10th Mar 2005 07:01
Cobham PLC10 March 2005 Cobham plc PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2004 Cobham plc, the Aerospace and Defence Company, today announces another set ofstrong results: 2004 2003 ChangeOrders received £1,062.8m £925.0m +14.9%Revenue £983.0m £832.6m +18.1%Underlying profit before tax (PBT) £146.9m £135.3m +8.6%Underlying earnings per share (EPS) 94.8p 93.5p +1.4%Basic earnings per share 76.0p 17.2p +342.0%Full year recommended dividend per share 31.0p 28.16p +10.1%Net cash generation from business £65.6m £49.7m +32.0% 2004• Record order intake• Revenue growth driven by US demand and acquisitions• Underlying operating margin 16%, PBT up 9% - after absorbing £11m impact from US$• Like-for-like EPS* up 6%• Strong cash generation with cash conversion at 82%• Dividend per share up 10%• Acquisitions made in 2003/4 adding value• Chelton and Flight Operations & Services performing strongly• Transition and investment in Aerospace Systems 2005• Focus on mid-single digit organic growth• Group margin expected to stabilise at 16%, despite known currency headwind• Preferred bidder announced on Future Strategic Tanker Aircraft (FSTA) Gordon Page, CBE, Chairman, commented: "Cobham has delivered another set of strong results in a year where we have hadchallenges in Aerospace Systems. We are well positioned in growth markets wherewe continue to seek acquisitions that will enhance our product range and ourcapability to serve our customers. We look forward to achieving furtherprogress in 2005." 10 March 2005 Throughout this document "underlying" is defined as excluding goodwillamortisation, and in 2003 exceptional loss on the disposal ofWestwind, and £0.8m of restructuring costs in Racal Antennas * Excluding FSTA bid costs and at constant translation exchange Enquiries: Cobham plc Telephone +44 (0) 1202 882020 Allan Cook, Chief ExecutiveWarren Tucker, Group Financial Director College Hill Telephone +44 (0) 207 457 2020Matthew Smallwood RESULTS Profit on ordinary activities before taxation increased by 131% to £125.9m (2003- £54.5m). Earnings per share increased by 342% to 76.0p (2003 - 17.2p). The2003 figures include the disposal of Westwind. The 2004 results continue the Group's outstanding growth trend over the past twodecades. Turnover for the year has increased by 18.1% to £983.0m (2003 -£832.6m). Operating profit before goodwill amortisation rose by 6.2% to £156.9m(2003 - £147.7m). Underlying profit before tax rose by 8.6% to £146.9m (2003 -£135.3m). Underlying earnings per share of 94.8p (2003 - 93.5p) were 1.4%higher than the previous year. A final dividend of 21.8p per share is recommended (2003 - 19.8p). Togetherwith the interim dividend of 9.2p per share (2003 - 8.36p) which was paid inDecember, this represents an increase of 10% compared to 2003. Subject toshareholders' approval, the final dividend will be paid on 4 July 2005 to allshareholders on the register at 3 June 2005. Cobham is one of the few UK quotedcompanies to have increased annual dividends at 10% or more, for a decade. MARKET The aerospace and defence market has continued to develop and grow during 2004.In the military market the key priorities now include increasedinteroperability, rapid reaction, precision strike and information superiority.These priorities have driven technology insertion into systems and sub-systemsfor network enabling capability, unmanned aerial vehicles, air refuelling andlife support systems. In the commercial market, airline traffic has returned to levels seen in 2000,and 2005 is expected to see a further increase. Our two major customers, Airbusand Boeing, are forecasting higher levels of output for 2005 with furtherpotential increases in 2006. Three new commercial aircraft are on the horizon -Airbus A350, Boeing 787 and, potentially, the Bombardier C Series. CORPORATE DEVELOPMENT During the year the Group successfully pursued its strategy of sustaineddevelopment through organic growth and acquisition. Six acquisitions werecompleted for a total consideration of £61m. In addition, in December,agreement was reached to acquire H Koch and Sons (Koch) for a cash considerationof US$63m and Remec Defense & Space Inc. (Remec) for a cash consideration ofUS$260m. Both of these acquisitions are expected to complete in the secondquarter 2005, subject to certain approvals. Remec, in particular, positions theGroup well in the network enabling capability market. Three further smallacquisitions for the Chelton Group