------- ---------- ----------- ----------
Profit/(loss)
after taxation
for the year 133.3 (54.5) 78.8 135.6 (930.7) (795.1)
------------------ ----- ----------- ----------- ---------- ----------- ----------- ----------
Attributable
to:
Owners of
the parent 133.1 (54.5) 78.6 135.5 (930.7) (795.2)
Non-controlling
interests 0.2 - 0.2 0.1 - 0.1
------------------ ----- ----------- ----------- ---------- ----------- ----------- ----------
133.3 (54.5) 78.8 135.6 (930.7) (795.1)
------------------ ----- ----------- ----------- ---------- ----------- ----------- ----------
Earnings per ordinary
share 3
Basic 6.0p 3.5p 7.8p (45.9)p
Diluted 6.0p 3.5p 7.8p (45.9)p
------------------ ----- ----------- ----------- ---------- ----------- ----------- ----------
EPS for the comparative period has been restated
for the impact of the Rights Issue in May 2017.
Underlying results are presented to assist with
the understanding of the Group's performance trends.
Definitions of these measures and details of specific
adjusting items are detailed in note 2.
Consolidated Statement of Comprehensive
Income
For the year ended 31 December
2017
GBPm Note 2017 2016
--------------------------------------------- ----- ------- --------
Profit/(loss) after
taxation for the year 78.8 (795.1)
Items that will not be reclassified subsequently
to profit or loss
Remeasurements of defined benefit
retirement benefit obligations 15 7.4 (42.6)
Actuarial loss on other retirement
benefit obligations - (1.2)
Tax effects (1.4) 8.9
------------------------------------------------ ----- -------
6.0 (34.9)
Items that may subsequently be reclassified
to profit or loss
Net translation differences on investments
in overseas subsidiaries (50.4) 41.3
Reclassification of cash
flow hedge fair values 0.5 1.6
Hedge accounted derivative
financial instruments 0.9 (2.8)
Tax effects (0.1) 0.4
----- -------
(49.1) 40.5
Other comprehensive (expense)/income
for the year (43.1) 5.6
----------------------------------------------- ----- ------- --------
Total comprehensive income/(expense)
for the year 35.7 (789.5)
----------------------------------------------- ----- ------- --------
Attributable to:
Owners of the parent 35.5 (789.6)
Non-controlling
interests 0.2 0.1
------------------------------------------------ ----- ------- --------
35.7 (789.5)
--------------------------------------------- ----- ------- --------
Consolidated Balance Sheet
As at 31 December 2017
2016
GBPm Note 2017 (restated)
---------------------------------- ----- -------- -------------
Assets
Non-current assets
Intangible assets 9 893.8 1,165.9
Property, plant and equipment 10 380.9 422.9
Investment properties 2.4 3.6
Investments in joint ventures
and associates 3.6 3.6
Trade and other receivables 64.5 66.0
Other financial assets 6.1 6.1
Deferred tax 57.5 43.9
Derivative financial instruments 25.0 19.7
---------------------------------- ----- -------- -------------
1,433.8 1,731.7
---------------------------------- ----- -------- -------------
Current assets
Inventories 11 389.4 405.3
Trade and other receivables 329.0 409.8
Current tax receivables 7.2 3.1
Derivative financial instruments 10.4 8.5
Cash and cash equivalents 451.9 236.2
Assets classified as held
for sale 13 171.7 -
---------------------------------- ----- -------- -------------
1,359.6 1,062.9
---------------------------------- ----- -------- -------------
Liabilities
Current liabilities
Borrowings (0.1) (60.9)
Trade and other payables (448.2) (440.3)
Provisions 14 (125.1) (180.6)
Current tax liabilities (135.8) (141.6)
Derivative financial instruments (12.2) (42.2)
Liabilities associated with
assets classified as held
for sale 13 (49.1) -
---------------------------------- ----- -------- -------------
(770.5) (865.6)
---------------------------------- ----- -------- -------------
Non-current liabilities
Borrowings (835.3) (1,203.5)
Trade and other payables (36.1) (31.5)
Provisions 14 (30.7) (57.3)
Deferred tax (2.1) (27.6)
Derivative financial instruments (27.2) (32.2)
Retirement benefit obligations 15 (63.2) (87.0)
---------------------------------- -------- -------------
(994.6) (1,439.1)
---------------------------------- ----- -------- -------------
Net assets 1,028.3 489.9
---------------------------------- ----- -------- -------------
Equity
Share capital 16 61.7 44.6
Share premium 16 1,257.9 778.3
Other reserves (8.6) 37.9
Retained earnings (284.0) (372.0)
---------------------------------- ----- -------- -------------
Total equity attributable
to owners of the parent 1,027.0 488.8
Non-controlling interests
in equity 1.3 1.1
---------------------------------- ----- -------- -------------
Total equity 1,028.3 489.9
---------------------------------- ----- -------- -------------
Details of the restatement of the 2016 Balance
Sheet can be found in note 6.
