TIDMCOB
RNS Number : 2998Y
Cobham PLC
02 March 2017
NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, DIRECTLY OR
INDIRECTLY, IN OR INTO AUSTRALIA, CANADA, JAPAN OR SOUTH AFRICA OR
ANY OTHER STATE OR JURISDICTION IN WHICH SUCH RELEASE, PUBLICATION
OR DISTRIBUTION WOULD BE UNLAWFUL.
2 March 2017
PRELIMINARY RESULTS FOR THE YEARED 31 DECEMBER 2016 AND PROPOSED
RIGHTS ISSUE
Initial diagnosis made of underlying problems following a deeply
disappointing year; in early stages of actions to arrest and
reverse Cobham's negative performance trajectory.
Note 2016 2015(2)
Underlying results** 1
Order intake GBP2,084.0m GBP2,148.0m
Revenue GBP1,943.9m GBP2,072.0m
Operating profit GBP225.0m GBP332.2m
Profit before tax GBP175.2m GBP280.4m
Earnings per share (EPS) 9.0p 16.5p
Free cash flow 3 GBP50.7m GBP105.5m
Net debt/EBITDA 3.0x 2.9x
Statutory results
Operating (loss)/profit GBP(779.1)m GBP12.0m
Loss before tax GBP(847.9)m GBP(39.8)m
Basic EPS (52.8)p (2.8)p
Net debt GBP1,028.2m GBP1,206.8m
Full year dividend per share 2.03p 11.18p
**Underlying results are presented to assist with the
understanding of the Group's performance trends. These measures are
defined in the notes on page 4 and reconciled to GAAP measures in
this statement on page 21.
2016 Results
-- Underlying operating profit: impacted by weaknesses in
management and financial controls; contractual and commercial
failures and, in a few businesses, more challenging market
conditions
-- Balance sheet review: impairments of GBP573.8m and other
charges of GBP236.8m, including KC-46, as announced on 16 February
2017
-- Dividend policy: final dividend for 2016 suspended, as
announced on 11 January 2017. No dividend to be recommended in
respect of 2017
2017 Priorities
-- Management focus: better control and execution, improved
customer relationships, simplification of systems, processes and
reporting, combined with strong and visible leadership
Actions to address balance sheet
-- Financial position: targeting a net debt/EBITDA gearing ratio of 1.5x
-- Rights Issue: Board to raise approximately GBP500m (gross
proceeds), by way of a Rights Issue, which is fully underwritten on
a standby basis; anticipated to complete during second quarter of
2017
Outlook
-- 2017: outlook unchanged from 16 February 2017 announcement
-- Medium term: leverage Cobham's strong capabilities and market
positions into improved operating and financial performance, from a
business model that produces an attractive and sustainable returns
profile
Michael Wareing, Cobham Chairman said:
"The Board and I are deeply disappointed with events through
2016 and the poor outcome that has been delivered. While the Board
has already undergone significant change over recent months, it is
my intention to effect a rolling programme of material Board
changes over the next two years.
"Our new management team, who has only been in place for a few
weeks, has presented an initial diagnosis of the issues and a
realistic assessment of the Group's operating and financial
position."
David Lockwood, Cobham Chief Executive Officer said:
"Given the reality of Cobham's current financial performance and
our high leverage coming into the year, we have announced actions
today to strengthen the balance sheet. This is needed to reassure
our customers, to give us the flexibility to drive operational
improvements and to provide us with a sustainable platform for the
future.
"Cobham has a portfolio of businesses with leading positions in
attractive markets, differentiated technologies and know-how, and
an enviable customer list. This gives us confidence that Cobham can
be reinvigorated over time, as our actions release its potential
and demonstrate the value in our businesses."
ENQUIRIES
Cobham plc
Julian Wais, Director of Investor
Relations +44 (0)1202 857998
MHP Communications
Reg Hoare/Tim Rowntree/Jamie Ricketts +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, 2 March 2017, 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 20 March 2017.
A PDF of this preliminary announcement is available for download
from www.cobhaminvestors.com/reports-and-presentations/2016.
The following notes apply throughout these preliminary
results:
1. To assist with the understanding of earnings trends, the
Group has included within its published financial statements
non-GAAP measures including underlying operating profit (previously
called trading profit) and underlying profit. All underlying
measures include the operational results of all businesses
including those held for sale until the point of sale. The non-GAAP
measures used do not include the impact of items described below
which are not considered to reflect the day to day operating
results of the Group. Underlying measures are therefore considered
to provide a more comparable view year-on-year, having removed the
distorting effects of the excluded items which are more clearly
understood when presented separately.
Underlying operating profit has been defined as operating profit
from continuing operations excluding the impacts of business
acquisition and divestment related activity and business
restructuring costs as detailed below. Also excluded are changes in
the marking to market of non-hedge accounted derivative financial
instruments, gains and losses arising on dividend related foreign
exchange contracts and other items deemed by the Directors to be of
an exceptional, non-operating nature including impairment of
intangible assets.
Business acquisition and divestment related items excluded from
underlying operating profit and underlying profit 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 and other
direct costs associated with business combinations and terminated
divestments.
Business restructuring costs relate to the restructuring of the
Group's portfolio which are incremental to normal operations. Where
restructuring costs are incurred as a result of the on-going
execution of Group strategy, such costs are included within
administrative expenses and are not excluded from underlying
results.
In 2016 additional exceptional items excluded from underlying
results due to their unusual size and incidence arose out of the
January 2017 Balance Sheet review and include revisions to the
carrying value of assets, additional contract loss provisions and
legal and other provisions.
Underlying profit before taxation is defined as underlying
operating profit less net underlying finance costs, which exclude
business acquisition and divestment related items and non-recurring
finance costs (such as costs associated with the early repayment of
senior notes following the June 2016 Rights Issue).
A reconciliation of the statutory results to the respective
underlying measures is shown on page 20.
2. Restatement relates to the reflection of the bonus element of
the June 2016 Rights Issue on the prior period average number of
shares and EPS.
3. 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 conversion is defined as operating cash flow as a percentage
of underlying operating profit excluding the share of post-tax
profits of joint ventures and associates.
A reconciliation of underlying operating profit to operating
cash is shown on page 21.
Net debt is defined as the net of borrowings less cash and cash
equivalents at the balance sheet date.
4. Organic revenue is defined as revenue stated at constant
translation exchange rates, excluding the incremental effect of
acquisitions and divestments.
5. 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.
CHIEF EXECUTIVE'S REVIEW
Performance in 2016
It has been a very challenging year for Cobham and the result
reflects a number of significant management, execution and market
issues. Despite the obvious attributes of the business, including
its differentiated technology and know-how and leading market
positions, there are a wide range of strategic, operational and
cultural weaknesses that need addressing.
The year-on-year decrease in underlying operating profit is
partly due to a disappointing 7.7% organic(4) revenue decline in
the year, including an adverse revenue mix from an increase in
lower margin activity. In addition, there have been a number of
previously announced execution issues which have increased costs
and had an adverse impact on the Group's profitability in 2016.
Underlying Issues
The Group has many issues which require attention to reverse the
current negative performance trajectory. These will be the subject
of relentless focus for every employee, starting with me.
During 2016, there have been a succession of performance issues
in a number of Cobham businesses. These have stemmed from
weaknesses in management and financial controls; contractual and
commercial failures and, in a few businesses, more challenging
market conditions.
Change projects and initiatives driven from the centre have
diverted focus from improving critical production, operational and
contract performance. These change programmes have consumed
significant financial resources and management energy over a number
of years with disappointing outcomes.
The Group's reporting structures, including its internal
processes and the allocation of responsibilities have become overly
complex and unclear. In a number of instances, this has led to
duplication, reduced accountability and slow decision making, which
have contributed to sustained operational and financial challenges.
This situation has ultimately impacted employee motivation and
morale, evidenced by Cobham's high voluntary staff turnover.
Furthermore, with hindsight, the Group may have misread the
cycles within its markets and within its businesses, making poorly
timed acquisitions or integrating them poorly. These acquisitions
appear to have amplified internal weaknesses, rather than
compensated for them.
Technology and Market Positions
However, the poor 2016 outcome and the underlying issues above
are in stark contrast to what I have seen since I became Cobham's
Chief Executive Officer on 14 December 2016. The Group holds
leading positions in many of its specialist markets, and its
technologies are critical to customer needs. Many of these markets
are highly attractive and offer good medium term opportunities. The
high technology value-add and Cobham's leading market positions
represent significant barriers to entry. The key, of course, is to
monetise these attributes by improving our execution.
Consistent with these observations, I have also met a number of
customers and other business partners, and I have had very
encouraging early engagements with them. My customer meetings have
been both with those who have had a significant and long term
relationship with Cobham and those where there is tremendous,
untapped potential. It is apparent that there are many
opportunities for our businesses to increase market share, as there
is both a need and a real enthusiasm for the products and services
that Cobham can offer.
I have also met many Cobham employees and have been impressed by
their knowledge, passion and commitment. If we can effectively
harness the energy I have seen and apply the Group's technology to
win the most promising programmes, executing on time and on budget,
then I am confident the fortunes of the company will be restored
over time.
In thinking about future margins, there are things we can
control and things we cannot. We cannot control market forces,
which may benefit us or weigh on us. However, we can control our
operational delivery. We have already announced that it may be
challenging to deliver a similar performance to that of 2016 in
2017. However, when I look at our capabilities and market
positions, and also what well run companies with similar
characteristics achieve, over the medium term we should be able to
deliver underlying operating margins 2-3% higher than at present,
all else being equal.
I also intend to prioritise cash flow as a key measure of
operational performance and not just now whilst we strengthen our
balance sheet, but always. For the next two to three years we will
need to fund the onerous contract provisions that were taken at the
year end on key development programmes. Once we are through the
development cycle, a company like Cobham ought to be targeting a
run rate cash conversion of around 90%, thereby demonstrating its
quality of earnings.
Priorities for 2017
Having carefully considered the Group's position, I have set the
following priorities for 2017:
Control and Execution
We need to deliver consistently to our customers' and to our
shareholders' expectations, recognising we have not always done so.
We are in the early stages of enhancing our management controls and
our operational and financial disciplines to address this,
understanding that a strong operational performance and financial
control are key pillars of improvement for us.
Customer Focus
It is also vital that we bring additional focus to our customer
relationships. This starts with me, the CEO, and then must be
reflected throughout our businesses. We will allocate an
appropriate level of resource and contact to each customer and
prioritise winning and retaining key platform and programme
positions.
Cobham spent approximately GBP130 million on Private Venture(5)
(PV or company funded research and development - R&D) in 2016.
This was matched by a broadly similar amount funded by our
customers. This investment provides a powerful platform on which we
can develop world-class technologies with significant commercial
advantages. In the past this substantial programme of technology
investment has not always yielded the expected returns. We will be
looking at ways of focusing this R&D spend to generate maximum
shareholder value.
Leadership and Simplification
We will reduce complexity and duplication in the business by
simplifying systems, processes and reporting and, with this in
mind, we are also commencing a review of the breadth and shape of
the Group's portfolio. By aligning this reduction in complexity
with strong and visible leadership, we will build a sense of
momentum and clear purpose among Cobham's management and employees.
This will also improve accountability and enhance the speed and
quality of decision making.