were announced in February 2005. BUSINESS OVERVIEW Cobham has had strong performance in 2004 with record order intake and strongrevenue growth. Profitability in Chelton and Flight Operations & Services hasshown good organic growth and Aerospace Systems has had a year of transition andinvestment. The fall in the dollar has slowed profit growth, but this has beenpartially offset by our currency hedging programme. The award of preferred bidder status for FSTA is welcome. Our bid costs in 2004for FSTA have been £2.3m (2003 - £1.2m). This is a Cobham wide programme. Thecosts incurred are not attributable to any particular division and are excludedfrom the segmental profits shown below. Aerospace Systems Group** 2004 2003Revenue £385.7m £319.7mOperating profit* £62.2m £66.2mMargin 16.1% 20.7% * Excludes goodwill amortisation of £8.0m (2003 - £5.7m)** Includes Cobham head office The Aerospace Systems Group reported revenue up 21% and operating profit down6.0%. This result reflects strong growth in air refuelling, UK countermeasuresand life support. As previously indicated profit margins have fallen due toA380 development costs, start-up losses in the US countermeasures business,lower revenues from Eurofighter Typhoon production, US$ exchange rates andrestructuring costs. Continued resolution of these challenges remains amanagement priority. The Life Support Division has enhanced its reputation as a leader in aviationoxygen systems. The development and qualification of the suite of componentsfor the A380 oxygen system has been achieved. In the Air Refuelling (AR) and Auxiliary Mission Equipment Division, FlightRefuelling Limited (FRL) and Sargent Fletcher Inc (SFI) are leaders in thedesign and manufacture of AR and auxiliary mission equipment. Development of arefuelling pod to meet United States Air Force Special Operations Commandrequirements continues. Refuelling pods for both German and Royal Canadian AirForce A310 tankers and for Sukhoi for integration with an AR capable SU-30fighter were delivered in 2004. FRL and SFI are also engaged in the productionand supply of weapon carriage and release systems. In the Fluid and Air Division, deliveries of the first fuel tubes and couplingsfor the Lockheed Martin F-35 Joint Strike Fighter were accomplished in the year.FR-HiTEMP has made good progress on the development of the A380 fuel pumpsystem with initial deliveries of development and production hardware and wassuccessful in winning the B787 fuel pumps and inerting system. In Countermeasures, Wallop Defence Systems' new, state-of-the-art productionfacility began operations in February 2005. FR Countermeasures (FRC), Milan,Tennessee, is in production with a flare order for the US Navy. Following theloss of a major countermeasures order and a review of the US countermeasuresmarket, Cobham is exploring a range of strategic options for FRC. Chelton 2004 2003Revenue £408.9m £316.1mOperating profit* £71.8m £60.8mMargin 17.6% 19.2% * Excludes integration costs nil (2003 - £0.8m) and goodwill amortisation of£11.0m (2003 - £8.4m) The Chelton Group reported revenue up 29.4% and underlying operating profit up18.1%. This reflects strong growth in microwave, antennas and avionics. Theacquisitions in antennas and avionics contributed strongly, but overall profitmargins have been diluted by recent acquisitions. The Antenna business achieved strong growth. Increased sales were recorded forinterference cancellation systems. As Chelton focuses more on armycommunications and the digital battlefield, it has increased output of itsproducts. Chelton vehicle intercom systems are fitted to all the US Army'simproved armour light vehicles, and sales are buoyant in Europe and the MiddleEast. Investment was rewarded with satcom antenna and system selection for Gulfstreamand Embraer Legacy aircraft. In Avionics, growth continues with additional FAA certifications for itssynthetic vision electronic flight instrument system (EFIS) and its selectionfor the South African C-130 fleet. Delivery of production radio and audiomanagement systems for the A380 is underway alongside the supply intercomsystems for the Rafale fighter. Law enforcement and national security (LENS) is an area of increasing importancewithin Homeland Security. GPS tracking made inroads into the US market placeand the introduction of an advanced internet protocol based capability to trackindividual members of a group promises continued strong performance in 2005. In Microwave, the US defence