Consolidated Statement of
Changes in Equity
For the year ended
31 December 2017
Total
attributable
to owners
Share Share Other Retained of the Non-controlling Total
GBPm capital premium reserves earnings parent interests equity
------------------------ --------- --------- ---------- ---------- -------------- ---------------- --------
Total equity at
1 January 2016 30.4 301.9 (0.3) 576.8 908.8 0.9 909.7
Loss for the year - - - (795.2) (795.2) 0.1 (795.1)
Other comprehensive
income/(expense)
Items that will
not be reclassified
subsequently to
profit or loss - - - (34.9) (34.9) - (34.9)
Items that may
subsequently be
reclassified to
profit or loss - - 40.5 - 40.5 - 40.5
Issue of shares,
net of costs
(note 16) 14.2 476.4 - - 490.6 - 490.6
Proceeds on allocation
of treasury shares - - - 2.3 2.3 - 2.3
Dividends (note
7) - - - (126.1) (126.1) - (126.1)
Share based payments - - 3.8 - 3.8 - 3.8
Transfer of other
reserves to retained
earnings - - (5.1) 5.1 - - -
Tax effects - - (1.2) - (1.2) - (1.2)
Foreign exchange
adjustments - - 0.2 - 0.2 0.1 0.3
------------------------ --------- --------- ---------- ---------- -------------- ---------------- --------
Total equity at
31 December 2016 44.6 778.3 37.9 (372.0) 488.8 1.1 489.9
------------------------ --------- --------- ---------- ---------- -------------- ---------------- --------
Profit for the
year - - - 78.6 78.6 0.2 78.8
Other comprehensive
income/(expense)
Items that will
not be reclassified
subsequently to
profit or loss - - - 6.0 6.0 - 6.0
Items that may
subsequently be
reclassified to
profit or loss - - (49.1) - (49.1) - (49.1)
Issue of shares,
net of costs (note
16) 17.1 479.6 - - 496.7 - 496.7
Proceeds on allocation
of treasury shares - - - 0.5 0.5 - 0.5
Share based payments - - 5.5 - 5.5 - 5.5
Transfer of other
reserves to retained
earnings - - (2.9) 2.9 - - -
------------------------ --------- --------- ---------- ---------- -------------- ---------------- --------
Total equity at
31 December 2017 61.7 1,257.9 (8.6) (284.0) 1,027.0 1.3 1,028.3
------------------------ --------- --------- ---------- ---------- -------------- ---------------- --------
Consolidated Cash Flow Statement
For the year ended 31 December
2017
GBPm Note 2017 2016
------------------------------------ ----- -------- ----------
Cash generated from operations 282.3 226.0
Tax paid (32.2) (20.1)
Interest paid (41.6) (74.7)
Interest received 6.7 3.5
------------------------------------ ----- ----------
Net cash from operating activities 8 215.2 134.7
Cash flows from investing
activities
Purchase of property, plant
and equipment (69.0) (82.8)
Purchase of intangible assets (10.8) (9.1)
Capitalised expenditure on
intangible assets 9 - (0.3)
Proceeds on disposal of property,
plant and equipment 5.1 6.1
Acquisition of subsidiaries
net of cash or debt acquired (0.3) (1.4)
(Costs)/proceeds of business
divestments (0.5) 1.0
Net used in investing activities (75.5) (86.5)
Cash flows from financing
activities
Issue of share capital 16 496.7 490.6
Dividends paid 7 - (126.1)
Dividends paid to non-controlling
interests 7 (0.1) -
Proceeds on allocation of
treasury shares 0.5 2.3
New borrowings - 9.9
Repayment of borrowings (359.6) (497.0)
Net cash from/(used in) financing
activities 137.5 (120.3)
Net increase/(decrease) in
cash and cash equivalents 277.2 (72.1)
Exchange movements (61.5) 14.3
Cash and cash equivalents
at start of year 236.2 294.0
Cash and cash equivalents
at end of year 451.9 236.2
------------------------------------ ----- -------- ----------
Reconciliation of cash and cash
equivalents and net debt
GBPm 2017 2016
------------------------------------ ----- -------- ----------
Cash and cash equivalents 451.9 236.2
Borrowings - current liabilities (0.1) (60.9)
Borrowings - non-current
liabilities (835.3) (1,203.5)
------------------------------------
Net debt at 31 December (383.5) (1,028.2)
------------------------------------ ----- -------- ----------
Notes to the Financial Information
For the year ended 31 December 2017
1. Basis of preparation
The financial information set out in this statement does not
constitute the Group's statutory accounts for the years ended 31
December 2017 or 31 December 2016.
Statutory accounts for the year ended 31 December 2016 have been
delivered to the Registrar of Companies, and those for 2017 will be
delivered following the Company's Annual General Meeting.
The auditors have reported on these accounts; their report for
the year ended 31 December 2017 was unqualified, and did not
contain any statements under section 498 (2) or (3) of the
Companies Act 2006.
The attached audited financial information and the full Group
Financial Statements have been prepared in accordance with
International Financial Reporting Standards (IFRS) as adopted by
the EU, interpretations of the IFRS Interpretations Committee and
those parts of the Companies Act 2006 applicable to companies
reporting under IFRS.
The financial statements have been prepared on a going concern
basis under the historical cost convention, unless otherwise
stated.
Management judgement and estimation uncertainty
The preparation of financial statements in conformity with IFRS
requires the use of judgements and estimates that affect the
application of accounting policies and reported amounts of assets,
liabilities, revenue and expenses.
These judgements and estimates are continually evaluated and are
based on historical experience and other factors, including
expectations of future events that are believed to be reasonable
under the circumstances. The current economic conditions have been
considered when evaluating accounting judgements and estimates,
including the application of the going concern basis of
preparation. Although estimates are based on management's best
knowledge of the amount, event or actions, actual results
ultimately may differ from those estimates.
Significant judgements in applying accounting policies
The following are the judgements, apart from those involving
estimations, that the Directors have made in the process of
applying the Group's accounting policies and that have the most
significant effect on the amounts recognised in the financial
statements.
a. Consolidation of Cobham Advanced Electronic Solutions Sector
The Cobham Advanced Electronic Solutions Sector operates under a
Special Security Agreement (SSA) with the US Government due to the
nature of its work on classified US Department of Defense (DoD)
programmes. The results of this Sector have been consolidated based
on a judgement that, whilst the day to day operation of this Sector
is managed by the SSA Board, the Cobham plc Board retains the right
to variable returns and the ability to affect those returns;
b. Classification of assets as held for sale
It is considered that the carrying amount of the assets and
liabilities of the AvComm and Wireless test and measurement
businesses will be recovered through a sale transaction rather than
through continuing use, and these have therefore been classified as
held for sale at 31 December 2017. Following the announcement of
the divestment of these businesses on 2 February 2018, the
Directors believe it is highly probable that the sale will be
completed within a year of the balance sheet date;
c. Revenue recognition - milestone recognition
The recognition of significant revenue milestones which often
involve judgement surrounding the achievement of those
milestones;
d. Capitalisation of development costs
The Group undertakes significant levels of development work
which is largely expensed to the Income Statement. Judgement is
exercised in determining whether the criteria for capitalisation as
described in IAS 38, Intangible Assets are met; in particular in
applying the appropriate level of caution to the requirement for
the product to be technically feasible and capable of generating a
financial return. If these tests were met, further costs would be
capitalised as an intangible asset until the intangible asset was
readily available for use and would then be amortised.