To help me drive all these priorities, I am pleased that David
Mellors has joined me as Cobham's Chief Financial Officer (CFO).
David is an experienced CFO who, among his other attributes, has a
proven track record of improving financial discipline, driving cash
generation and achieving effective cost control.
Outlook
Whilst market uncertainties undoubtedly exist, the ability of
the Group to forecast performance is not as strong as it should be
and these factors lead to our early view for 2017 having a wide
range of potential outcomes.
The Group has many operational issues which require attention in
addition to arresting and reversing the current negative
performance trajectory. Some actions to address these have already
commenced but are at an early stage. Some actions may also have
associated costs. Given these and the issues highlighted above, the
Board considers that delivery of a similar performance to that of
2016 in 2017 may be challenging.
Despite the current challenges facing Cobham, the Group has a
portfolio of businesses with differentiated technologies and
know-how, and it has leading positions in attractive markets. These
offer good opportunities over the medium term and the Board is
confident that the fortunes of the company will be restored over
time.
Actions to Address the Balance Sheet
Year end net debt was GBP1,028.2m, a reduction of GBP178.6m on
the prior year, after the GBP490.6m net proceeds from the June 2016
rights issue. Net debt also reflects the Group's modest free cash
flow generation, GBP126.1m of dividend payments and adverse
exchange rate movements of GBP236.4m. Due to the limited reduction
in net debt and the Group's lower than expected profitability, the
Group's net debt/EBITDA ratio at the year end was 3.0x, slightly
higher than at 31 December 2015, but remains within the covenant
upper threshold.
As we previously stated, the balance sheet is not strong enough
to support the operations of the Group, given the important role it
plays in many customer programmes. A stronger balance sheet will
underpin the confidence of our customers and other stakeholders,
supporting our medium term growth aspirations, for the benefit of
our shareholders.
The Group is targeting a net debt/EBITDA gearing ratio of circa.
1.5x. This should be an appropriate capital structure given the
requirement for balance sheet strength. The timeframe to achieving
this target needs to be accelerated to give our customers,
suppliers and employees confidence in our financial position.
Having considered the cash required to complete its ongoing
development programmes, including the impact of the provisions
taken at the year end, and to strengthen its balance sheet
position, the Board has concluded that it is in the Group's best
interests to raise GBP500m by way of an Rights Issue, which is
fully underwritten on a standby basis and on customary market
conditions. The Rights Issue will be completed in Q2 2017.
The Board intends to use the proceeds of the Rights Issue to pay
down borrowings on the revolving credit facilities. There is no
current intention to pay down the senior notes prior to maturity
and incur make-whole charges before the Group has refinanced its
bank facilities in 2018. The Board also intends to more closely
align the currency mix of net debt with the currency mix of
profits, thereby reducing foreign exchange exposure on the gearing
ratio (net debt/EBITDA).
However the Group will also look to optimise its working capital
position over time and, as noted above, will consider the breadth
and shape of the portfolio.
Dividend
As previously announced, the Board will not be recommending a
final dividend in respect of financial year 2016. Furthermore, the
Board will not recommend either an interim or final dividend in
respect of financial year 2017 and it expects to resume dividend
payments when it is prudent to do so. This decision, and the level
of payment, will take into account a number of factors including
the Group's underlying earnings, cash flows and gearing, its
investment needs and the requirement to maintain an appropriate
level of dividend cover.
David Lockwood, OBE
Chief Executive Officer
BOARD
David Lockwood joined the Cobham Board on 14 December 2016 as
Chief Executive Officer, replacing Bob Murphy.
David Mellors joined the Board on 1 January 2017 as Chief
Financial Officer, replacing Simon Nicholls.
Michael Wareing, previously Senior Independent Director, became
Chairman on 1 January 2017, replacing John Devaney and Jonathan
Flint, Non-executive Director, also became Senior Independent
Director.
Going forward, the Board believes that it is important that a
number of new and experienced Non-executive Directors are appointed
to the Board. At the same time, it is important that the Group
benefits from a period of stability as well as effective continuity
into the future. Consequently, it is the Chairman's intention to
effect a rolling programme of material Board changes over the next
two years.
FINANCIAL OVERVIEW OF THE YEAR
Group order intake was GBP2,084.0m (2015: GBP2,148.0m). After
adjusting for divestments and currency Group order intake was 5%
lower. The Group's book-to-bill ratio was 1.07x (2015: 1.04x);
0.99x (2015: 1.09x) excluding the Aviation Services Sector.
Group revenue was lower at GBP1,943.9m (2015: GBP2,072.0m),
driven by divestments and a 7.7% organic decline. Partially
offsetting this there was a significant benefit from currency
translation.
Organic revenue decreased in the Aviation Services Sector by
GBP57.6m or 13.9%, which was driven by lower flying activity in
Australian natural resources markets. There was also a decrease due
to the cessation of some smaller flying contracts and reduced
operational readiness training activity in some defence markets.
The Advanced Electronic Solutions Sector, with an organic decline
of GBP46.2m or 8.3%, continued to be impacted by the end of
production on certain US defence programmes. Within the
Communications and Connectivity Sector, there was an organic
decline of GBP36.9m or 5.1%, including from lower test and
measurement revenue in the Wireless business and lower antenna and
SATCOM volumes. Organic revenue in the Mission Systems Sector was
down GBP27.3m or 6.6%, due to lower revenue overall from aerial
refuelling, principally due to C-130 tanker production volumes and
development revenue from the KC-46 tanker programme.
The Group made a statutory operating loss of GBP779.1m (2015:
GBP12.0m profit). This in part reflected the results of the
previously announced year-end balance sheet review. The Group
recognised a total non-cash impairment of goodwill and other
intangible fixed assets of GBP573.8m (2015: GBP26.6m) and GBP236.8m
(2015: nil) of other charges, including a GBP150.0m charge on the
KC-46 tanker programme. These charges have been recognised as
exceptional items.
As previously announced, the Group's underlying operating profit
was GBP225.0m (2015: GBP332.2m). This decrease in the Group's
underlying operating profit reflected the revenue reduction in the
year from lower shipment volumes, an adverse revenue mix, and the
lower flying activity. There were also significant additional costs
incurred, as previously announced, in the Wireless business and on
certain development programmes in the Advanced Electronic Solutions
Sector. The Group's underlying operating margin was 11.6% (2015:
16.0%).
Basic EPS was (52.8)p (2015: (2.8)p restated) and underlying EPS
was 9.0p (2015: 16.5p restated). The lower 2016 numbers also
reflected an adverse impact from the higher share count following
the rights issue.
Operating cash flow, which is stated after net capital
expenditure, but before interest and tax payments, was GBP181.8m
(2015: GBP234.6m). Operating cash conversion was 81% (2015: 71%),
including capital expenditure of GBP86.1m (2015: GBP98.7m). Free
cash flow was GBP50.7m (2015: GBP105.5m), after GBP39.8m (2015:
GBP48.2m) relating to prior periods' restructuring programmes.
Below free cash flow, the Group paid dividends of GBP126.1m
(2015: GBP122.1m). There was a net inflow of GBP492.9m (2015:
GBP24.9m outflow - net cost of treasury shares to satisfy awards
and options under the Group's share based schemes), primarily
relating to the net proceeds of the rights issue completed in the
first half.
The Group's net debt decreased to GBP1,028.2m (31 December 2015:
GBP1,206.8m) at the year end, including adverse exchange rate
movements of GBP236.4m (2015: GBP80.1m), which were largely driven
by translation of Cobham's US dollar denominated debt. Consistent
with the Group's funding agreements the net debt/EBITDA ratio was
3.0x (2015: 2.9x) at the year end.
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, wireless and mobile
connectivity markets.
GBPm 2015 FX Translation Divestments Organic(5) 2016
Revenue 771.8 68.7 (113.4) (36.9) 690.2
Operating Profit 108.4 6.6 9.3 (64.3) 60.0
Operating Margin 14.0% 8.7%
================== ====== =============== ============ =========== ======
Total Sector revenue decreased by GBP81.6m. This was driven by a
GBP113.4m decrease due to divestments, principally the Composites
businesses which were divested in November 2015, and the
Surveillance business divested in January 2016. There was a
favourable impact from currency translation of GBP68.7m, which was
partially offset by organic revenue, which was GBP36.9m or 5.1%
lower.
The organic revenue performance was primarily driven by lower
volumes including in the Wireless business, with lower sales of
test and measurement products. In addition, there were lower
antenna and SATCOM volumes, including an adverse impact from
discontinued product lines.
Underlying operating profit was GBP60.0m (2015: GBP108.4m). The
lower operating profit in part reflected the reduced volumes set
out above. However, there were also significant additional costs
incurred through the year primarily from increased resource
requirements and a number of accounting adjustments, as a result of
the previously announced operational issues in the Wireless
business, rendering it loss making in the year. There was a partial
offset to this from the favourable impact on operating profit from
divestments completed in 2015 and 2016, from currency translation
and from net cost savings achieved in the year. Reflecting the
overall impact of these factors, the Sector's operating margin was
8.7% (2015: 14.0%).
While marine markets remain challenging, there has been
acceleration in shipments of medium maritime Very Small Aperture
Terminals in the SATCOM business, which are linked to the growth in
subscribers for new constellations such as Inmarsat Global Xpress.
Within aerospace markets, Cobham's Aviator S SATCOM product has
been selected for the Airbus single aisle and long range aircraft,
as previously announced, with revenue anticipated from 2018.
In the Wireless business, sales volumes for test and measurement
products were lower, particularly for legacy test products, while
there has been growth in distributed antenna systems and initial
requests to support 5G pilot projects. The AvComm business has
developed the first industry test platform for Software
Communications Architecture, generating significant interest from
radio manufacturers and governments, with first orders received in
the second half of 2016. The Cobham Aerospace Communications
business has been awarded an initial contract from OneWeb for its
600+ internet-providing satellite constellation.
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 2015 FX Translation Divestments Organic(5) 2016
Revenue 382.4 37.4 (6.1) (27.3) 386.4
Operating Profit 68.0 6.3 (1.0) (16.8) 56.5
Operating Margin 17.8% 14.6%
================== ====== =============== ============ =========== ======
Total Sector revenue increased GBP4.0m, primarily reflecting
favourable currency translation of GBP37.4m. This was partly offset
by reduced revenue of GBP6.1m, due to the divestment of the
unmanned systems business in October 2016, and an organic decline
of GBP27.3m or 6.6%.
Within the organic result, there was revenue growth in some
areas, including from increased shipments of actuation control
subsystems related to air-to-ground munitions. However, this was
offset by lower revenue overall from aerial refuelling, principally
due to Lockheed Martin C-130 tanker production volumes and
development revenue from the KC-46 tanker programme.
Underlying operating profit was lower at GBP56.5m (2015:
GBP68.0m). This was primarily driven by lower C-130 volumes and a
lower profit contribution from KC-46 development revenue. Partially
offsetting these was a favourable impact from currency translation.
Reflecting these factors, the operating margin was 14.6% (2015:
17.8%).