C4ISR market is particularly strong. Our USmicrowave companies received development contracts for a service life extensionfor all US air route surveillance radar rotary couplers, for a real-timeprecision targeting radar, and for the waveguide assemblies for AEGIS WeaponSystems and the F/A-22 Raptor. In Europe, the group benefited from sustained space waveguide equipment sales.At the end of 2004 the microwave and diode division of Temex SA was acquired.Chelton is now the only major European manufacturer of p-i-n diodes used in manycore antenna products. In Composites, the recent approval of the Eurofighter Typhoon Tranche 2programme will provide substantial work for the future. Flight Operations & Services 2004 2003Revenue £188.4m £179.7mOperating profit* £25.2m £23.1mMargin 13.4% 12.9% *Excludes goodwill amortisation of £2.0m (2003 - £1.8m) 2003 has been adjusted to exclude £1.2m of FSTA bid costs Flight Operations & Services' order book grew by £50m, with very strong orderintake. Revenue was up 4.8% and underlying operating profit up 9.1%. Thisreflects growth in all segments. Profit margins have benefited from enhancedprogramme management and the elimination of BASCO losses. In Military Training, the UK MOD awarded a £140m five year extension to itspartnering agreement for the provision of electronic warfare aerial trainingservices to the Royal Navy and Royal Air Force from 2009 to 2014. In Special Mission Flight Operations, the Australian businesses continue totrade strongly. The Coastwatch contract for the Australian Customs Service wasextended to June 2007. In Outsourced Aviation Services, preferred bidder status was awarded by Qantasfor operation of eight B717s from their JetStar fleet which will replace eightBAe 146 aircraft. In the resource industry market, our position as a majorsupplier of air transport services has continued to strengthen. The scope ofactivities in support of listed mining companies Rio Tinto, BHP Billiton andMinara Resources has also been increased. FR Aviation and Bristow Helicopters announced in November the expansion of theirexisting joint venture, FB Heliservices (FBH) to provide, operate and supporthelicopters worldwide for military and government customers. A further sevenhelicopters were acquired bringing the fleet to 59, together with a £10m fouryear contract in Brunei, which began in October 2004. In Large Military Aircraft Engineering, FR Aviation Services, working with BAESystems and Northrop Grumman, has been selected to provide 21 year whole lifesupport at RAF Waddington for the Sentry airborne early warning aircraft. A£50m contract award is anticipated by April 2005. FINANCIAL MATTERS Foreign Exchange During 2004, the Group continued with the policy first adopted at the end of2003 of hedging transaction exposure on a minimum twelve month rolling basis.In addition, certain programmes are partially hedged for up to ten yearsforward. The majority of the anticipated exposure to US$ in 2005, for the UK andEuropean subsidiaries, is hedged at an average rate of US$1.68 compared withUS$1.59 in 2004. Transition to IFRS As of 1 January 2005 Cobham is required to prepare its consolidated accounts inaccordance with International Financial Reporting Standards (IFRS). Work hasbeen under way for some months to ascertain the likely impact of this transitionand significant progress has been made. The areas which are likely to changeare Business Combinations and resulting goodwill (IFRS3), employee share basedincentives (IFRS2) and Financial Instruments (IAS32 and 39). Other changes areexpected to affect the Group's financial statements to a lesser degree. Theseinclude the capitalisation of development costs, the reclassification of leasesand employee benefit provisions. The Group does not intend to change the fundamental tenet of its foreignexchange hedging policy. IFRS requires all hedges to be strictly designated andthe hedge effectiveness tested. Up until now the nature of Cobham's use of thisform of derivative instrument is to take broad hedges against the anticipatednet position of a portfolio of foreign exchange risks. Meeting the strict hedgecriteria for all contracts may therefore not be practicable. If this were theoutcome, forward foreign currency contracts would be recorded at fair value onthe balance sheet and movements in these fair values booked to the incomestatement as they arise, resulting in potential volatility in the reportedprofit and loss account. The Group will identify