Assumptions and estimation uncertainties
Management considers that there are a number of assumptions
concerning the future and other major sources of estimation
uncertainty at the balance sheet date, which have a significant
risk of resulting in a material adjustment to the carrying amounts
of assets and liabilities within the next financial year. These key
assumptions and estimation uncertainties are as follows:
a. Long term contract provisions (note 14)
Recognition and measurement of onerous contract provisions
includes estimates of the costs to complete the contracts, the
outcome of negotiations with customers and the amounts recoverable
under these contracts;
b. Impairment of goodwill and intangible assets (note 9)
Determination of the value in use of Cash Generating Units
(CGUs) as assessed in relation to the annual review of goodwill and
any subsequent impairment of goodwill and intangible assets, or
reversal of previously impaired intangible assets;
c. Inventory provisions (note 11)
Recognition and measurement of provisions for obsolete, slow
moving and defective items of inventory;
d. Uncertain tax positions (note 6)
Recognition and measurement of amounts provided in respect of
uncertain tax positions included within net current tax payables in
the Balance Sheet; and
e. Pension assets and liabilities (note 15)
Assumptions are made in assessing the costs and present value of
the pension assets and liabilities, which include the discount
rate, inflation and mortality rates.
Accounting policies
The accounting policies applied are consistent with those
published in the financial statements for the year ended 31
December 2016.
No new standards are required to be adopted from 1 January 2017.
In September 2017 the IFRS Interpretations Committee issued an
agenda decision on interest and penalties related to income taxes.
This decision clarified that entities do not have a policy choice
between applying IAS 12, 'Income taxes' and applying IAS 37,
'Provisions, contingent liabilities and contingent assets' to
interest and penalties related to income taxes. Details of the
restatement arising from this change can be found in note 6. A
number of amendments to standards have been adopted from 1 January
2017 however these have not impacted the results as reported.
IFRS 15, Revenue from Contracts with Customers
The Group will adopt IFRS 15, Revenue from Contracts with
Customers, from 1 January 2018. IFRS 15 introduces a five-step
model to be applied to all contracts with customers when
determining accounting for revenue. In addition a number of new
disclosures will be required. Upon adoption of IFRS 15 in 2018
comparatives will be restated using the fully retrospective
approach.
A detailed review of contracts impacted by IFRS 15 has been
undertaken and the provisional impact on the Balance Sheet as at 31
December 2016 is a decrease to working capital of GBP17m, a
decrease in provisions of GBP21m, and a decrease in other Balance
Sheet items of GBP4m resulting in no net impact on reserves.
The impact on 2017 revenue is an increase of approximately
GBP41m, with an increase in operating profit of approximately
GBP3m.
IFRS 9, Financial instruments
IFRS 9 is effective from 1 January 2018. It has an impact on
three areas: classification and measurement: impairment of
financial assets; and hedge accounting.
The valuation of certain of Cobham's minority shareholding
investments will increase by approximately GBP30m, reflecting a
requirement to hold these at fair value, rather than at cost, with
the change also increasing Group reserves. There are no other
material changes arising from the adoption of IFRS 9.
2. Underlying measures and specific adjusting items
Use of underlying measures
To assist with the understanding of earnings trends, the Group
has included within its published financial statements non-GAAP
alternative performance measures including underlying operating
profit and underlying earnings.
The non-GAAP measures used are not defined terms under IFRS and
therefore may not be comparable to similar measures used by other
companies. They are not intended to be a substitute for, or
superior to, GAAP measures.
Management uses underlying measures to assess the operating
performance of the Group, having adjusted for specific items as
defined below. They form the basis of internal management accounts
and are used for decision making including capital allocation and a
subset also forms the basis of internal incentive arrangements. By
using underlying measures in our segmental reporting, this further
ensures readers of the financial statements can recognise how
incentive performance is targeted. Underlying measures are also
presented in this report because the Directors believe they provide
additional useful information to shareholders on comparative trends
over time. Finally, this presentation allows for separate
disclosure and specific narrative to be included concerning the
adjusting items; this helps to ensure performance in any one year
can be more clearly understood by the user of the financial
statements.
Definitions of underlying measures
All underlying measures include the operational results of all
businesses including those held for sale until the point of sale.
These definitions are applied consistently on a year to year
basis.
Underlying operating profit
Underlying operating profit has been defined as operating profit
from continuing operations excluding the impacts of business
acquisition and divestment related activity and prior periods'
business restructuring costs as detailed below. Also excluded are
changes in the marking to market of non-hedge accounted derivative
financial instruments, gains and losses arising on dividend related
foreign exchange contracts and other items deemed by the Directors
to be of a non-operating nature including the impairment of
intangible assets.
Underlying profit
Underlying profit before taxation is defined as underlying
operating profit less net underlying finance costs, which exclude
business acquisition and divestment related items and specific
finance costs.
Details of specific adjusting items
The specific adjusting items excluded from underlying
profit can be analysed as follows:
GBPm Note 2017 2016
------------------------------------------- ----- ------- ------
Cost of sales
Revisions of the carrying values of
other assets - 24.1
Estimates of fixed price contract
profitability - 179.1
Assessment of legal and other provisions - 5.5
- 208.7
------------------------------------------- ----- ------- ------
Operating costs
Amounts related to prior periods restructuring
programmes 4.7 (8.7)
Derivative financial instruments (28.9) 39.3
Business acquisition and divestment related
items
Amortisation of intangible assets
arising on business combinations 9 138.9 161.2
(Profit)/loss on divestments (1.1) 1.3
Other M&A related costs 0.3 0.4
Impairment of goodwill and other
intangible assets 9 33.5 573.8
Reversal of impairment of intangible
assets 9 (31.8) -
Other items provided at 31 December
2016
Adjustments to revisions of the carrying
values of other assets (1.4) 9.2
Adjustments to the assessment of legal
and other provisions provided (8.0) 18.9
106.2 795.4
------------------------------------------- ----- ------- ------
Finance costs
Non-underlying finance costs -
make whole payments 5 - 19.0
---------------------------------- ------- -------
Taxation
Tax on specific adjusting items (51.7) (92.4)
---------------------------------- ------- -------
Explanation of specific adjusting items
Business acquisition and divestment related items
The Group has been acquisitive over time and also divests
businesses in accordance with its strategy. Accounting adjustments
that arise as a result of business combinations and divestments are
not considered to result from the underlying business activity and
have therefore been excluded from underlying results.