As announced on 16 February 2017, the Group has taken an
exceptional charge of GBP150.0m in 2016 on KC-46 development. This
is not included in underlying operating profit above. Within this
programme, work on the conformity process for the KC-46 tanker
Centreline Drogue System (CDS) has continued and is now
substantially complete. Qualification activity on this system is
now ongoing as part of the overarching US Federal Aviation
Administration (FAA) certification process. Completion of
conformity activity for the more complex Wing Aerial Refuelling
Pods (WARP) and common components for the CDS continues. Elsewhere,
on the Airbus A400M programme the first full production wing pods
entered service with the German Air Force during 2016.
The Sector's long life Air Separation Module product has now
entered service with three major US airlines. This product
leverages previous investments in defence technology to reduce
flammability in commercial aircraft fuel tanks and is driven by an
FAA mandate to reduce and mitigate fuel tank flammability on board
all US domestic carriers by 2018. Demand for missile actuation
control subsystems on high volume air-to-ground missiles and laser
guided munitions continued to grow, with multi-year contracts
secured.
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 incorporates defence, including missile, radar and electronic
warfare, X-ray imaging, medical and industrial markets.
GBPm 2015 FX Translation Divestments Organic(5) 2016
Revenue 538.0 69.1 (49.3) (46.2) 511.6
Operating Profit 80.5 9.3 (5.0) (24.6) 60.2
Operating Margin 15.0% 11.8%
================== ====== =============== ============ =========== ======
Total Sector revenue decreased by GBP26.4m. This included a
GBP49.3m decrease due to divestments, principally Weinschel and
Inmet, which were divested in June 2015, and Metelics which was
divested in December 2015. There was a favourable impact from
currency translation of GBP69.1m, which was partially offset by
organic revenue, which was GBP46.2m or 8.3% lower.
Organic revenue was lower primarily due to the Integrated
Electronic Solutions business, which continued to be impacted by
the end of production on certain mature programmes. This included
the EA-18G Low Band Transmitter (LBT) programme for the US Navy,
although this impact was partially mitigated by the commencement of
the Low Band Consolidation programme, which will deliver upgrades
to the LBT system. In addition, there was lower revenue from space
programmes within the Semiconductor Solutions business. However,
partially offsetting the above, there was revenue growth from
missile programmes in the Microelectronic Solutions business.
Operating profit was GBP60.2m (2015: GBP80.5m). This was due to
the lower volumes described above, including from the mature
production programmes. The Sector incurred some additional costs,
including the previously announced technical and supplier quality
issues on certain of its development programmes, and additional IT
security compliance costs. In addition, there was a favourable
impact from currency translation. The Sector's operating margin at
11.8% (2015: 15.0%) reflected these factors.
The Sector is expected to continue to benefit from its strong
positions in missile, radar and electronic warfare markets. This
includes the Standard Missile-6 and Evolved Sea Sparrow Missile
(ESSM) programmes, which have been successfully tested for expanded
roles. It also has significant electronic warfare and radar
subsystem content on the F-35 Joint Strike Fighter aircraft, with a
continuing increase in aircraft production expected. In addition,
the Air and Missile Defense Radar programme is expected to go into
initial production in 2017, following a multi-year development
phase. The Sector has also had initial success in penetrating small
satellite programmes and anticipates production awards by early
2018, and it has continued to secure large orders for
Application-Specific Integrated Circuits. These are wins from
international space customers and long term agreements with
industrial customers.
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 2015 FX Translation Divestments Organic(5) 2016
Revenue 390.1 24.7 - (57.6) 357.2
Operating Profit 57.3 2.3 - (21.3) 38.3
Operating Margin 14.7% 10.7%
================== ====== =============== ============ =========== ======
Total Sector revenue decreased by GBP32.9m. While currency
translation had a GBP24.7m favourable impact, this was offset by
organic revenue, which was GBP57.6m or 13.9% lower. The majority of
this organic decline was in commercial markets, in particular due
to lower flying activity in Australian natural resources markets.
However, there was also a decrease, in part due to the cessation of
some smaller flying contracts in certain defence markets and
reduced operational readiness training activity. This was partially
offset by initial revenue from the new Australian Maritime Safety
Authority contract.
Operating profit was GBP38.3m (2015: GBP57.3m), primarily
reflecting the overall reduction in flying activity, with cost
actions taken which partially mitigated this impact. Reflecting
this, the operating margin was 10.7% (2015: 14.7%).
Conditions within the Australian natural resources market are
expected to remain challenging in 2017. Despite this outlook, the
Sector has commenced flying operations for Blackham Resources and
Doray Minerals to provide fly-in, fly-out services to mining sites
in Western Australia. The previously announced repriced ten year
contract extension to continue operations across Australia under
the Qantas brand commenced on 1 January 2017, albeit at reduced
margins. The mobilisation phase of the four specially modified
Bombardier Challenger CL-604 aircraft for the new 12-year AUS$640m
Australian Maritime Safety Authority contract is nearing
completion. The first fully modified aircraft commenced training
operations in September 2016 and the first base in Cairns began
service in December 2016, following regulatory and customer
acceptance. The remaining aircraft are undergoing mission systems
modifications in Cobham's Adelaide facilities and will enter
service in the first half of 2017. The Sector continues to operate
the defence helicopter flying school in the UK, with transition
planning underway ahead of the expected contract end on 31 March
2018.
FINANCIAL RESULTS
Orders
Group order intake was GBP2,084.0m (2015: GBP2,148.0m). Order
intake benefited from the significant contract extension for the
Aviation Services Sector in the first half, with it continuing
operations across Australia for Qantas until 2026. Overall, after
adjusting for divestments and currency, Group order intake was 5%
lower.
The Group's book-to-bill ratio was 1.07x (2015: 1.04x).
Excluding the Aviation Services Sector, which is characterised by
the receipt of large multi-year orders, the Group's book-to-bill
was 0.99x (2015: 1.09x).
At 31 December 2016, the Group's order book was GBP2,946.4m
(2015: GBP2,476.8m), an increase of 19%. Within this, orders due
for delivery in the current year are GBP1,301.7m (2015:
GBP1,130.5m), an increase on the prior year of 15%, but only 3%
after adjusting for divestments and currency.
Summary of Underlying Results
To assist with the understanding of earnings trends, the Group
has included within its published financial statements non-GAAP
measures including underlying operating profit and underlying
earnings. These are considered by the Board to be the most
meaningful measures under which to assess the operating performance
of the Group and provide additional useful information on
underlying trends to shareholders. The non-GAAP measures used do
not include the impact of items described below which are not
considered to reflect the day to day operating results of the
Group. As the Group has been acquisitive over time, these include
certain accounting treatments and adjustments credits that do not
result from the underlying business activity. In addition, in 2016
a number of business and control issues have been identified that
have given rise to changes in the financial statements. Given the
nature and size of these items, the Board believes that earnings
trends are better understood by separately identifying the amounts
as exceptional as detailed below. Underlying measures are therefore
considered to provide a more comparable view year on year, having
removed the distorting effects of the excluded items which are more
clearly understood when presented separately.
A reconciliation of underlying to statutory profit numbers is
set out on page 21.
A summary of the Group's underlying results is set out
below.
GBPm 2016 2015
==================================== ========= =========
Revenue 1,943.9 2,072.0
==================================== ========= =========
Operating Profit 225.0 332.2
Operating Margin 11.6% 16.0%
Net Finance Expense (49.8) (51.8)
==================================== ========= =========
Profit Before Tax 175.2 280.4
Tax (39.6) (60.2)
Tax Rate 22.6% 21.5%
==================================== ========= =========
Profit After Tax 135.6 220.2
Weighted Average Number of Shares 1,506.3 1,333.2
(millions)*
EPS (pence)* 9.0 16.5
==================================== ========= =========
*Comparatives have been restated to reflect the bonus element of
the rights issue completed during 2016.
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:
2016 2015
--------------------------------- ----- ------
Income statement - average rate
US$/GBP 1.35 1.53
AUS$/GBP 1.83 2.03
EUR/GBP 1.22 1.38
DKK/GBP 9.11 10.27
Balance sheet - closing rate
US$/GBP 1.24 1.47
AUS$/GBP 1.71 2.03
EUR/GBP 1.17 1.36
DKK/GBP 8.71 10.13
================================= ===== ======
Revenue
A summary of the changes to Group revenue in the year is as
follows:
2015 FX Translation Divestments Organic 2016
------------ --------------- ------------ ------------ ------------
GBP2,072.0m GBP199.5m GBP(166.5)m GBP(161.1)m GBP1,943.9m
============ =============== ============ ============ ============
Total Group revenue was lower at GBP1,943.9m (2015: GBP2,072.0m)
and this was primarily driven by divestments and lower organic
revenue. Partially offsetting this there was a significant benefit
from currency translation, as the pound sterling weakened against
all four of the Group's primary foreign currencies.
Analysing this revenue performance by end market, organic
revenue in the Group's commercial markets, which was 41% (2015:
38%) of Group revenue, was GBP46.7m or 5.5% lower in the year.
Organic revenue in the US defence/security market, which was 34%
(2015: 36%) of Group revenue, was GBP84.4m or 11.2% lower. UK, RoW
defence/security organic revenue, which was 25% (2015: 26%) of
Group revenue, was GBP30.0m or 5.9% lower.
Statutory Operating Loss
The Group made a statutory operating loss of GBP779.1m (2015:
GBP12.0m profit). This was adversely impacted by the lower
underlying operating result but also included significant
exceptional costs.
For 2016 a number of items are considered to be exceptional
because of their size and non-recurring nature and are excluded
from underlying measures. While these relate, in part to ongoing
activities, their impact is much larger than would normally be
expected in any individual accounting period and reflect commercial
events that are not expected to repeat. The Board has adopted a
more cautious approach due to the current trading environment and
associated risks. As a result, the Board considers these costs to
be exceptional.
To aid understanding, items have been aggregated into the
following categories based on similar business and control
factors:
-- Impairments of goodwill and intangible assets;
-- Revisions of the carrying values of other assets;
-- Estimates of fixed price contract profitability;
-- Assessment of legal and other provisions.
The Board has considered whether any of the identified items
above relate to prior years. The conclusion reached is that these
adjustments relate to 2016 events and no prior year adjustment is
necessary. The key components of these adjustments are as
follows:
1) Impairments of goodwill and intangible assets:
The Group has recognised a total non-cash impairment of goodwill
and other intangible assets of GBP573.8m (2015: GBP26.6m). This
impairment is made up of charges against:
-- The Wireless business unit, within the Communications and
Connectivity Sector, where there is an impairment of goodwill and
intangible assets of GBP196.1m. This unit includes part of the
Aeroflex acquisition in 2014 and Axell Wireless acquired in
2013;
-- The Integrated Electronic Solutions business unit, part of
the Advanced Electronic Solutions Sector, where there is an
impairment of goodwill of GBP185.7m. This unit includes the
Lansdale business acquired in 2009, part of the M/A-COM business
also acquired in 2009, the Trivec business acquired in 2011 and
part of the Aeroflex acquisition in 2014;
-- The Semiconductor Solutions business unit, also within the
Advanced Electronic Solutions Sector, where there is an impairment
of GBP192.0m. This unit includes part of the Aeroflex acquisition
in 2014.
The 2015 charge related to the Group's unmanned systems
business, which was divested during the year.
The impairments do not reflect a lack of confidence from the
Board that these businesses can create value in the future. They
are generated as a result of the lower 2016 outturn, combined with
lower growth from this base. Any benefits or costs expected to
arise from future restructuring or initiatives to enhance
performance which have not yet commenced are not included, in
accordance with accounting standards. The Board considers the
resultant charge to be exceptional given the significance of the
changes in approach that have been agreed.