the underlying profit impact ofthe hedging policy. Our 2004 results will be re-stated to IFRS prior to the publication of our 2005Interim results. Additional Borrowing Facilty In January 2005 the Group entered into a 12 month US$200m facility to provideshort term finance for the purchase of Remec and Koch. BUSINESS Prospects After more than a year of negotiations between the European manufacturers of theEurofighter Typhoon and the governments of the four partner nations, Britain,Germany, Italy and Spain, agreement was finally reached on 14 December 2004 forthe second production tranche of 236 combat aircraft. The announcement broughta guarantee of production continuity through to 2013. This is a major boost forCobham as tranche 2 production commences. In the field of avionics, combat aircraft require ever higher data acquisitionrates to support improved capabilities. This will require further upgrades ofnew and existing aircraft in both Europe and the USA. Chelton is well placed tosupport this requirement as part of its network centric capability programme. The Group now has a strong worldwide presence in LENS including offshore andonshore surveillance and advanced multi-mode communication systems. This areaof activity is expected to expand significantly in the years ahead. In addition, the Group's products and services address the current militarypriorities of countries with the largest defence budgets. In recent years theGroup has greatly increased its industrial presence in the USA and has continuedto invest in research and development and improved facilities in its USbusinesses. The Group is actively involved in bilateral government/industrydiscussions to facilitate the secure interchange of technologies between the USAand the UK. The order book is £1.3bn. In the last twelve months a number of significantlong-term contracts have been won or successfully renewed. In February 2005,the UK Ministry of Defence announced that the AirTanker consortium, in which theGroup is a shareholder, had been awarded Preferred Bidder status on the FSTAprogramme. This is a significant milestone in this £13bn, 27 year programme toprovide the Royal Air Force with a new tanker/transport service based on theAirbus A330-200 aircraft. Group companies are pursuing further opportunitiesworldwide and the outlook for further success is encouraging. Outlook Cobham continues to focus on mid-single digit organic growth with potentialacquisitions increasing growth into double digits. We indicated in Decemberthat the impact of currency transaction exposure would result in half apercentage point of headwind in 2005. Nevertheless we expect to maintain Groupoperating margins at 16%. We look forward to achieving further progress in2005. Consolidated Profit and Loss Accountfor the year ended 31 December 2004 Before Goodwill Total Before Goodwill Total goodwill amortisation 2004 goodwill amortisation, 2003 amortisation amortisation, integration integration costs and costs and disposals disposals Notes £m £m £m £m £m £mGroup TurnoverTurnover (including share of jointventures) Continuing 975.5 848.3 operations Acquisitions 40.9 - 1,016.4 848.3 Discontinued operations - 17.1 1,016.4 865.4 Less: share in turnover (33.4) (32.8) of joint ventures 2 983.0 983.0 832.6 832.6Cost of sales (714.6) - (714.6) (584.5) (0.8) + (585.3)Gross Profit 268.4 - 268.4 248.1 (0.8) 247.3Selling and (55.5) (55.5) (48.2) (48.2)distribution costsAdministrative (62.4) (20.9) (83.3) (57.4) (15.8) * (73.2)expensesGroup Operating ProfitContinuing operations 147.3 (19.8) 127.5 143.7 (16.6) 127.1Acquisitions 3.2 (1.1) 2.1 - - 150.5 (20.9) 129.6 143.7 (16.6) 127.1Discontinued - - (1.2) (1.2)operations 3 150.5 (20.9) 129.6 142.5 (16.6) 125.9Share of operating profit in joint 6.5 (0.1) 6.4 5.8 (0.1) * 5.7venturesShare of operating loss in (0.1) - (0.1) (0.6) - (0.6)associates 156.9 (21.0) 135.9 147.7 (16.7) 131.0Exceptional loss on disposal of - - (64.1) ** (64.1)subsidiary undertakings -discontinued operations Net interest 4 Group (8.5) (8.5) (9.3) (9.3) Joint ventures (2.0) (2.0) (2.2) (2.2) (10.5) (10.5) (11.5) (11.5)Other finance income/ 8 0.5 0.5 (0.9) (0.9)(charges)Profit on Ordinary 146.9 (21.0) 125.9 135.3 (80.8) 54.5Activities before TaxationTax on profit on 5 (40.9) (36.0)ordinary activitiesProfit on Ordinary 85.0 18.5Activities after Taxationbefore Minority InterestsMinority Interests (0.3) (0.3)Profit on Ordinary 84.7 18.2Activities after Taxationattributable to ShareholdersDividends 6 (34.6) (31.3)Retained profit/(loss) 50.1 (13.1)for the yearEarnings per Ordinary Share 7 -basic 76.0p 17.2p -fully diluted 75.5p 17.1p -underlying 94.8p 93.5p There is no material difference between the results disclosed above and the results on an unmodified historical costbasis.