These adjustments include the amortisation of intangible assets
arising on business combinations, gains or losses arising on
business divestments, adjustments to businesses held for sale, the
writing off of the pre-acquisition profit element of inventory
written up on acquisition, revaluation gains and losses arising on
the original equity interests on stepped acquisitions, other direct
costs associated with business combinations and terminated
divestments, and adjustments to contingent consideration related to
previously acquired businesses.
Amortisation of intangible assets arising as a result of the
purchase price allocation on business combinations, such as
customer lists, technology based assets and order book and trade
names, is not included in underlying measures. Amortisation of
internally generated intangible assets such as software and
development costs is included within underlying measures.
Likewise impairments of goodwill and other intangible assets
arising on business combinations, together with any reversal of
impairment of intangible assets, are treated as specific adjusting
items as these assets arose from business acquisitions in prior
periods.
Other M&A related costs reflect the finalisation of costs
related to acquisitions and divestments in prior years.
Amounts related to prior periods restructuring programmes
Amounts related to prior periods restructuring programmes were
deemed as incremental to normal operations. These costs relate to
the integration of the Aeroflex businesses acquired in 2014
specifically in respect of the IT integration and remediation costs
resulting from this acquisition. Where restructuring costs are
incurred as a result of the ongoing business activity, such costs
are included within operating costs and are not excluded from
underlying results.
Derivative financial instruments
The impact of derivative financial instruments excluded from
underlying results includes changes in the marking to market of
non-hedge accounted derivative financial instruments. These amounts
relate to foreign currency exchange contracts and would not impact
operating results had the Group chosen to comply with IAS 39
requirements to enable these contracts to be hedge accounted. Also
included are gains and losses arising on dividend related foreign
exchange contracts. As dividend cash flows do not impact operating
results, the movement in the fair value of foreign exchange
contracts being used to manage the currency risks arising are
excluded from underlying results.
Other items
In 2016 additional items which were excluded from underlying
results due to their unusual size and incidence arose out of the
January 2017 Balance Sheet review. The impact of these items was
much larger than would normally be expected in any individual
accounting period and they reflected commercial events that were
not expected to repeat. They included revisions to the carrying
value of assets, changes in estimates of fixed price contract
profitability and the assessment of legal and other provisions.
Adjustments to revisions of the carrying value of other assets
provided at 31 December 2016 relate to a provision against aged
receivables which was considered doubtful at 31 December 2016 but
which has been recovered during the first half of the year ended 31
December 2017. The release of this provision has been treated as an
adjusting item consistent with the treatment of the original
provision.
Adjustments to the assessment of legal and other provisions
relate to provisions made at 31 December 2016 which have been
reassessed during 2017. These provision releases have been treated
as an adjusting item consistent with the treatment of the original
provisions.
3. Earnings per ordinary
share
2016
2017 (restated)
Specific Specific
adjusting adjusting
GBPm Underlying items Total Underlying items Total
----------------------- --------- ----------- ----------- -------- ----------- ----------- ------------
Profit/(loss) after
taxation for the
year 133.3 (54.5) 78.8 135.6 (930.7) (795.1)
less amount attributable
to non-controlling
interests 0.2 - 0.2 0.1 - 0.1
---------------------------------- ----------- ----------- -------- ----------- ----------- ------------
Earnings attributable
to owners of
the parent 133.1 (54.5) 78.6 135.5 (930.7) (795.2)
---------------------------------- ----------- ----------- -------- ----------- ----------- ------------
Weighted average
number of shares million 2,231.8 2,231.8 1,732.2 1,732.2
Basic EPS 6.0p 3.5p 7.8p (45.9)p
---------------------------------- ----------- ----------- -------- ----------- ----------- ------------
Weighted average
number of shares million 2,231.8 2,231.8 1,732.2 1,732.2
Effect of dilutive
securities million 3.5 3.5 2.0 -
-----------------------
Diluted weighted
average number
of shares million 2,235.3 2,235.3 1,734.2 1,732.2
----------------------- --------- ----------- ----------- -------- ----------- ----------- ------------
Diluted EPS 6.0p 3.5p 7.8p (45.9)p
---------------------------------- ----------- ----------- -------- ----------- ----------- ------------
Potentially dilutive securities are unvested awards under the
Group's share based payment schemes. When losses are made, EPS is
not impacted by any potential dilution.
Basic and diluted EPS figures for the comparative period have
been restated and adjusted by the bonus factor of 1.15 to reflect
the bonus element of the May 2017 Rights Issue, in accordance with
IAS 33, Earnings per Share. Amounts as originally stated were
(52.8) pence basic and diluted EPS, and 9.0 pence basic and diluted
underlying EPS.
4. Revenue and segmental information
Revenue
Revenue comprises income from the sale of goods
and services during the year and can be analysed
as follows:
GBPm 2017 2016
-------------------------------------- -------- --------
Revenue from sale of
goods 1,508.8 1,445.0
Revenue from services 543.7 498.9
------------------------------------------ -------- --------
2,052.5 1,943.9
-------------------------------------- -------- --------
Operating segments
Underlying Segment net
operating assets
Revenue profit
------------------ ----------------------- ------------
2016 2016
GBPm 2017 2016 2017 (restated) 2017 (restated)
----------------------------- -------- -------- -------- ------------- ------------ -------------
Communications and
Connectivity 700.7 690.2 69.0 58.2 523.0 573.7
Mission Systems 419.0 386.4 55.2 60.0 206.2 196.3
Advanced Electronic
Solutions 568.4 511.6 63.3 66.2 583.4 686.1
Aviation Services 366.6 357.2 22.8 40.6 222.2 276.3
Head office, other
activities and elimination
of inter-segment items (2.2) (1.5) - - 13.8 37.5
----------------------------- -------- -------- -------- ------------- ------------ -------------
Total Group 2,052.5 1,943.9 210.3 225.0 1,548.6 1,769.9
----------------------------- -------- -------- -------- -------------
Interests in joint ventures
and associates 3.6 3.6
Unallocated liabilities (523.9) (1,283.6)
Total net assets 1,028.3 489.9
----------------------------- -------- -------- -------- ------------- ------------ -------------
The segmental analysis of underlying operating profit
for 2016 as shown above has been restated with the
effect of eliminating the net underlying operating
profit previously reported as Head Office and other
activities. The Directors consider that the revised
allocation, whereby all costs of the corporate head
office and Group functions are allocated across the
operating segments, more fairly represents the underlying
performance of the Group and its Sectors.