Further details of the impairment review can be found in note
9.
2) Revisions to the carrying values of other assets:
A charge of GBP33.3m has been taken against other assets in the
balance sheet. This includes:
-- GBP20.2m against the inventory balance reflecting ageing
stock and lower demand forecasts;
-- GBP3.9m against intangible assets no longer planned to be used;
-- GBP3.9m tangible asset write down against plant and machinery
no longer expected to be used;
-- GBP5.3m provision against aged receivables considered doubtful.
These changes to asset carrying values were identified following
a detailed review and reassessment of recovery of generally older
items to a more cautious standard. Given the size of the changes,
these have been highlighted as exceptional items.
3) Estimates of fixed price contract profitability:
Additional contract loss provisions have been identified. The
Board considers these costs to be exceptional because of their size
and non-recurring nature.
In total a charge of GBP179.1m, including the KC-46 charge, has
been taken against certain contracts reflecting increased estimates
of costs to complete and, in some cases, lower recovery from
customers. The Board recognises that making estimates on complex
contracts is inherently judgemental and therefore whilst it has
taken a reasonable view of contract positions, the final outcome of
the contracts could be more or less favourable than the position
taken. The charges booked can be broadly categorised as:
-- GBP150.0m against KC-46 reflecting the position announced on 16 February 2017;
-- GBP18.5m on other development contracts within the Mission Systems Sector;
-- GBP7.7m on development contracts within the Advanced Electronic Solutions Sector;
-- GBP2.9m within the Communications and Connectivity Sector.
4) Legal and other provisions:
GBP24.4m of charges have been taken to cover the estimated
exposure on a number of legal, environmental, warranty and other
regulatory matters across the Group. Given the size and
non-recurring nature of the provisions, these have been highlighted
as exceptional.
The above adjustments for the estimates of fixed price contract
profitability and legal and other provisions are expected to be
cash affecting over the next two to three years.
In addition to the items identified by the balance sheet review
above, there were other items which have been accounted for as
non-underlying, consistent with prior years' treatment, with the
most significant being:
-- Amortisation of intangible assets arising on business
combinations of GBP161.2m (2015: GBP176.8m);
Goodwill and other intangible assets arising on business
combinations are recognised as a result of the purchase price
allocation on acquisition of subsidiaries.
-- Movements in non-hedge accounted derivative financial
instruments of GBP39.3m (2015: GBP18.8m);
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
results had the Group chosen to comply with IAS 39 requirements to
enable these contracts to be hedge accounted.
-- Business restructuring credit of GBP8.7m related to the
integration of the 2014 Aeroflex acquisition (2015: GBP67.5m charge
- primarily Aeroflex);
These costs relate to prior years' restructuring programmes
which have been accounted for as incremental to normal operations
and non-recurring in nature. In 2016 and 2015, these relate to the
integration of the Aeroflex businesses acquired in 2014. In 2016,
this also reflects a reassessment of the level of provisions
required in respect of the IT integration and remediation costs
resulting from the Aeroflex acquisition. This has occurred because
the technical methodology for resolving the issues was reassessed
in the year, making it inappropriate to use against the opening
provision and resulting in a reversal of GBP28.6m. It is expected
that these costs will be treated as non-underlying in future.
Net Finance Expense
The Group's net finance charge was GBP68.8m (2015: GBP51.8m),
and this included GBP19.0m (2015: nil) of make-whole payments
relating to the pay down of senior notes following the June 2016
Rights Issue. These have been treated as non-underlying as they are
one-off in nature and do not reflect the ongoing costs of servicing
the Group's net debt.
The Group's underlying net finance charge was GBP49.8m (2015:
GBP51.8m). The net expense on cash and debt holdings was GBP48.0m
(2015: GBP48.7m), with an adverse impact from foreign currency
translation largely offsetting the favourable impact of the lower
debt on the interest charge. The non-cash finance charge from
pension schemes was GBP1.8m (2015: GBP3.1m), and this is expected
to remain broadly unchanged in 2017.
Profit Before Tax
The Group made a statutory loss before tax of GBP847.9m (2015:
GBP39.8m). The Group's underlying profit before tax was GBP175.2m
(2015: GBP280.4m).
Taxation
The Group's overall tax credit was GBP52.8m (2015: GBP2.1m),
reflecting the significant operating loss in the year.
The Group's underlying tax rate increased to 22.6% (2015: 21.5%)
from an underlying tax charge of GBP39.6m (2015: GBP60.2m). This
included a change in the geographical mix of taxable profit.
Earnings per Share (EPS)
Basic EPS was (52.8)p (2015: (2.8)p), including the restatement
of the prior year figure for the bonus factor, following the 2016
rights issue. In addition to the underlying operating performance,
basic EPS was principally impacted by the exceptional items, as set
out in the paragraphs on the statutory operating loss. There was
also a higher share count, as set out below.
Underlying EPS of 9.0p (2015: 16.5p, restated) was 45% lower.
Underlying EPS was primarily impacted by the lower underlying
operating profit in the year but this decline included a reduction
of 12% from the higher share count following the rights issue,
partially offsetting a favourable foreign exchange impact.
The Group's average share count in the year was 1,506.3m (2015:
1,129.9m or 1,333.2m restated to reflect the bonus element of the
rights issue completed during 2016) with the year end share count,
excluding treasury shares, being 1,707.9m shares (31 December 2015:
1,138.6m).
Retirement Obligations
Cobham operates a number of defined benefit pension schemes,
with the largest being the Cobham Pension Plan in the UK. At the
year end the estimated deficit for accounting purposes, which is
the difference between the aggregate value of the schemes' assets
and the present value of their future liabilities, was GBP87.0m
before deferred tax (2015: GBP56.7m). The increase in the deficit
was due to a decrease in corporate bond rates which has resulted in
a lower discount rate being applied to the schemes' liabilities.
This was partially offset by gains in liability driven investments,
following previous years' de-risking, and by net employer
contributions made.
The Cobham Pension Plan was closed to future accrual on 1 April
2016.
Cash Flow
Operating cash flow, which is stated after net capital
expenditure, but before interest and tax payments was GBP181.8m
(2015: GBP234.6m). Operating cash conversion was 81% (2015: 71%),
including lower capital expenditure of GBP86.1m (2015: GBP98.7m).
There was also a modest working capital outflow of GBP8.2m (2015:
GBP48.9m).
Free cash flow was GBP50.7m (2015: GBP105.5m). There was net
interest paid of GBP71.2m (2015: GBP49.4m), which included GBP19.0m
(2015: GBPnil) of make-whole payments on senior notes that were
paid down following the rights issue. In addition, tax payments
were GBP20.1m (2015: GBP31.5m), reflecting the lower underlying
profits in the year. Also included in free cash flow were payments
relating to prior periods' restructuring programmes of GBP39.8m
(2015: GBP48.2m). A significant element of these ongoing payments
relate to items provided for in previous years, including lease
payments on vacated premises and IT remediation payments.
Below free cash flow, the Group paid dividends of GBP126.1m
(2015: GBP122.1m). In addition, there was a net inflow of GBP492.9m
(2015: GBP24.9m outflow - net cost of treasury shares to satisfy
awards and options under the Group's share based payment schemes),
primarily relating to the net proceeds of the rights issue
completed in the first half.
The table below sets out the Group's cash flows over the
year:
GBPm 2016 2015
Underlying operating profit 225.0 332.2
Less: share of post-tax results of joint
ventures (0.2) (0.2)
------------------------------------------------- -------- --------
Underlying operating profit (excluding
joint ventures) 224.8 332.0
Depreciation and amortisation 80.5 74.6
Share based payments and provisions (12.5) (6.6)
Pension contributions in excess of pension
charges (16.7) (17.8)
Increase in working capital (8.2) (48.9)
Net capital expenditure (86.1) (98.7)
Operating cash flow 181.8 234.6
Operating cash/operating profit (excluding
JV's) 81% 71%
------------------------------------------------- -------- --------
Net interest paid (71.2) (49.4)
Taxation paid (20.1) (31.5)
90.5 153.7
Amounts related to prior periods' restructuring
programmes (39.8) (48.2)
------------------------------------------------- -------- --------
Free cash flow 50.7 105.5
Dividends paid (126.1) (122.1)
Business acquisition and divestment related
costs paid (2.5) 137.5
Net rights issue proceeds and treasury
shares allocation 492.9 (24.9)
Exchange movements (236.4) (80.1)
------------------------------------------------- -------- --------
Decrease in net debt 178.6 15.9
================================================= ======== ========
Net Debt, Gearing and 2016 Rights Issue
The Group's net debt decreased to GBP1,028.2m (31 December 2015:
GBP1,206.8m) at the year end, including adverse exchange rate
movements of GBP236.4m (2015: GBP80.1m), which were largely driven
by translation of Cobham's US dollar denominated debt between the
opening and closing rates.
As previously announced, the Group swapped the net sterling
proceeds of the rights issue into US dollars at approximately
US$1.45/GBP, and this was used to repay US dollar denominated
borrowings. These repayments comprised US$523m of variable rate
debt and US$158m of fixed rate senior notes, and associated
make-whole payments. There was an average coupon of just over 7% on
the senior notes repaid.
Under the Group's borrowing agreements, the net debt number used
in the net debt/EBITDA ratio calculation is based on an average
foreign exchange rate. On this basis, the Group's year end net debt
figure was GBP937.9m. Consistent with the Group's borrowing
agreements, the net debt/EBITDA ratio was 3.0x (2015: 2.9x) at the
year end. Interest cover was 5.1x (2015: 6.8x).
RECONCILIATION OF UNDERLYING MEASURES
To assist with the understanding of earnings trends, the Group
has included within its published financial statements non-GAAP
measures including underlying operating profit and underlying
earnings results.
These are considered by the Board to be the most meaningful
measures under which to assess the operating performance of the
Group and provide additional useful information on underlying
trends to shareholders. The non-GAAP measures used do not include
the impact of items described below which are not considered to
reflect the day to day operating results of the Group. Underlying
measures are therefore considered to provide a more comparable view
year-on-year, having removed the distorting effects of the excluded
items which are more clearly understood when presented separately.
Definitions of the underlying measures can be found on page 4.
The table below provides a reconciliation between statutory
operating (loss)/profit and underlying operating profit, as well as
between statutory loss before tax and underlying profit before
tax.
GBPm 2016 2015
--------------------------------------------------- -------- -------
Operating (loss)/profit (779.1) 12.0
Adjusted to exclude:
Amounts relating to prior periods' restructuring
programmes (8.7) 67.5
Derivative financial instruments 39.3 18.8
Amortisation of intangible assets arising
on business combinations 161.2 176.8
Other business acquisition and divestment
related items 1.7 30.5
Exceptional items
Impairment of goodwill and other intangible
assets 573.8 26.6
Revisions of the carrying values of other 33.3 -
assets
Estimates of fixed price contract profitability 179.1 -
Assessment of legal and other provisions 24.4
Total operating reconciling items 1,004.1 320.2
--------------------------------------------------- -------- -------
Underlying operating profit 225.0 332.2
--------------------------------------------------- -------- -------
GBPm
--------------------------------------------------- -------- -------
Underlying profit before tax is calculated
as follows:
Loss before taxation (847.9) (39.8)
Total operating reconciling items as above 1,004.1 320.2
Non-underlying finance costs 19.0 -
--------------------------------------------------- -------- -------
Underlying profit before taxation 175.2 280.4
Taxation charge on underlying profit (39.6) (60.2)
--------------------------------------------------- -------- -------
Underlying profit after taxation 135.6 220.2
Underlying EPS (pence) 9.0 16.5
=================================================== ======== =======
This document contains inside information.