* Amortisation of goodwill.+ Integration costs connected with the acquisition of the Racal Antennas business of Thales in July 2003.** In December 2003 the Group disposed of Westwind Air Bearings Limited and Westwind Air Bearings Inc, givingrise to an exceptional loss of £64.1m. This transaction was fully reported in the 2003 Annual Report. Consolidated Balance Sheetas at 31 December 2004 2004 2003 Notes £m £m £m £mFixed AssetsIntangible 373.8 345.9assetsTangible assets 241.0 228.1Investments in jointventures: Share of gross 72.7 71.6 assets Share of gross (57.6) (58.0) liabilities Goodwill 1.2 1.3 16.3 14.9Investment in associate 1.0 1.6Investments - - 632.1 590.5Current AssetsStocks 183.9 190.0Debtors: Amounts falling due within one 227.7 184.5 year Amounts falling due after more than one 9.6 6.3 * yearInvestments - 0.1Cash at bank and in hand 101.3 106.1 522.5 487.0Creditors: Amounts falling due within one year Borrowings (116.1) (80.4) Other creditors (281.1) (259.8) (397.2) (340.2)Net Current Assets 125.3 146.8Total Assets less Current 757.4 737.3LiabilitiesCreditors: Amounts falling due after more thanone year Borrowings (151.3) (180.2) Other creditors (10.6) (11.7) (161.9) (191.9)Provisions for Liabilities and (38.1) (39.3)Charges Net assets excluding pension 557.4 506.1liabilities Deficit on group pension schemes 8 (47.7) (49.2) Net assets including pension 509.7 456.9liabilitiesCapital and Reserves including non equity interestsCalled up share capital 27.9 27.8Share premium account 81.6 76.8Revaluation reserve 1.7 1.7Other reserve 0.3 0.7Profit and loss account 397.1 348.8Shareholders' Funds 508.6 455.8Minority interest 1.1 1.1(equity) 509.7 456.9 * Within the 2003 comparatives, a balance of £6.1m has been reclassified fromAmounts falling due within one year to Amounts falling due after more than oneyear. Approved by a duly appointed and authorised committee of the board on 10 March2005: Gordon Page Warren Tucker Directors Consolidated Cash Flow StatementFor the year ended 31 December 2004 2004 2003 Notes £m £m Net cash inflow from operating activities 9 163.1 147.8Dividend received from joint venture 5.0 -Returns on investments and servicing of finance 11a (7.6) (11.0)Taxation (22.9) (20.3)Capital expenditure and financial investment 11b (39.7) (39.2)Acquisitions and disposals 11c (73.8) (115.0)Equity dividends paid (32.3) (27.6) Net cash outflow before use of liquid resources and (8.2) (65.3)financingManagement of liquid resources 11d 0.2 -Financing 11e 7.2 105.1 (Decrease)/increase in Cash 10 (0.8) 39.8 Reconciliation of Net Cash Flow toMovement in Net Debt 2004 2003 Notes £m £m (Decrease)/increase in cash in the (0.8) 39.8year(Increase)/decrease in debt and lease financing (17.2) 0.6Borrowings on purchase of subsidiary - (12.2)Decrease in liquid resources + (0.1) -Loans of subsidiary undertakings acquired (1.0) (1.4)Exchange movements 7.4 7.6 Movement in Net Debt in the year (11.7) 34.4Net Debt at 1 January (154.4) (188.8) Net Debt at 31 December 10 (166.1) (154.4) + Liquid resources includes corporateinvestments Statement of Total Recognised Gains and LossesFor the year ended 31 December 2004 Group 2004 2003 Notes £m £mProfit Attributable to Shareholders 84.7 18.2Currency translation differences on foreign currency net investments 1.5 2.1Actuarial loss on pensions 8 (4.7) (7.5)Movement on deferred tax relating to pension liability 1.4 1.1 Total recognised Gains relating to the year 82.9 13.9 Reconciliation of Movements inShareholders' FundsFor the year ended 31 December 2004 Group 2004 2003 Restated Notes £m £m Profit Attributable to Shareholders 84.7 18.2Dividends 6 (34.6) (31.3) Retained profit/(loss) for the year 50.1 (13.1)Release of goodwill previously written-off against reserves - 68.4Actuarial loss on pension scheme (net of deferred tax) 8 (3.3) (5.3)Currency translation differences on foreign currency net investments 1.5 2.1New share capital subscribed: nominal value 0.1 0.1 premium on share issues 4.8 2.4New share capital issued by private placing: nominal value - 2.3 merger reserve on share issues - 104.0 share issue costs - (1.7)Long term incentive plan (0.4) 0.6Net addition to shareholders' funds 52.8 