Underlying operating profit is reconciled
to the profit/(loss) before taxation as
follows:
GBPm Note 2017 2016
----------------------------- -------- -------- -------- ------------- ------------ -------------
Underlying operating
profit 210.3 225.0
Specific adjusting
items included within:
Cost of sales 2 - (208.7)
Operating costs 2 (106.2) (795.4)
Net finance costs 5 (37.2) (68.8)
Profit/(loss) before
taxation 66.9 (847.9)
----------------------------- -------- -------- -------- ------------- ------------ -------------
Geographical information
Revenue from external customers analysed by their
geographic location, irrespective of the origin of
the goods and services, is shown below; Non-current
assets are analysed by the physical location of the
assets and exclude financial instruments and deferred
tax assets.
Non-current
Revenue assets
----------------------- ------------
GBPm 2017 2016 2017 2016
----------------------------- -------- -------- -------- ------------- ------------ -------------
USA 1,028.8 941.9 647.3 862.0
UK 188.3 185.2 172.1 269.6
Other EU 337.5 312.1 294.8 289.6
Australia 229.5 213.9 146.2 151.4
Rest of the world 268.4 290.8 20.3 23.4
------------- -------------
2,052.5 1,943.9 1,280.7 1,596.0
----------------------------- -------- -------- -------- ------------- ------------ -------------
The largest component of revenue from customers located in the
rest of the world is GBP193.9m (2016: GBP195.1m) from customers in
Asia including the Middle East. The balance of this geographic
location includes South America, Africa, and non EU European
countries. Revenue from customers in individual countries within
the EU (except the UK) and the rest of the world is not considered
to be individually material.
5. Finance income and costs
GBPm 2017 2016
------------------------------------ ------- -------
Bank interest 3.9 0.9
Other finance income 2.2 3.2
------------------------------------ ------- -------
Total finance income 6.1 4.1
Interest on bank overdrafts and
loans (38.3) (51.9)
Interest on net pension scheme
liabilities (2.3) (1.8)
Other finance expense (2.7) (19.2)
------------------------------------ ------- -------
Total finance costs (43.3) (72.9)
Net finance costs (37.2) (68.8)
------------------------------------ ------- -------
Other finance expense for 2016 includes GBP19.0m
of make-whole fees payable in connection with
the early repayment of fixed term borrowings
following the Rights Issue in June 2016. These
costs are excluded from underlying earnings.
6. Taxation
GBPm 2017 2016
-------------------------------------- ------- --------
Charge for the year 22.0 45.1
Adjustments to tax charge in respect
of prior years - 4.5
--------
Current tax 22.0 49.6
Credit for the year (39.9) (107.6)
Impact of change in tax rates 2.7 5.0
Adjustments to tax charge in respect
of prior years 3.3 0.2
Deferred tax (33.9) (102.4)
Total tax credit for the year (11.9) (52.8)
-------------------------------------- ------- --------
Income tax is calculated on the estimated assessable profit for
the year at the rates prevailing in the relevant tax jurisdiction.
The total tax credit for the year includes a credit of GBP8.6m
(2016: credit GBP44.3m).
The effective tax rate for 2017 is (17.8%) (2016: 6.2%). The tax
charge on underlying profit is GBP39.8m (2016: GBP39.6m) at an
effective rate of 23.0% (2016: 22.6%).
Current tax risks
The Group is subject to corporate and other tax rules in the
jurisdictions where it conducts its business operations. Changes in
tax rates, tax reliefs and tax laws, changes in practice or
interpretation of the law by the relevant tax authorities,
increasing challenges by relevant tax authorities on transfer
pricing and other matters, or any failure to manage tax risks
adequately could result in increased charges, financial loss,
penalties and reputational damage, which may materially adversely
affect the Group's financial condition and results of
operations.
In addition, tax enforcement has become a higher priority for
many tax authorities in jurisdictions in which the Group operates,
which has led to an increase in tax audits, enquiries and
challenges, or the testing through litigation of the boundaries of
the correct interpretation of legislation. Tax authorities may also
actively pursue additional taxes based on retroactive changes to
tax laws and the Group may have disagreements with tax authorities
which could result in a material restatement to the tax position.
For example, the availability of certain interest deductions on one
of the Group's internal financing arrangements, principally as a
result of various US acquisitions, has been under challenge for
some time. Over the life of this internal financing arrangement,
the aggregate tax value of the interest deductions amounted to
approximately GBP130m. If decided adversely to the Group, this
could lead to increased tax liabilities in excess of those provided
in the Group's Balance Sheet, and result in a substantial tax
payment becoming due. That payment may also be subject to an
interest charge from the relevant authority. The Group has taken
external advice and considers that it has strong support for its
position. However, the timing and resolution of this issue is
uncertain.
The European Commission (EC) has opened an investigation into
the UK's controlled foreign company (CFC) rules. The CFC rules levy
a charge on foreign entities controlled by the UK that are subject
to a lower rate of tax, however there is currently an exemption
available for 75% of this charge if the activities being undertaken
by the CFC relate to financing. The EC are investigating whether
this exemption is in breach of EU State Aid rules, but it is too
early to assess what the conclusions of this investigation might
be.
On 22 December 2017 extensive changes to the US tax system were
made. A number of risks to the Group arise as a result, including
Anti-base erosion, the way that interest deductions are made,
foreign tax credits and tax of foreign earnings. These risks are
currently being assessed as further clarity is provided by the US
tax authorities.