-Ends-
Cautionary Statements
This announcement is not a prospectus and not an offer of
securities for sale in any jurisdiction, including in or into the
United States, Australia, Canada, Japan or South Africa.
Neither this announcement nor anything contained herein shall
form the basis of, or be relied upon in connection with, any offer
of securities or commitment to make an offer whatsoever in any
jurisdiction. Any offer to acquire shares pursuant to the proposed
rights issue will be made, and any investor should make his or her
investment decision solely on the basis of the information that is
contained in the final prospectus (the "Prospectus") to be
published by Cobham plc ("Cobham" or the "Company") in due course
in connection with, among other things, the admission of ordinary
shares of the Company ("Ordinary Shares") to the Official List of
the UK Listing Authority and to trading on the main market for
listed securities of London Stock Exchange plc (together,
"Admission"). Copies of the Prospectus will, following publication,
be available from Cobham plc, Brook Road, Wimborne, Dorset BH21
2BJ.
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 plans 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 negatives 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 the 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 the 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.
This announcement does not constitute or form part of, and
should not be construed as, any offer, invitation, solicitation or
recommendation to purchase, sell or subscribe for any securities in
any jurisdiction and neither the issue of the information nor
anything contained herein shall form the basis of or be relied upon
in connection with, or act as an inducement to enter into, any
investment activity. Any purchase of Ordinary Shares in the
proposed rights issue should be made solely on the basis of the
information contained in the final Prospectus to be issued by
Cobham in connection with the proposed rights issue. The
information in this announcement is subject to change. This
announcement is for information and background purposes only and
does not purport to be full or complete.
This announcement is not and does not contain an offer of
securities for sale or a solicitation of an offer to purchase or
subscribe for securities in the United States, Australia, Canada,
Japan or South Africa or any other state or jurisdiction in which
such release, publication or distribution would be unlawful. The
securities to which this announcement relates (the "Securities")
have not been, and will not be, registered under the U.S.
Securities Act of 1933, as amended (the "Securities Act") and may
not be offered or sold in the United States unless registered under
the Securities Act or pursuant to an exemption from, or a
transaction not subject to, registration under the Securities Act.
There will be no public offer of the Securities in the United
States or any other jurisdiction. Subject to certain exceptions,
the Securities may not be offered or sold in Australia, Canada,
Japan or South Africa or to, of for the account or benefit of any
national, resident or citizen of such countries. The distribution
of this announcement and the offering of Securities in certain
jurisdictions may be restricted by law. No action has been taken by
the Company that would permit an offering of such Securities or
possession or distribution of this announcement or any other
offering or publicity material relating to such Securities in any
jurisdiction where action for that purpose is required. Persons
into whose possession this announcement comes are required by the
Company to inform themselves about, and to observe, such
restrictions.
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 profit or set a minimum level of operating profit.
The information in this announcement may not be forwarded or
distributed to any other person and may not be reproduced in any
manner whatsoever. Any forwarding, distribution, reproduction, or
disclosure of this information in whole or in part is unauthorised.
Failure to comply with this directive may result in a violation of
the Securities Act or the applicable laws of other
jurisdictions.
Neither the content of the Company's website nor any website
accessible by hyperlinks on the Company's website is incorporated
in, or forms part of, this announcement.
Consolidated Income Statement
For the year ended 31 December 2016
GBPm Note 2016 2015
----------------------------------------- ------ ----------- ----------
Revenue 3 1,943.9 2,072.0
Cost of sales (1,567.3) (1,408.2)
----------------------------------------- ------ ----------- ----------
Gross profit 376.6 663.8
Selling and distribution costs (134.5) (130.1)
Administrative expenses (1,021.2) (521.7)
Operating (loss)/profit (779.1) 12.0
Finance income 4 4.1 5.2
Finance costs 4 (72.9) (57.0)
Loss before taxation (847.9) (39.8)
Taxation 5 52.8 2.1
----------------------------------------- ------ ----------- ----------
Loss after taxation for the year (795.1) (37.7)
----------------------------------------- ------ ----------- ----------
Attributable to:
Owners of the parent (795.2) (37.8)
Non-controlling interests 0.1 0.1
----------------------------------------- ------ ----------- ----------
(795.1) (37.7)
----------------------------------------- ------ ----------- ----------
Earnings per ordinary share 7
Basic (52.8)p (2.8)p
Diluted (52.8)p (2.8)p
EPS for the comparative period has been restated for the impact
of the rights issue in June 2016.
Underlying results are presented to assist with the understanding
of the Group's performance trends. These measures are defined on
page 4 and reconciled to GAAP measures in note 2.
Consolidated Statement of Comprehensive
Income
For the year ended 31 December 2016
GBPm 2016 2015
----------------------------------------------------- ------- -------- ----------
Loss after taxation for the year (795.1) (37.7)
Items that will not be reclassified subsequently to profit or loss
Remeasurements of defined benefit retirement benefit
obligations (note 13) (42.6) 29.6
Actuarial loss on other retirement benefit
obligations (1.2) -
Tax effects 8.9 (5.9)
----------------------------------------------------- ------- -------- ----------
(34.9) 23.7
Items that may subsequently be reclassified to profit or loss
Net translation differences on investments
in overseas subsidiaries 41.3 (38.2)
Reclassification of cash flow hedge fair
values 1.6 1.1
Hedge accounted derivative financial instruments (2.8) -
Tax effects 0.4 (0.2)
----------------------------------------------------- ------- -------- ----------
40.5 (37.3)
Other comprehensive income/(expense) for the year 5.6 (13.6)
-------------------------------------------------------------- -------- ----------
Total comprehensive expense for the year (789.5) (51.3)
----------------------------------------------------- ------- -------- ----------
Attributable to:
Owners of the parent (789.6) (51.4)
Non-controlling interests 0.1 0.1
----------------------------------------------------- ------- -------- ----------
(789.5) (51.3)
------------------------------------------------------------ -------- ----------
Consolidated Balance Sheet
As at 31 December 2016
GBPm Note 2016 2015
----------------------------------------------- ----- ---------- ----------
Assets
Non-current assets
Intangible assets 9 1,165.9 1,729.5
Property, plant and equipment 10 422.9 379.9
Investment properties 3.6 4.3
Investments in joint ventures and associates 3.6 3.0
Trade and other receivables 66.0 71.3
Other financial assets 6.1 6.1
Deferred tax 42.3 11.4
Derivative financial instruments 19.7 6.5
----------------------------------------------- ----- ---------- ----------
1,730.1 2,212.0
----------------------------------------------- ----- ---------- ----------
Current assets
Inventories 405.3 410.4
Trade and other receivables 409.8 366.0
Current tax receivables 3.1 8.6
Derivative financial instruments 8.5 9.1
Cash and cash equivalents 8 236.2 294.7
Assets classified as held for sale - 16.8
----------------------------------------------- ----- ---------- ----------
1,062.9 1,105.6
----------------------------------------------- ----- ---------- ----------
Liabilities
Current liabilities
Borrowings 8 (60.9) (156.4)
Trade and other payables (430.8) (398.1)
Provisions 12 (180.6) (74.3)
Current tax liabilities (149.5) (125.1)
Derivative financial instruments (42.2) (30.6)
Liabilities associated with assets classified
as held for sale - (12.7)
----------------------------------------------- ----- ---------- ----------
(864.0) (797.2)
----------------------------------------------- ----- ---------- ----------
Non-current liabilities
Borrowings 8 (1,203.5) (1,345.1)
Trade and other payables (31.5) (24.8)
Provisions 12 (57.3) (68.2)
Deferred tax (27.6) (102.0)
Derivative financial instruments (32.2) (13.9)
Retirement benefit obligations 13 (87.0) (56.7)
----------------------------------------------- ----- ---------- ----------
(1,439.1) (1,610.7)
----------------------------------------------- ----- ---------- ----------
Net assets 489.9 909.7
----------------------------------------------- ----- ---------- ----------
Equity
Share capital 14 44.6 30.4
Share premium 778.3 301.9
Other reserves 37.9 (0.3)
Retained earnings (372.0) 576.8
----------------------------------------------- ----- ---------- ----------
Total equity attributable to the owners
of the parent 488.8 908.8
Non-controlling interests in equity 1.1 0.9
----------------------------------------------- ----- ---------- ----------
Total equity 489.9 909.7
----------------------------------------------- ----- ---------- ----------
Consolidated Statement of Changes in Equity
For the year ended 31 December 2016
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 2015 30.4 301.9 42.7 736.4 1,111.4 0.9 1,112.3
Loss for the year - - - (37.8) (37.8) 0.1 (37.7)
Items that will not
be reclassified
subsequently
to profit or loss - - - 23.7 23.7 - 23.7
Items that may
subsequently
be reclassified to
profit or loss - - (37.3) - (37.3) - (37.3)
-------------------------- --------- --------- ---------- ---------- -------------- ---------------- ----------
Total comprehensive
expense for the year - - (37.3) (14.1) (51.4) 0.1 (51.3)
-------------------------- --------- --------- ---------- ---------- -------------- ---------------- ----------
Net purchase of treasury
shares - - - (24.9) (24.9) - (24.9)
Dividends (note 6) - - - (122.1) (122.1) - (122.1)
Share based payments - - (3.0) - (3.0) - (3.0)
Transfer of other
reserves to retained
earnings - - (1.5) 1.5 - - -
Tax effects - - (1.1) - (1.1) - (1.1)
Foreign exchange
adjustments - - (0.1) - (0.1) (0.1) (0.2)
-------------------------- --------- --------- ---------- ---------- -------------- ---------------- ----------
Total equity
at 31 December 2015 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)
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
-------------------------- --------- --------- ---------- ---------- -------------- ---------------- ----------
Total comprehensive
income/(expense) for
the year - - 40.5 (830.1) (789.6) 0.1 (789.5)
-------------------------- --------- --------- ---------- ---------- -------------- ---------------- ----------
Issue of shares, net
of costs (note 14) 14.2 476.4 - - 490.6 - 490.6
Proceeds on allocation
of treasury shares - - - 2.3 2.3 - 2.3
Dividends (note 6) - - - (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
-------------------------- --------- --------- ---------- ---------- -------------- ---------------- ----------
Consolidated Cash Flow Statement
For the year ended 31 December 2016
GBPm Note 2016 2015
------------------------------------------------------ ----- -------- --------
Operating (loss)/profit (779.1) 12.0
Non-cash items:
Share of post-tax profits of joint ventures
and associates (0.2) (0.2)
Depreciation and amortisation 248.1 254.4
Impairment of goodwill and intangible assets 9 573.8 26.6
Loss/(profit) on sale of property, plant and
equipment 4.4 (1.4)
Business acquisition and divestment related
items 1.7 27.3
Derivative financial instruments 39.3 18.8
Pension contributions in excess of pension
charges (16.7) (17.8)
Share based payments 3.8 (3.0)
Operating cash movements:
Decrease/(increase) in inventories 50.8 (34.6)
Decrease in trade and other receivables 21.9 19.1
Decrease in trade and other payables (9.7) (38.6)
Increase in provisions 87.9 7.4
Tax paid (20.1) (31.5)
Interest paid (74.7) (53.0)
Interest received 3.5 3.6
------------------------------------------------------ ----- -------- --------
Net cash from operating activities 134.7 189.1
Cash flows from investing activities
Purchase of property, plant and equipment (82.8) (97.8)
Purchase of intangible assets (9.1) (18.6)
Capitalised expenditure on intangible assets (0.3) -
Proceeds on disposal of property, plant and
equipment 6.1 17.7
Acquisition of subsidiaries net of cash or
debt acquired (1.4) (52.6)
Proceeds of business divestments 15 1.0 205.2
------------------------------------------------------ ----- -------- --------
Net cash (used in)/from investing activities (86.5) 53.9
Cash flows from financing activities
Issue of share capital 14 490.6 -
Dividends paid 6 (126.1) (122.1)
Purchase of treasury shares - (29.3)
Proceeds on allocation of treasury shares 2.3 4.4
New borrowings 8 9.9 257.9
Repayment of borrowings 8 (497.0) (271.0)
------------------------------------------------------ ----- -------- --------
Net cash used in financing activities (120.3) (160.1)
Net (decrease)/increase in cash and cash equivalents (72.1) 82.9
Exchange movements 14.3 (13.2)
Cash and cash equivalents at start of year 294.0 224.3
------------------------------------------------------ ----- -------- --------
Cash and cash equivalents at end of year 236.2 294.0
------------------------------------------------------ ----- -------- --------
A reconciliation of cash and cash equivalents to the Balance Sheet
and movement in net debt is detailed in note 8.