159.8Shareholders' funds at 1 January 455.8 296.0Shareholders' funds at 31 December (which include non-equity 508.6 455.8interest of £19,700)(2003 - £19,700) In order to reflect the adoption of UITF 38, Shareholders' funds as at 1 January2003 have been restated from £297.4m and £412.3m for group and parent companyrespectively. Investment in own shares at 1 January 2003 has been reduced by£1.4m to £nil in both the group and parent company balance sheets. This restatement has had no effect on either the group profit and loss accountin either year. Notes 1 The financial information set out in this statement does not constitute theGroup's statutory accounts for the years ended 31 December 2004 and 31 December2003. Statutory accounts for 2003 have been delivered to the Registrar ofCompanies. The auditors have reported on the 2004 and 2003 accounts; theirreports were unqualified and did not contain any statement under section 237(2)or (3) of the Companies Act 1985. The 2004 accounts have not yet been deliveredto the Registrar of Companies. The financial information has been prepared inaccordance with the accounting policies adopted in the statutory accounts for2004. 2 Segmental Analysis Aerospace Systems Flight Operations Westwind and Group Chelton & Services (Discontinued) Total 2004 2003 2004 2003 2004 2003 2004 2003 2004 2003By Class of Business £m £m £m £m £m £m £m £m £m £m Turnover 387.6 320.5 411.4 317.0 220.4 212.2 - 17.1 1,019.4 866.8Less share of joint - - (1.7) (0.5) (31.7) (32.3) - - (33.4) (32.8)venturesLess inter-segmental (1.9) (0.8) (0.8) (0.4) (0.3) (0.2) - - (3.0) (1.4) Turnover to third parties 385.7 319.7 408.9 316.1 188.4 179.7 - 17.1 983.0 832.6 Operating Profit/(Loss) 51.9 60.5 60.5 51.6 17.2 15.0 - (1.2) 129.6 125.9Group share of joint - - 0.3 - 6.0 5.1 - - 6.3 5.1ventures and associates Group Operating Profit/ 51.9 60.5 60.8 51.6 23.2 20.1 - (1.2) 135.9 131.0(Loss)Goodwill amortisation 8.0 5.7 11.0 8.4 2.0 1.8 - - 21.0 15.9Integration costs - - - 0.8 - - - - - 0.8 Underlying Operating 59.9 66.2 71.8 60.8 25.2 21.9 - (1.2) 156.9 147.7Profit/(Loss) Net Operating Assets 283.2 267.4 267.2 227.6 125.4 116.3 - - 675.8 611.3 Net Debt (166.1) (154.4)Net Assets 509.7 456.9 United Other EU United Rest of the Kingdom Countries States World Total 2004 2003 2004 2003 2004 2003 2004 2003 2004 2003By Geographical Segment £m £m £m £m £m £m £m £m £m £m Turnover to Third PartiesBy destination - Group 259.2 210.8 189.5 161.7 356.6 291.9 211.1 183.9 1,016.4 848.3 - continuingactivitiesBy destination - Group - 0.3 - 4.4 - 2.8 - 9.6 - 17.1 - discontinuedactivitiesLess share of joint (25.8) (26.0) (5.9) (6.3) (1.7) (0.5) - - (33.4) (32.8)ventures Total 233.4 185.1 183.6 159.8 354.9 294.2 211.1 193.5 983.0 832.6 By origin - Group 431.3 364.8 113.0 85.4 322.4 255.1 149.7 143.0 1,016.4 848.3 - continuingactivitiesBy origin - Group - 11.3 - - - 2.4 - 3.4 - 17.1 -discontinued activitiesLess share of joint (25.8) (26.0) (5.9) (6.3) (1.7) (0.5) - - (33.4) (32.8)ventures Total 405.5 350.1 107.1 79.1 320.7 257.0 149.7 146.4 983.0 832.6 Operating Profit-continuing activities 59.0 71.3 8.8 7.0 43.1 37.2 18.7 11.6 129.6 127.1Operating Profit/(Loss) - (1.7) - - - 0.2 - 0.3 - (1.2) - discontinuedactivitiesGroup share of joint 5.3 5.0 0.7 0.1 0.3 - - - 6.3 5.1ventures and associatesGroup Operating Profit 64.3 74.6 9.5 7.1 43.4 37.4 18.7 11.9 135.9 131.0 Net Operating Assets 247.0 274.1 58.2 51.1 287.8 219.2 82.8 66.9 675.8 611.3Net Debt (166.1) (154.4)Net Assets 509.7 456.9 3 Operating Profit 2004 2003 £m £mThe operating profit of £129.6m (2003 - £125.9m) is after charging:Depreciation - owned assets 39.6 33.5 - assets under finance leases 2.9 0.2Amortisation - goodwill 20.9 15.8 - other intangible assets 0.7 0.5Hire of plant and machinery - aircraft 13.6 20.4 - other 2.7 3.0Other operating lease 4.8 4.0rentalsResearch and development costs 48.7 40.4 Auditors' remuneration in respect of audit services to the group amounted to£1.0m (2003 - £0.8m), of which £0.9m (2003 - £0.7m) was payable toPricewaterhouseCoopers LLP (PWC) and £0.1m (2003 - £0.1m) was payable to otheraudit firms. Audit fees payable to PWC in respect of the parent companyamounted to £56,000 (2003 - £55,000). Remuneration payable to PWC for non-audit services provided to the parentcompany and its UK subsidiaries amounted to £0.6m (2003 - £1.0m) being fortaxation services. Non-audit fees payable to PWC in respect of taxationservices provided outside of the UK amounted to £0.1m (2003 - £0.1m). Cost of sales, gross profit and other operating expenses: Continuing operations Acquired Continuing Discontinued Total owned at 1 January operations operations operations 2004 2004 2004 2003 2004 2003 2004 2003 £m £m £m £m £m £m £m £m Turnover 942.1 40.9 983.0 815.5 - 17.1 983.0 832.6Cost of sales 681.6 33.0 714.6 570.6 - 14.7 714.6 585.3 Gross profit 260.5 7.9 268.4 244.9 - 2.4 268.4 247.3Selling and distribution 52.6 2.9 55.5 46.7 - 1.5 55.5 48.2costsAdministrative expenses 80.4 2.9 83.3 71.1 - 2.1 83.3 73.2 Operating profit 127.5 2.1 129.6 127.1 - (1.2) 129.6 125.9 Operating profit excludes the group share in Joint Venture and Associatecompanies. Administrative expenses for acquired operations include amortisation of goodwilltotalling £1.1m. 4 Net Interest 2004 2003 £m £m £m £mGroupInterest receivable 4.3 3.4Interest payable: Bank loans and overdrafts (10.4) (12.2) On finance leases (1.6) - Other borrowings (0.8) (0.5) (12.8) (12.7)Net interest (8.5) (9.3)Joint venturesInterest receivable 0.5 0.4Interest payable (2.5) (2.6) (2.0) (2.2) 5 Tax on Profit on Ordinary Activities 2004 2003 £m £mCurrent tax:UK corporation tax on profits of the year 21.9 18.1Share of joint ventures' and associate's tax 1.3 1.0Overseas tax on profits of the year 15.3 14.7Adjustments in respect of previous years (2.1) (0.5) Total current tax 36.4 33.3Deferred tax:Origination and reversal of timing differences 4.4 5.1Adjustments in respect of previous years 0.1 (2.4)Total deferred tax 4.5 2.7Tax on profit on ordinary activities 40.9 36.0 Excluding goodwill amortisation of £21.0m (2003 - £15.9m), the prior year taxcredit of £2.0m (2003 - £2.9m) and the exceptional loss on disposal relating to2003 of £nil (2003 - £64.1m), the effective rate for the year is 29.2% (2003 -28.9%). This adjusted tax charge is lower than the prevailing rates principallybecause part of the goodwill charge is an allowable expense for tax purposes andsome group expenditure on research and development qualifies for additional taxcredit. The tax assessed for the year is different to the standard rate of corporationtax in the UK of 30% (2003 - 30%). The differences are explained overleaf: 5 Tax on Profit on Ordinary Activities continued 2004 2003 £m £mProfit on ordinary activities before 125.9 54.5tax Profit on ordinary activities multiplied by standard rate in the UK 30% (2003 - 37.8 16.330%)Effects of:Tax disallowed items (2004 - primarily goodwill amortisation; 2003 3.5 21.3 - primarily exceptional loss and goodwill amortisation)Capital allowances for year in excess of depreciation (1.0) (0.2)Other timing differences (3.4) (4.9)Overseas tax rates higher than UK rates 2.7 2.0Expenditure qualifying for additional R&D tax deduction (1.1) (0.7)Adjustments to tax charge in respect of prior years (2.1) (0.5)Current tax charge for the year 36.4 33.3 Factors that may affect future tax charges: The group's effective rate of current tax on underlying profits is expected tobe lower than the standard rate of corporation tax in the UK primarily becauseof timing differences arising on fixed assets and because some of the goodwillamortisation is an allowable deduction for tax purposes. The group expects thatthis will remain broadly unchanged in the foreseeable future. No provision has been made for deferred tax on gains recognised on revaluingproperty to its market value. Also, no deferred tax is recognised on theunremitted earnings of overseas subsidiaries, associates and joint ventures asno tax is expected to be payable on them in the foreseeable future. 6 Dividends 2004 2003 £m £mDividends on ordinary sharesInterim paid of 9.2p per share (2003 - 8.36p) 10.3 9.3Proposed final of 21.8p per share (2003 - 24.3 22.019.8p) 34.6 31.3 Dividends include £1,182 (2003 - £1,182) paid in respect of non equity second cumulative preference shares. 