In respect of the above risks and other uncertain tax positions
in the UK, US and other tax jurisdictions, amounts totalling
GBP126.4m (2016: GBP138.7m) have been accrued. Final resolutions
will affect the amounts settled and the timing of any settlements.
Whilst resolution remains uncertain, these amounts are included in
current liabilities.
Prior year restatement
In September 2017 the IFRS Interpretations Committee issued an
agenda decision on interest and penalties related to income taxes.
This decision clarified that entities do not have a policy choice
between applying IAS 12, 'Income taxes' and applying IAS 37,
'Provisions, contingent liabilities and contingent assets' to
interest and penalties related to income taxes. As a consequence
the Group has reassessed its treatment of interest and penalties
related to its global uncertain tax positions as presented in the
2016 Annual Report and Accounts. This resulted in other liabilities
within trade and other payables increasing by GBP9.5m, current tax
liabilities decreasing by GBP7.9m, and deferred tax assets
increasing by GBP1.6m and 2016 balances have been restated
accordingly.
7. Dividends
No dividends have been paid or approved by Cobham
plc during the year ended 31 December 2017. The
following dividends were paid in the prior year:
GBPm 2016
---------------------------------------------- --------
Final dividend of 7.07p per
share for 2015 (restated) 91.6
Interim dividend of 1.77p
per share for 2016 (restated) 34.5
------------------------------------------------ --------
126.1
---------------------------------------------- --------
Dividend per share figures above have been restated
to reflect the bonus element of the May 2017 Rights
Issue.
A dividend of GBP0.1m (2016: GBPnil) was paid
to the holders of non-controlling interests in
TEAM SA, a subsidiary of Cobham plc.
8. Cash flow from operations
GBPm Note 2017 2016
------------------------------------- -------------- ------- --------
Operating profit/(loss) 104.1 (779.1)
Non-cash items:
Share of post-tax results
of joint ventures and associates 0.2 (0.2)
Depreciation and amortisation 223.9 248.1
Impairment of goodwill and
intangible assets 9 33.5 573.8
Reversal of impairment provision 9 (31.8) -
(Profit)/loss on sale of
property, plant and equipment (0.2) 4.4
Business acquisition and
divestment related items (0.8) 1.7
Derivative financial instruments (28.9) 39.3
Adjustments to revisions of the
carrying values of other assets 2 (1.4) -
Adjustments to the assessment of
legal and other provisions 2 (8.0) -
Pension contributions in
excess of pension charges (17.3) (16.7)
Share based payments 5.5 3.8
Operating cash movements:
(Increase)/decrease in inventories (26.7) 50.8
Decrease in trade and other
receivables 24.1 21.9
Increase/(decrease) in trade
and other payables 71.1 (9.7)
(Decrease)/increase in provisions (65.0) 87.9
------------------------------------- --------
Cash generated from operations 282.3 226.0
Tax paid (32.2) (20.1)
Interest paid (41.6) (74.7)
Interest received 6.7 3.5
Net cash from operating activities 215.2 134.7
------------------------------------- -------------- ------- --------
Use of alternative cash flow
performance measures
Free cash flow and operating cash flow are considered
to provide a consistent measure of the operating
cash flow of the Group's business. These alternative
performance measures are used in internal management
accounts and for decision making including capital
allocation. In addition to underlying profit measures,
underlying cash conversion is also used for internal
incentive arrangements, and presenting this information
allows users of the financial statements to better
understand the way in which performance is targeted.
Definitions of operating cash
flow measures
Free cash flow
Free cash flow is defined as net cash from operating
activities plus dividends received from joint
ventures, less cash flows related to the purchase
or disposal of property, plant, equipment and
intangible assets but excluding payments relating
to business acquisition and divestment related
activities.
Operating cash flow
Operating cash flow is free cash flow before payment
of tax, interest and restructuring costs.
Reconciliation of operating
cash flow measures
The Cash Flow Statement subtotal of net cash from
operating activities is reconciled to alternative
measures of cash flow, free cash flow and operating
cash flow, as follows:
GBPm 2017 2016
-------------------------------------------- ------- -------
Net cash from operating activities
per Cash Flow Statement 215.2 134.7
Purchase of property, plant
and equipment (69.0) (82.8)
Purchase of intangible assets (10.8) (9.1)
Capitalised expenditure on
intangible assets - (0.3)
Proceeds on disposal of property,
plant and equipment 5.1 6.1
Business acquisition and divestment
related costs paid 0.1 2.1
Free cash flow 140.6 50.7
Amounts related to prior periods
restructuring programmes 9.9 39.8
Tax paid 32.2 20.1
Underlying net finance costs
paid 34.9 71.2
---------------------------------------------
Operating cash flow 217.6 181.8
--------------------------------------------- ------- -------
The underlying cash conversion ratio is the operating
cash flow divided by the underlying operating
profit, excluding the share of results of joint
ventures and associates:
GBPm 2017 2016
-------------------------------------------- ------- -------
Underlying operating profit excluding
the share post-tax result of joint
ventures 210.5 224.8
Operating cash flow 217.6 181.8
--------------------------------------------- ------- -------
Underlying cash conversion 103% 81%
--------------------------------------------- ------- -------
9. Intangible assets
GBPm 2017 2016
---------------------------------------- --------- ---------
Carrying amount at start of year 1,165.9 1,729.5
Additions 10.6 8.2
Additions - internally generated - 0.3
Business divestments - (1.0)
Disposals - (0.2)
Amortisation of intangible assets
arising on business combinations (138.9) (161.2)
Other amortisation (10.8) (14.0)
Impairment provision (33.5) (573.8)
Reversal of impairment provision 31.8 -
Reclassified as held for sale (88.1) -
Other reclassifications 0.6 2.0
Foreign exchange adjustments (43.8) 176.1
----------------------------------------
Carrying amount at end of period 893.8 1,165.9
---------------------------------------- --------- ---------
Goodwill
Goodwill must be allocated to CGUs for the purposes
of reporting and accounting. Cobham has previously
defined CGUs in line with Business Units. However
during the year, the Group determined that following
completion of all historic integration activities,
the strategic review undertaken in 2017 and increasing
numbers of new customer platforms using multiple
Cobham products, CGUs are now more appropriately
defined at the Sector level. This avoids the need
to allocate goodwill on an increasingly arbitrary
basis and represents the lowest level at which
goodwill is now monitored by management. Prior
to making the assessment of impairment at this
new level, impairment reviews were performed at
the Business Unit level. Where relevant any impairments
arising are discussed below.