Notes to the Financial Information
For the year ended 31 December 2016
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 2016 or 31 December 2015.
Statutory accounts for the year ended 31 December 2015 have been
delivered to the Registrar of Companies, and those for 2016 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 2016 was unqualified, and did not
contain any statements under section 498 (2) or (3) of the
Companies Act 2006. However, it included an emphasis of matter in
respect of going concern.
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.
Note 17 refers to the Group's target net debt/EBITDA ratio of
1.5x and intention to raise equity of GBP500m. If the equity raise
of GBP500m were to not occur, it is likely that the Company would
approach its lenders to seek an amendment to its key financing
covenant of net debt/EBITDA to ensure that it would not breach its
debt agreements. There can be no certainty that the Company would
be able to secure such an amendment on acceptable terms or at all
and in these circumstances if the Group's net debt/EBITDA should
exceed 3.5x, the Group's lenders would be able to demand immediate
repayment of all borrowings.
The Board has concluded that the resolutions which are necessary
for the rights issue to proceed are likely to be passed and that
the equity proceeds are likely to be raised in line with the
timetable so that there will be no covenant breach.
The Board acknowledges that there are risks that may prevent the
rights issue proceeding in line with the expected timetable or at
all. There is a risk that sufficient shareholders will not vote in
favour of the resolutions to enable the equity raise to occur and
also a risk that the Financial Conduct Authority does not approve
the rights issue prospectus. Note 17 explains that the rights issue
is fully underwritten on a standby basis subject to customary
conditions. These conditions allow the underwriters to not fund the
equity in a number of circumstances including there being a
material adverse change in the affairs of the company or financial
markets.
The Board believes that it is unlikely that the rights issue
will not occur but the consequences of not being successful
indicate the existence of a material uncertainty. This may cast
significant doubt about the Group's ability to continue as a going
concern so it is appropriate to make full disclosure as required by
accounting standards. The Board believes that adopting the going
concern basis in preparing the consolidated financial statements is
appropriate and the financial statements do not include the
adjustments that would result if the Group were unable to continue
as a going concern.
The preparation of financial statements in conformity with IFRS
requires the use of estimates and judgements that affect the
application of accounting policies and reported amounts of assets,
liabilities, revenue and expenses. Although estimates are based on
management's best knowledge of the amount, event or actions, actual
results ultimately may differ from those estimates.
Accounting policies
The accounting policies applied are consistent with those
published in the financial statements for the year ended 31
December 2015. From 1 January 2016 a number of amendments to
existing standards, which were effective from 1 January 2016 and
have been endorsed by the EU, have been adopted; however no changes
to previously published accounting policies or other adjustments
were required on their adoption.
2. Underlying measures
To assist with the understanding of earnings trends, the Group has
included within its published financial statements non-GAAP measures
including underlying operating profit and underlying earnings results.
These are considered by the Board to be the most meaningful measures
under which to assess the operating performance of the Group and
provide additional useful information on underlying trends to shareholders.
The non-GAAP measures used do not include the impact of items described
below which are not considered to reflect the day to day operating
results of the Group. Underlying measures are therefore considered
to provide a more comparable view year-on-year, having removed the
distorting effects of the excluded items which are more clearly understood
when presented separately. Definitions of the underlying measures
can be found on page 4.
Underlying profit is derived from the operating result as set out
below:
GBPm 2016 2015
-------------------------------------------------------- --------- -------- ------------
Operating (loss)/profit (779.1) 12.0
Amounts related to prior periods restructuring
programmes (8.7) 67.5
Derivative financial instruments 39.3 18.8
Amortisation of intangible assets arising on business
combinations 161.2 176.8
Other business acquisition and divestment related
items
Loss/(profit) on divestments (note 15) 1.3 (53.8)
Amounts provided related to businesses held
for sale - 69.0
Pre-acquisition profit element of inventory
written off - 9.3
Other M&A related costs 0.4 6.0
Exceptional items
Impairment of goodwill and other intangible
assets (note 9) 573.8 26.6
Revisions of the carrying values of other assets 33.3 -
Estimates of fixed price contract profitability 179.1 -
Assessment of legal and other provisions 24.4 -
------------------------------------------------------- --------- -------- ------------
Underlying operating profit 225.0 332.2
Underlying net finance costs (49.8) (51.8)
-------------------------------------------------------- --------- -------- ------------
Underlying profit before taxation 175.2 280.4
Taxation charge on underlying profit (effective
rate 22.6%, 2015: 21.5%) (39.6) (60.2)
Non-controlling interests (0.1) (0.1)
-------------------------------------------------------- --------- -------- ------------
Underlying profit after tax attributable to owners
of the parent 135.5 220.1
-------------------------------------------------------- --------- -------- ------------
2015
2016 (Restated)
-------------------------------------------------------- --------- -------- ------------
Weighted average number of shares million 1,506.3 1,333.2
Underlying basic EPS 9.0p 16.5p
Diluted weighted average number of shares million 1,508.1 1,337.8
Underlying diluted EPS 9.0p 16.5p
-------------------------------------------------------- --------- -------- ------------
Underlying EPS figures for the comparative period have been restated
to reflect the bonus element of the rights issue completed during
the year.
Adjusting items in the table above are as follows:
Amounts related to prior years' restructuring programmes were deemed
as incremental to normal operations and non-recurring in nature.
In 2016 and 2015, these relate to the integration of the Aeroflex
businesses acquired in 2014. In 2016, this reflects a reassessment
of the level of provisions required in respect of the IT integration
and remediation costs resulting from the Aeroflex acquisition.
Derivative financial instruments excluded from underlying measures
includes changes in the marking to market of non-hedge accounted
derivative financial instruments together with gains and losses arising
on dividend related foreign exchange contracts.
Amortisation of intangible assets arising 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.
Other business acquisition and divestment related items in 2016 include
profits or losses on divestments and costs related to acquisitions
in prior years. These follow the sale during the year of the Surveillance
and Unmanned Systems businesses and reflect the difference between
the agreed transaction price and the book value of assets prior to
the divestments, as detailed in note 15.
For 2016 the following items are considered to be exceptional because
of their size and non-recurring nature and are excluded from underlying
measures. While these relate, in part, to ongoing activities, their
impact is much larger than would normally be expected in any individual
accounting period and reflect commercial events that are not expected
to repeat. The Board have adopted a more cautious approach due to
the current trading environment and associated risks. As a result,
management consider these costs to be exceptional. To aid understanding
items have been aggregated into the following categories based on
similar business and control factors:
* An impairment provision totaling GBP573.8m booked
against goodwill and other intangible assets as
described in note 9;
* Revisions to the carrying values of other assets
include GBP20.2m against the inventory balance
reflecting ageing stock and lower demand forecasts;
GBP3.9m against intangible assets no longer planned
to be used; GBP3.9m tangible asset write down against
plant and machinery and similar items no longer
expected to be used; and GBP5.3m provision against
aged receivables considered doubtful;
* A charge of GBP179.1m has been taken against
estimates of fixed price contract profitability
including KC-46. This reflects increased estimates of
costs to complete and, in some cases, lower recovery
from customers. The Board recognises that making
estimates on complex contracts is inherently
judgemental and therefore whilst it has taken a
reasonable view of contract positions at present, the
final outcome of the contracts could be more or less
favourable than the position taken. The charges
booked can be broadly categorised as: GBP150.0m
against KC-46; GBP18.5m on other development
contracts within the Mission Systems Sector; GBP7.7m
on development contracts within the Advanced
Electronic Solutions Sector; and GBP2.9m within the
Communications and Connectivity Sector; and
* Legal and other provisions have been made to cover
the estimated exposure on a number of legal,
environmental, warranty and other regulatory matters
across the Group.
Adjusting items in the table above total GBP1,004.1m (2015: GBP320.2m)
and are included in the Income Statement as follows:
GBPm 2016 2015
------------------------------------------------------------------ --------- -------
Cost of sales 208.7 -
Selling and distribution costs 0.6 -
Administrative expenses 794.8 320.2
------------------------------------------------------------------ --------- -------
1,004.1 320.2
------------------------------------------------------------------ --------- -------
Underlying administrative expenses, after adjusting for the reconciling
items above, amounted to GBP226.6m (2015: GBP201.5m), representing
11.7% (2015: 9.7%) of revenue.
Net cash from operating activities is reconciled to free cash flow
and operating cash flow as follows:
GBPm 2016 2015
------------------------------------------------------------------ --------- -------
Net cash from operating activities per Cash Flow
Statement 134.7 189.1
Purchase of property, plant and equipment (82.8) (97.8)
Purchase of intangible assets (9.1) (18.6)
Capitalised expenditure on intangible assets (0.3) -
Proceeds on disposal of property, plant and equipment 6.1 17.7
Business acquisition and divestment related costs
paid 2.1 15.1
------------------------------------------------------------------ --------- -------
Free cash flow 50.7 105.5
Amounts related to prior periods restructuring programmes 39.8 48.2
Tax paid 20.1 31.5
Underlying net finance costs paid 71.2 49.4
------------------------------------------------------------------ --------- -------
Operating cash flow 181.8 234.6
------------------------------------------------------------------ --------- -------
3. Revenue and segmental information
Revenue
Revenue comprises income from the sale of goods and services during
the year and can be analysed as follows:
GBPm 2016 2015
-------------------------------------------- ------------- ------------
Revenue from sale of goods 1,445.0 1,585.4
Revenue from services 498.9 486.6
-------------------------------------------- ------------- ------------
1,943.9 2,072.0
-------------------------------------------- ------------- ------------
Revenue from services includes service contracts in the Aviation
Services Sector together with logistics support, maintenance and
repairs in other Sectors.