7 Earnings per Ordinary Share 2004 2003 Weighted Weighted average average number Per-share number Per-share Earnings of shares amount Earnings of shares amount £m million pence £m million penceBasic Earnings per Share (EPS)Earnings attributable to ordinary 84.7 111.4 76.0 18.2 105.9 17.2shareholdersEffect of dilutivesecuritiesOptions - 0.7 - 0.7Long term incentive plans - 0.1 - - Fully Diluted EPS 84.7 112.2 75.5 18.2 106.6 17.1 In addition to the information required by FRS14, the directors believe that it is helpful to calculate anunderlying earnings per share figure excluding goodwill amortisation and for 2003 also excluding the loss on disposal ofsubsidiary undertakings and integration costs: 2004 2003 Weighted Weighted average average number Per-share number Per-share Earnings of shares amount Earnings of shares amount £m million pence £m million penceBasic EPS 84.7 111.4 76.0 18.2 105.9 17.2Loss on disposal of subsidiary undertakings - - 64.1 60.5Effect of goodwill 21.0 18.8 15.9 15.0amortisationEffect of integration costs - - 0.8 0.8 Underlying EPS 105.7 111.4 94.8 99.0 105.9 93.5 The calculation of earnings per ordinary share has been based on £84.7m (2003 - £18.2m), being the profit after taxation, minority interests and preference dividend, and on the weighted average number of ordinary shares in issue during the year, being 111,448,271 (2003 - 105,941,221). The weighted average number of ordinary shares used for the fully diluted earnings per share is 112,222,295 (2003 - 106,622,128). 8 Employees 2004 2003 Number NumberAverage number of employeesUnited Kingdom 4,415 4,052Other EU Countries 1,109 1,010United States 2,808 2,342Rest of the World 1,531 1,586 9,863 8,990 2004 2003 £m £mEmployment costsWages and salaries 260.4 231.8Social security 29.6 23.8costsOther pension 12.6 14.6costs 302.6 270.2 Pensions The group's pension arrangements comprise various defined benefit and defined contribution schemes throughout theworld mainly with assets held in separate trustee administered funds. From 1 January 2003, new employees in the UK have only been able to join the defined contribution scheme. In theUSA, both the Carleton Technologies and Stanley Aviation defined benefit schemes have been closed to new members from 31December 2003 and 31 January 2004 respectively.Since the majority of the defined benefit schemes operated by the group are closed to new entrants, the age profileof the schemes' in service membership will increase over time. Under the funding method prescribed by FRS17, the current service cost will increase as a percentage of pensionable salaries as members approach retirement. FRS 17 assumptions The Group operates a number of defined benefit schemes, the most significant being the Cobham Pension Plan (CPP).A full valuation of the CPP scheme was undertaken as at 1 April 2004 and updated to 31 December 2004 by a qualifiedindependent actuary. During the period, the employer contributions to the CPP were 17.3% and this rate willcontinue in 2005. The major assumptions used by the actuaries of the group schemes in respect of FRS 17 were as follows: UK USA European Schemes Schemes SchemesAt 31 December 2004Rate of increase in salary costs 3.50% 3.50% 1.00%Discount rate 5.50% 5.75% 5.25%Inflation and pensions in deferment assumption 2.90% 3.00% 1.75%Pensions 2.90% - 1.75%increase At 31 December 2003Rate of increase in salary costs 3.50% 4.00%-5.00% 1.00%Discount rate 5.50% 6.00%-6.25% 5.50%Inflation and pensions in deferment assumption 2.75% 2.50%-3.00% 1.00%Pensions 2.75% - 1.50%increase 8 Employees continued UK USA European Schemes Schemes SchemesAt 31 December 2002Rate of increase in salary costs 3.25% 4.00% -Discount rate 5.60% 7.00% -Inflation and pensions in deferment assumption 2.25% 2.50% -Pensions 2.25% - -increase At 31 December 2001Rate of increase in salary costs 4.00% 4.00% -Discount rate 6.00% 7.00% -Inflation and pensions in deferment assumption 2.50% 2.50% -Pensions increase 2.50% - - The assets of the various schemes are held in managed and segregated funds held with various companies. The fairvalue of the assets held and the expected rates of return are as follows: Expected long term rate of return Value UK USA UK USA Schemes Schemes Schemes SchemesAt 31 December 2004Equities 8.00% 8.2%-8.3% 211.2 8.8Bonds 5.00% 5.00% 53.1 4.2Other 4.75% 3.10% 17.8 0.1Total fair value of assets 282.1 13.1 At 31 December 2003Equities 8.00% 8.00% 181.7 8.0Bonds 5.10% 4.50% 42.3 4.0Other 3.75% 3.20% 19.4 0.4Total fair value of 243.4 12.4assets At 31 December 2002Equities 8.00% 9.00% 117.9 7.4Bonds 5.00% 7.00% 28.7 3.6Other 4.00% 4.00% 7.5 0.2Total fair value of 154.1 11.2assets At 31 December 2001Equities 8.00% 9.00% 145.5 8.1Bonds 5.50% 7.00% 30.1 4.8Other 4.00% 4.00% 8.3 0.7Total fair value of 183.9 13.6assets The European schemes are unfunded and have no assets. 8 Employees continued The funding position of the schemes in the group as calculated under FRS 17 is as follows:- 2004 2003 2002 2001 £m £m £m £mTotal market value of assets 295.2 255.8 165.3 197.5Present value of scheme (363.3) (326.1) (231.9) (204.3)liabilitiesRelated Shares:
Cobham