The carrying value of goodwill is allocated to
the following Sectors:
GBPm 2017 2016
---------------------------------------- --------- ---------
Communications and Connectivity 278.8 310.0
Mission Systems 89.8 92.4
Advanced Electronic Solutions 225.1 244.1
Aviation Services 43.3 78.7
Total 637.0 725.2
---------------------------------------- --------- ---------
Helicopter Services goodwill arose on the acquisition
of the FB Group in 2013. The previously announced
loss of the UK Defence Helicopter Flying School
contract, which expires at the end of March 2018,
meant this business has been more sensitive to
its ability to secure extensions on its remaining
portfolio of contracts and to secure new business.
In 2017 the business was not able to win extensions
with two key non-UK customers where local governments
are reconsidering whether or not, and how, they
fund training activities. Reflecting the lower
level of secured income into future projections
an impairment provision of GBP33.5m has been expensed
leaving a balance of GBP17.3m.
GBP31.8m of a previous impairment of intangible
assets held in the Wireless business was reversed
with reference to the expected sale proceeds less
costs to sell for the AvComm and Wireless businesses,
which were subsequently reclassified as held for
sale in the Balance Sheet.
10. Property, plant and equipment
GBPm 2017 2016
---------------------------------------- -------- -------
Carrying amount at start of year 422.9 379.9
Additions 69.4 81.5
Business divestments - (0.9)
Disposals (4.5) (10.5)
Depreciation (74.0) (72.2)
Reclassified as held for sale (18.3) -
Other reclassifications (0.6) (2.3)
Foreign exchange adjustments (14.0) 47.4
----------------------------------------
Carrying amount at end of period 380.9 422.9
---------------------------------------- -------- -------
At 31 December 2017 the Group had commitments
for the acquisition of property, plant and equipment
of GBP13.8m (2016: GBP14.3m).
11. Inventories
GBPm 2017 2016
------------------------------------- ------- -------
Raw materials and consumables 179.9 210.7
Work in progress 247.0 238.2
Finished goods and goods for resale 38.5 42.5
Allowance for obsolescence (76.0) (86.1)
------------------------------------- -------
389.4 405.3
------------------------------------- ------- -------
12. Fair values of financial assets
and liabilities
The fair value of financial assets and liabilities
which are held at fair value and are measured on
a recurring basis are as follows:
GBPm 2017 2016
------------------------------------------- -------- -------
Financial assets
Derivative contracts (designated
as hedging instruments) 22.2 18.9
Derivative contracts (not hedge
accounted) 13.2 9.3
Financial liabilities
Derivative contracts (designated
as hedging instruments) (22.0) (20.4)
Derivative contracts (not hedge
accounted) (17.4) (54.0)
(4.0) (46.2)
------------------------------------------- -------- -------
Borrowings are held at amortised cost which equates
to fair value except for the Group's fixed rate
borrowings. At 31 December 2017 the fair value
of those borrowings was GBP743.7m (2016: GBP932.8m)
compared to their book value of GBP687.4m (2016:
GBP848.9m). The fair value of the fixed rate borrowings
and derivative financial instruments have been
determined by reference to observable market prices
and rates.
Financial assets and liabilities which are initially
recorded at fair value and subsequently held at
amortised cost include trade and other receivables,
other financial assets, cash and cash equivalents,
trade payables and other liabilities. The carrying
values of these items are assumed to approximate
to fair value due to their short term nature.
13. Non-current assets and disposal groups held
for sale
On 2 February 2018, the divestment of the Group's
AvComm and Wireless test and measurement businesses,
part of the Cobham Communications and Connectivity
Sector was announced. The following assets and
liabilities have been classified as held for sale
in the Balance Sheet as at 31 December 2017, and
are measured on a non-recurring basis at fair value,
taking into account the agreed selling price of
US$455m. The divestment is expected to complete
within the first half of 2018, subject to regulatory
approval.
GBPm 2017
------------------------------------------------ -------
Property, plant and equipment 18.3
Investment property 0.6
Intangible assets 88.1
Deferred tax 3.8
Inventories 20.3
Trade and other receivables 40.6
-------------------------------------------------
Total assets classified as held for
sale 171.7
Trade payables and other liabilities (37.5)
Deferred tax (10.6)
Provisions (1.0)
------------------------------------------------- -------
Total liabilities associated with assets
classified as held for sale (49.1)
Total non-current assets and disposal
groups held for sale 122.6
------------------------------------------------- -------
There were no non-current assets or disposal groups
held for sale at 31 December 2016.
14. Provisions
GBPm 2017 2016
------------------------- ------ ------
Current liabilities 125.1 180.6
Non-current liabilities 30.7 57.3
------------------------- ------ ------
155.8 237.9
------------------------- ------ ------
Movements in provisions during the year are as follows:
Provisions
Contract related Aircraft
loss to businesses Restructuring Warranty maintenance
GBPm provisions divested provisions claims provisions Other Total
------------------------- ------------ --------------- -------------- --------- ------------- ------ -------
At 1 January
2017 147.0 6.6 23.4 17.0 3.3 40.6 237.9
Additional provisions
in the year 8.3 - - 6.0 1.0 7.2 22.5
Utilisation
of provisions (66.5) (0.7) (2.1) (3.5) (1.0) (6.5) (80.3)
Provisions
released (1.2) - (1.5) (6.0) (0.6) (4.2) (13.5)
Reclassified
as held for
sale - - - (0.7) - (0.3) (1.0)
Other reclassifications 5.5 - (1.5) 2.2 - (8.5) (2.3)
Foreign exchange
adjustments (3.4) - (0.7) (0.2) - (3.2) (7.5)
-------------------------- ------------ -------------- --------- ------------- ------ -------
At 31 December
2017 89.7 5.9 17.6 14.8 2.7 25.1 155.8
-------------------------- ------------ --------------- -------------- --------- ------------- ------ -------
Provisions released in the year include the release
of GBP4.3m of warranty and GBP3.7m of legal and
other provisions which have been excluded from underlying
earnings as shown in note 2.