Operating segments
Underlying
Revenue operating profit Segment net assets
------------------ -------------------- -------------------------
GBPm 2016 2015 2016 2015 2016 2015
----------------------------------- -------- -------- ---------- -------- ------------- ----------
Communications and Connectivity 690.2 771.8 60.0 108.4 573.7 844.0
Mission Systems 386.4 382.4 56.5 68.0 196.3 289.2
Advanced Electronic Solutions 511.6 538.0 60.2 80.5 686.1 996.0
Aviation Services 357.2 390.1 38.3 57.3 276.3 257.1
Head office, other activities
and elimination of inter-segment
items (1.5) (10.3) 10.0 18.0 47.0 19.9
----------------------------------- -------- -------- ---------- -------- ------------- ----------
Total Group 1,943.9 2,072.0 225.0 332.2 1,779.4 2,406.2
Interests in joint ventures and
associates 3.6 3.0
Unallocated liabilities (1,293.1) (1,499.5)
----------------------------------- -------- -------- ---------- -------- ------------- ----------
Total net assets 489.9 909.7
----------------------------------- -------- -------- ---------- -------- ------------- ----------
Underlying operating profit is reconciled to the loss before taxation
as follows:
GBPm 2016 2015
------------------------------------------------------------------- ------------- -------- ----------
Underlying operating profit 225.0 332.2
Amounts related to prior periods restructuring
programmes 8.7 (67.5)
Derivative financial instruments (39.3) (18.8)
Amortisation of intangible assets arising on
business combinations (161.2) (176.8)
Other business acquisition and divestment related
items (1.7) (30.5)
Exceptional items (note 2) (810.6) (26.6)
Net finance costs (note 4) (68.8) (51.8)
------------------------------------------------------------------- ------------- -------- ----------
Loss before taxation (847.9) (39.8)
------------------------------------------------------------------- ------------- -------- ----------
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.
Revenue Non-current assets
------------------------- ------------------------
GBPm 2016 2015 2016 2015
---------------------------- ------------ ----------- ----------- -----------
USA 941.9 985.1 862.0 1,156.8
UK 185.2 223.0 269.6 551.3
Other EU 312.1 305.2 289.6 275.4
Australia 213.9 226.6 151.4 106.2
Rest of the world 290.8 332.1 23.4 27.0
---------------------------- ------------ ----------- ----------- -----------
1,943.9 2,072.0 1,596.0 2,116.7
---------------------------- ------------ ----------- ----------- -----------
Revenue from customers located in the rest of the world includes
GBP195.1m (2015: GBP230.4m) from customers in Asia. 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.
Included in non-current assets located in EU countries other than
the UK are assets of GBP238.3m (2015: GBP232.0m) located in Denmark.
4. Finance income and costs
GBPm 2016 2015
--------------------------------------------------------- --------- --------
Bank interest 0.9 3.1
Other finance income 3.2 2.1
--------------------------------------------------------- --------- --------
Total finance income 4.1 5.2
Interest on bank overdrafts and loans (51.9) (52.8)
Interest on net pension scheme liabilities (1.8) (3.1)
Other finance expense (19.2) (1.1)
--------------------------------------------------------- --------- --------
Total finance costs (72.9) (57.0)
Net finance costs (68.8) (51.8)
--------------------------------------------------------- --------- --------
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.
5. Taxation
GBPm 2016 2015
----------------------------------------------------- -------- ----------
Current tax 49.6 29.0
Deferred tax (102.4) (31.1)
----------------------------------------------------- -------- ----------
Total tax credit for the year (52.8) (2.1)
----------------------------------------------------- -------- ----------
Income tax is calculated on the estimated assessable profit for
the year at the rates prevailing in the relevant tax jurisdiction.
The total tax credit for the year includes a charge of GBP44.3m
(2015: GBP9.2m) for the UK.
As shown in note 2, the tax charge on underlying profit is GBP39.6m
(2015: GBP60.2m) at an effective rate of 22.6% (2015: 21.5%).
6. Dividends
GBPm 2016 2015
----------------------------------------------------- -------- ----------
Final dividend of 8.13p per share for 2015 (2014:
7.746p) 91.6 87.7
Interim dividend of 2.03p per share for 2016 (2015:
3.05p) 34.5 34.4
----------------------------------------------------- -------- ----------
Total dividend authorised and paid during the
year 126.1 122.1
----------------------------------------------------- -------- ----------
As announced on 11 January 2017, the Board does not recommend payment
of a final dividend in respect of the year ended 31 December 2016.
7. Earnings per ordinary share
2015
2016 (Restated)
----------------------------------------------- --------- -------- ------------
Earnings attributable to owners of the parent GBPm (795.2) (37.8)
Weighted average number of shares million 1,506.3 1,333.2
Basic and diluted EPS pence (52.8) (2.8)
----------------------------------------------- --------- -------- ------------
When losses are made, potentially dilutive shares have no impact
on EPS.
EPS figures for the comparative period have been restated to reflect
the bonus element of the rights issue, in accordance with IAS 33,
Earnings per Share.
8. Cash and cash equivalents and net debt
Reconciliation of cash and cash equivalents and net debt
GBPm 2016 2015
--------------------------------------------------- ---------- ----------
Cash and cash equivalents per Cash Flow Statement 236.2 294.0
Bank overdrafts - 0.7
--------------------------------------------------- ---------- ----------
Cash and cash equivalents per Balance Sheet 236.2 294.7
Borrowings - current liabilities (60.9) (156.4)
Borrowings - non-current liabilities (1,203.5) (1,345.1)
--------------------------------------------------- ---------- ----------
Net debt at 31 December (1,028.2) (1,206.8)
--------------------------------------------------- ---------- ----------
Reconciliation of movements in net debt
GBPm 2016 2015
--------------------------------------------------- ---------- ----------
Net debt at 1 January (1,206.8) (1,222.7)
(Decrease)/increase in cash and cash equivalents
in the year per Cash Flow Statement (72.1) 82.9
New borrowings (9.9) (257.9)
Repayment of borrowings 497.0 271.0
Foreign exchange adjustments (236.4) (80.1)
--------------------------------------------------- ---------- ----------
Net debt at 31 December (1,028.2) (1,206.8)
--------------------------------------------------- ---------- ----------
9. Intangible assets
GBPm 2016 2015
--------------------------------------------------------- --------- -----------------
Carrying amount at 1 January 1,729.5 2,040.8
Additions 8.2 16.9
Additions - internally generated 0.3 -
Business divestments (note 15) (1.0) (110.8)
Disposals (0.2) -
Amortisation of intangible assets arising on business
combinations (161.2) (176.8)
Amortisation of other intangible assets within
exceptional items (3.9) -
Amortisation of other intangible assets included
in underlying profit (10.1) (4.0)
Impairment provision (573.8) (73.8)
Reclassifications 2.0 0.4
Foreign exchange adjustments 176.1 36.8
--------------------------------------------------------- --------- -----------------
Carrying amount at 31 December 1,165.9 1,729.5
--------------------------------------------------------- --------- -----------------
The Group reviews goodwill for potential impairment of each cash
generating unit (CGU) annually, or more frequently if there are indications
that goodwill might be impaired. CGUs are typically considered to
be Business Units. The recoverable amounts of the CGUs are determined
from value in use calculations unless specific conditions at a CGU
dictate otherwise.
The calculation of recoverable value for CGUs based on value in use
includes the following key assumptions:
- Cash flow forecasts prepared as part of the annual strategic planning
process and approved by management, updated where appropriate for
more recent forecasts. These forecasts take into account the current
and expected economic environment including factors such as continued
uncertainty within certain markets in which we operate. For 2016,
forecasts for the following three years have been used to reflect
the recent performance of the CGUs and the uncertainty of medium
term market conditions, compared to a five year forecast used in
2015. Cash flow projections do not include benefits or costs expected
to arise from future restructuring or initiatives to enhance performance
which have not yet commenced;
- Growth rates assumed after this period are based on long term GDP
projections of the primary market for each business. The long term
projections used are in the range 1.2% to 2.5% (2015: 1.2% to 2.5%);
- Cash flows are discounted using the Group's WACC, adjusted for
country, cash flow and currency risks in the principal territories
in which the Group operates. These pre-tax discount rates are within
the range 8.3% to 10.1% (2015: 9.2% to 11.0%);
- Cash flows include the impact of working capital and fixed asset
requirements; and
- Cash flows include management charges which allocate central overheads
to the CGUs.
Following the 2016 review the following impairments were made:
Other intangible
GBPm Goodwill assets
--------------------------------------------------------- --------- -----------------
Wireless (Communications and Connectivity) 152.9 43.2
Integrated Electronic Solutions (Advanced Electronic
Solutions) 185.7 -
Semiconductor Solutions (Advanced Electronic Solutions) 192.0 -
--------------------------------------------------------- --------- -----------------
530.6 43.2
--------------------------------------------------------- --------- -----------------
Sensitivity analysis has been performed on these CGUs and those considered
to be individually significant, as described below:
Wireless includes part of the Aeroflex business acquired in 2014
and Axell Wireless acquired in 2013. This CGU has generated lower
revenues than expected during 2016 due to market pressures, site
integration issues and delayed product launches. Cash flow projections,
using 2016 as a baseline, were discounted at 9.5% and terminal growth
of 2.1% was applied after 3 years. The calculated value in use was
insufficient to support in full the carrying value of goodwill and
intangible assets arising on business combinations. Therefore goodwill
related to this CGU has been impaired in full. GBP43.2m was written
off other intangible assets leaving a balance of GBP25.5m.
Integrated Electronic Solutions includes the Lansdale business and
some of the former M/A-COM businesses acquired in 2008, the Trivec
business acquired in 2011 and part of the Aeroflex business acquired
in 2014. This CGU has been impacted by the end of production on some
long term programmes. Projected cash flows for the next 3 years,
with subsequent growth assumed at a rate of 2.0%, have been discounted
at a pre-tax rate of 9.2%. This resulted in an impairment charge
of GBP185.7m which reduces the carrying value of goodwill related
to this CGU to GBP57.4m. Cash flow projections assume programme wins
that are fully funded by US defense budgets with successful product
developments. If the contract wins are lower than expected and cashflows
fall by 10% then further impairment losses of GBP15m would arise.
The pre-tax discount rate applied to forecast cash flows was 9.2%
and further impairment losses of GBP22m would arise if this increased
to 10.2%. The long term growth rate is assumed to be 2.0%. If the
long term growth rate was reduced to 1.0% then further impairment
losses of GBP17m would arise.
Semiconductor Solutions includes part of the Aeroflex business acquired
in 2014. This CGU has not performed in line with expectations driven
by lower volume. Projected cash flows for the next 3 years, with
subsequent growth assumed at a rate of 1.9%, discounted at a pre-tax
rate of 9.2% have resulted in an impairment charge of GBP192.0m.
This reduces the carrying value of goodwill related to this CGU to
GBP46.0m. Future growth relies on commercial satellite market advances
and penetration of new markets in medical and industrial devices.
If the expected cashflows fall by 10% then further impairment losses
of GBP31m would arise. If the long term growth rate was reduced to
nil then further impairment losses of GBP61m would arise.