15. Retirement benefit
obligations
GBPm 2017 2016
----------------------------- -------- --------
Defined benefit scheme
assets 816.3 790.0
Defined benefit obligations (879.5) (877.0)
(63.2) (87.0)
----------------------------- -------- --------
Movements in the net
liability are as follows:
GBPm 2017 2016
----------------------------- -------- --------
Net liability at start
of year (87.0) (56.7)
Amounts recognised in
the Income Statement (3.2) (3.6)
Employer contributions 18.2 18.5
Amounts recognised in
OCI 7.4 (42.6)
Exchange differences 1.4 (2.6)
Net liability at end
of year (63.2) (87.0)
----------------------------- -------- --------
16. Share capital
Share
capital Share premium
----------------
Number
of 2.5p shares GBPm GBPm
-------------------- ---------------- --------- --------------
At 1 January 2016 1,214,527,625 30.4 301.9
Issued in the year 569,287,950 14.2 476.4
-------------------- ---------------- --------- --------------
At 31 December
2016 1,783,815,575 44.6 778.3
Issued in the year 683,145,540 17.1 479.6
At 31 December
2017 2,466,961,115 61.7 1,257.9
-------------------- ---------------- --------- --------------
Shares were issued on 4 May 2017 as a result of a 2 for 5 fully
underwritten Rights Issue at an issue price of 75 pence per share.
Net proceeds of GBP496.7m were realised after costs of GBP15.7m. In
the prior year, shares were issued following a 1 for 2 fully
underwritten Rights Issue which raised net proceeds of GBP490.6m
after costs of GBP16.1m.
17. Contingent liabilities
At 31 December 2017, the Company and the Group had contingent
liabilities in respect of bank and contractual performance
guarantees and other matters arising in the ordinary course of
business. Where it is expected that a material liability will arise
in respect of these matters, appropriate provision is made within
the Group Financial Statements.
As announced in June 2017, Cobham was notified by the Financial
Conduct Authority that it had appointed investigators to ascertain
whether the Company had breached the Listing Rules and the
Disclosure and Transparency Rules between April 2016 and February
2017 and the Market Abuse Regulation between July 2016 and February
2017. It is currently not possible to predict what the outcome of
this investigation will be.
The Company and various of its subsidiaries are, from time to
time, parties to various legal proceedings and claims and
management do not anticipate that the outcome of these, either
individually or in aggregate, will have a material adverse effect
upon the Group's financial position.
The nature of much of the contracting work done by the Group
means that there are reasonably frequent contractual issues,
variations and renegotiations that arise in the ordinary course of
business, whose resolution is uncertain and could materially impact
the Group's future reported earnings. In particular, on fixed price
development contracts, costs incurred and anticipated can
significantly exceed amounts estimated as a result of material
enhancements to the specifications originally agreed under the
contracts. Judgement is therefore required as regards the estimated
costs to complete, the outcome of negotiations with customers and
the amounts recoverable under these contracts. The amount
recoverable may be subject to direct damages due to the customer
and damages or penalties they incur from their own end users. In
particular there are onerous contract terms and challenging
delivery schedules on air to air refuelling development contracts.
The Group may take account of the advice of experts as required in
making these judgements and whether the outcome of negotiations
will result in an appropriate recovery of costs.
In the case where the Group is undertaking development activity
at its own cost, but has given performance undertakings to
prospective customers, then a liability for losses consequent upon
the failure to meet such undertakings could exist.
The Group is subject to corporate and other tax rules in the
jurisdictions where it conducts its business operations. Changes in
tax rates, tax reliefs and tax laws, changes in practice or
interpretation of the law by the relevant tax authorities,
increasing challenges by relevant tax authorities on transfer
pricing and other matters, or any failure to manage tax risks
adequately could result in increased charges, financial loss,
penalties and reputational damage, which may materially adversely
affect the Group's financial condition and results of
operations.
In addition, tax enforcement has become a higher priority for
many tax authorities in jurisdictions in which the Group operates,
which has led to an increase in tax audits, enquiries and
challenges, or the testing through litigation of the boundaries of
the correct interpretation of legislation. Tax authorities may also
actively pursue additional taxes based on retroactive changes to
tax laws and the Group may have disagreements with tax authorities
which could result in a material restatement to the tax position.
For example, the availability of certain interest deductions on one
of the Group's internal financing arrangements, principally as a
result of various US acquisitions, has been under challenge for
some time. Over the life of this internal financing arrangement,
the aggregate tax value of the interest deductions amounted to
approximately GBP130m. If decided adversely to the Group, this
could lead to increased tax liabilities in excess of those provided
in the Group's Balance Sheet, and result in a substantial tax
payment becoming due. That payment may also be subject to an
interest charge from the relevant authority. The Group has taken
external advice and considers that it has strong support for its
position. However, the timing and resolution of this issue is
uncertain.
The European Commission (EC) has opened an investigation into
the UK's controlled foreign company (CFC) rules. The CFC rules levy
a charge on foreign entities controlled by the UK that are subject
to a lower rate of tax, however there is currently an exemption
available for 75% of this charge if the activities being undertaken
by the CFC relate to financing. The EC are investigating whether
this exemption is in breach of EU State Aid rules, but it is too
early to assess what the conclusions of this investigation might
be.
On 22 December 2017 extensive changes to the US tax system were
made. A number of risks to the Group arise as a result, including
anti-base erosion, the way that interest deductions are made,
foreign tax credits and tax of foreign earnings. These risks are
currently being assessed as further clarity is provided by the US
tax authorities.
18. Events after the balance sheet date
The Group's US$75m credit agreement was repaid in January 2018
following the refinancing activity completed in December 2017.
The divestment of the AvComm and Wireless test and measurement
businesses was announced on 2 February 2018, as disclosed in note
13.
-Ends-
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR EAAAPAFPPEAF
(END) Dow Jones Newswires
March 01, 2018 02:02 ET (07:02 GMT)
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