As noted above, for the three CGUs impaired in the year, future deterioration
in the underlying assumptions could result in the need for further
impairment.
SATCOM goodwill arose primarily on the acquisition of Thrane & Thrane
in 2012. Cash flow projections assume a recovery in the marine SATCOM
markets. If cash flows reduced by 10% or more then impairment losses
of GBP0.1m would arise. If the pre-tax discount rate, assumed to
be 8.6%, was 9.6% then impairment losses of GBP10m would arise, or
if the growth rate fell from 1.3% to zero, then impairment losses
of GBP12m would arise.
10. Property, plant and equipment
GBPm 2016 2015
---------------------------------------------------- -------- --------
Carrying amount at 1 January 379.9 390.0
Additions 81.5 99.0
Business divestments (note 15) (0.9) (19.8)
Disposals (10.5) (10.3)
Depreciation included in underlying profit (70.2) (73.0)
Depreciation included in exceptional items (2.0) -
Reclassifications (2.3) (6.0)
Foreign exchange adjustments 47.4 -
---------------------------------------------------- -------- --------
Carrying amount at 31 December 422.9 379.9
----------------------------------------------------- -------- --------
At 31 December 2016, the Group had commitments for the acquisition
of property, plant and equipment of GBP14.3m (2015: GBP29.3m).
11. Fair values of financial assets and liabilities
The fair values of financial assets and liabilities which are held
at fair value and are measured on a recurring basis are as follows:
GBPm 2016 2015
----------------------------------------------------------- --------- ---------
Financial assets
Derivative contracts (designated as hedging
instruments) 18.9 4.4
Derivative contracts (not hedge accounted) 9.3 11.2
Financial liabilities
Derivative contracts (designated as hedging
instruments) (20.4) (4.3)
Derivative contracts (not hedge accounted) (54.0) (40.2)
(46.2) (28.9)
----------------------------------------------------------- --------- ---------
Borrowings are held at amortised cost which equates to fair value
except for the Group's fixed rate borrowings. At 31 December 2016
the fair value of those borrowings was GBP932.8m (2015: GBP976.1m)
compared to their book value of GBP848.9m (2015: GBP873.5m). 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.
12. Provisions
GBPm 2016 2015
------------------------------------------------------------------------------------------------ ------ -------
Current liabilities 180.6 74.3
Non-current liabilities 57.3 68.2
237.9 142.5
------------------------------------------------------------------------------------------------ ------ -------
Movements in provisions during the year are as follows:
Provisions
related Contract Aircraft
to businesses Restructuring Warranty loss maintenance
GBPm divested provisions claims provisions provisions Other Total
----------------------- --------------- -------------- --------- ------------ ------------- ------ -------
At 1 January 2016 15.5 60.9 10.2 26.8 3.7 25.4 142.5
Additional provisions
in the year - - 10.4 146.5 2.4 17.2 176.5
Utilisation of
provisions (4.8) (15.2) (3.8) (26.8) (1.2) (4.2) (56.0)
Provisions released (4.1) (29.3) (1.2) (5.0) (2.3) (1.1) (43.0)
Disposed with
undertakings - - (0.2) - - (2.0) (2.2)
Reclassifications - - (0.3) 2.1 0.2 - 2.0
Foreign exchange
adjustments - 7.0 1.9 3.4 0.5 5.3 18.1
----------------------- --------------- -------------- --------- ------------ ------------- ------ -------
At 31 December
2016 6.6 23.4 17.0 147.0 3.3 40.6 237.9
----------------------- --------------- -------------- --------- ------------ ------------- ------ -------
Additional provisions in the year include GBP110.7m in respect of
KC-46 contract loss provisions, GBP20.0m of contract loss provisions
on other contracts, GBP5.3m for warranty claims and GBP15.7m of
other provisions which have been included within exceptional items
in note 2.
13. Retirement benefit obligations
GBPm 2016 2015
-------------------------------------------- -------- --------
Defined benefit scheme assets 790.0 663.9
Defined benefit obligations (877.0) (720.6)
Net liability at 31 December (87.0) (56.7)
-------------------------------------------- -------- --------
Movements in the net liability are as follows:
GBPm 2016 2015
-------------------------------------------- -------- --------
Net liability at 1 January (56.7) (102.0)
Amount recognised in the Income Statement (3.6) (6.5)
Contributions paid by the employer 18.5 22.7
Actuarial (losses)/gains recognised in OCI (42.6) 29.6
Exchange differences (2.6) (0.5)
-------------------------------------------- -------- --------
Net liability at 31 December (87.0) (56.7)
-------------------------------------------- -------- --------
14. Share capital
2016 2015
-------------- --------------
Number Number
of shares GBPm of shares GBPm
------------------------------ -------------- ----- -------------- -----
Issued and fully paid
Ordinary shares of par value
2.5p 1,783,815,575 44.6 1,214,527,625 30.4
------------------------------ -------------- ----- -------------- -----
Following a 1 for 2 fully underwritten rights issue 569,287,950
ordinary shares of 2.5 pence each were issued on 16 June 2016 at
an issue price of 89p per share. Net proceeds of GBP490.6m were
realised, net of costs of GBP16.1m.
15. Business divestments
The divestment of the Group's Surveillance businesses, part of the
Communications and Connectivity Sector, was announced on 15 January
2016. These businesses were classified as held for sale at 31 December
2015.
In addition, the divestment of the Unmanned Systems business, previously
included within the Cobham Mission Systems Sector was completed on
6 October 2016.
The loss on these divestments has been excluded from underlying measures
as disclosed in note 2 and is analysed as follows:
Unmanned
GBPm Surveillance Systems Total
----------------------------------------------- -------------- --------- -------
Gross consideration 6.6 0.3 6.9
Net assets at date of divestment (2.0) (6.6) (8.6)
Expenses of sale (3.2) (0.2) (3.4)
Foreign exchange adjustments (2.1) (4.6) (6.7)
------------------------------------------------ -------------- --------- -------
Loss on divestments completed during
the year (0.7) (11.1) (11.8)
Profit on divestments completed
in prior years 10.5
------------------------------------------------ -------------- --------- -------
Net loss on divestments before
tax (1.3)
Tax charge on net loss on divestments (5.6)
Net loss on divestments after tax (6.9)
------------------------------------------------ -------------- --------- -------
The profit on divestments completed in prior years includes the repayment
of a loan note previously written off following a divestment in 2013,
together with the release of a provision related to a business divested
in 2005.
The net cash impact of the divestments during the year is as follows:
Unmanned
GBPm Surveillance Systems Total
----------------------------------------------- -------------- --------- -------
Cash consideration 6.6 0.3 6.9
Cash disposed - (1.9) (1.9)
Expenses of sale (3.4) (0.2) (3.6)
------------------------------------------------ -------------- --------- -------
Net cash impact of divestments
in current year 3.2 (1.8) 1.4
Net cash relating to divestments completed
in prior periods (0.4)
------------------------------------------------ -------------- --------- -------
1.0
----------------------------------------------- -------------- --------- -------
The net assets divested during the year were as follows:
Unmanned
GBPm Surveillance Systems Total
----------------------------------------------- -------------- --------- -------
At date of divestment
Intangible assets - 1.0 1.0
Property, plant and equipment - 0.9 0.9
Deferred tax - 2.6 2.6
Inventories 3.9 4.5 8.4
Trade and other receivables 12.9 0.3 13.2
Cash and cash equivalents - 1.9 1.9
Trade and other payables (13.6) (2.4) (16.0)
Provisions (1.2) (2.2) (3.4)
------------------------------------------------ -------------- --------- -------
Net assets 2.0 6.6 8.6
------------------------------------------------ -------------- --------- -------
At 31 December 2015
Intangible assets - 3.1 3.1
Property, plant and equipment - 0.8 0.8
Deferred tax - 1.1 1.1
Inventories 3.9 2.5 6.4
Trade and other receivables 12.9 2.6 15.5
Cash and cash equivalents - 1.4 1.4
Borrowings - (0.1) (0.1)
Trade and other payables (11.5) (11.1) (22.6)
Provisions (1.2) (2.3) (3.5)
-------------------------------- ------- ------- -------
Net assets/(liabilities) 4.1 (2.0) 2.1
16. Contingent liabilities
At 31 December 2016, 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.
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.
As previously notified, the Group identified one, more significant,
contractual breach dating back some years, in respect of goods provided
into a geographic market representing only a small amount of revenue
for the Group. The resolution of this matter remains uncertain at
the year end, however no further information is disclosed as it could
be prejudicial.
The nature of much of the contracting work done by the Group means
that there are reasonably frequent contractual issues, variations
and renegotiations that arise in the ordinary course of business,
whose resolution is uncertain and could materially impact the Group's
future reported earnings. In particular, on fixed price development
contracts, costs incurred and anticipated can significantly exceed
amounts estimated at inception as a result of material enhancements
to the specifications originally agreed under the contracts. Judgement
is therefore required as regards the final costs of technical solutions,
the outcome of negotiations with customers and the amounts recoverable
under these contracts. The Group takes account of the advice of experts
in making these judgements and believes that the outcome of negotiations
will result in an appropriate recovery of costs. In the case where
the Group is undertaking development activity on a PV basis but has
given performance undertakings to the prospective customer 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
in which it conducts its business operations. Due to changes in tax
laws and regulations, changes in interpretation of taxation regulations,
an increase in tax audits and challenges and the testing of interpretations
through litigation, tax liabilities may be, and are being, challenged
and may ultimately be deemed inaccurate by tax authorities. Areas
of tax authority scrutiny include transfer pricing, EU State Aid
and Base Erosion and Profit Shifting. Tax authorities may also pursue
additional taxes based on retroactive changes to, and interpretations
of, tax laws. The availability of interest deductions on the Group's
internal financing arrangements, principally as a result of various
US acquisitions, has been challenged for some time. This could lead
to increased tax liabilities in excess of those provided in the Balance
Sheet, worsening the financial outlook of the Group, and result in
a substantial tax payment becoming necessary. 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.
17. Events after the balance sheet date
On 16 February 2017, Cobham provided an update on KC-46, 2016 results
and 2017 guidance. Within this statement, we highlighted that the
net debt/EBITDA ratio was 3.0x and that the Balance Sheet is not
strong enough to properly support the operations of the Group, given
the important role it plays in many customer programmes.
The Group is targeting a net debt/EBITDA gearing ratio of around
1.5x. This should be an appropriate capital structure given the requirement
for balance sheet strength. The route to get to this target needs
to be accelerated to give our customers, suppliers and employees
confidence that Cobham's credit is good and the risk of doing business
with us is as low as practical.
Having considered the cash required to complete its ongoing development
programmes, including the impact of the provisions taken at the year
end, and to strengthen its balance sheet position, the Board has
concluded that it is in the Group's best interests to raise new equity
finance of GBP500m by way of a rights issue during the second quarter
of 2017. The rights issue has been fully underwritten on a standby
basis on customary market conditions.
-ENDS-
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR SSESDEFWSEDD
(END) Dow Jones Newswires
March 02, 2017 02:01 ET (07:01 GMT)
Cobham (LSE:COB)
Historical Stock Chart
From Apr 2024 to May 2024
Cobham (LSE:COB)
Historical Stock Chart
From May 2023 to May 2024