Interim Results

INTERIM RESULTS FOR THE hALF YEAR ENDED 30 june 2013

8 August 2013

·; Results consistent with guidance and good progress on strategic objectives 

·; Order book increased to £2.5bn (31 December 2012: £2.4bn), benefitting from strong order intake in Aviation Services 

·; Group revenue increased 2%. Organic revenue4 declined 3%, in line with expectations, with strong growth in commercial markets more than offset by defence/security

·; Underlying profit before tax down 3%, with positive contributions from acquisitions, offset by US defence/security weakness and prior period beacon divestments  

·; Further progress towards more balanced portfolio, with commercial markets now 36% of Group revenue, and Axell Wireless Limited and FBH acquisitions bringing further complementary capabilities

·; Incremental savings from Excellence in Delivery programme accelerated, now expected to be £19m in the full year, with reinvestment to drive organic growth

·; Interim dividend up 10% to 2.64p, continuing the Group's long standing, progressive dividend policy

Bob Murphy, Cobham Chief Executive Officer, said:

"We have delivered results consistent with our full year guidance, in a US defence/security market that continues to be challenging, and we have taken further important steps in the first half towards achieving our strategic objectives.

"We anticipate that we will continue to perform in line with our previous full year guidance for 2013. While the outlook for US Government spending remains highly uncertain, on the basis of current market trends, there is the potential to deliver modest organic growth in 2014. We anticipate mid-single digit organic growth thereafter."

ENQUIRIES

The following notes apply throughout these interim results:

1. To assist with the understanding of earnings trends, the Group has included within its published statements trading profit and underlying earnings results. Trading profit has been defined as operating profit from continuing operations excluding the impacts of certain M&A related costs and business restructuring costs as detailed below. Also excluded are changes in the marking to market of non-hedge accounted derivative financial instruments and items deemed by the Directors to be of an exceptional nature. Underlying earnings are defined as trading profit less net underlying finance costs, which excludes the unwinding of acquisition related discounting, and after deducting taxation and non-controlling interests.

M&A related costs excluded from trading profit and underlying earnings include the amortisation of intangible assets recognised on business combinations and the writing off of the pre-acquisition profit element of inventory written up on acquisition. M&A related costs also include other direct costs associated with business combinations, adjustments to contingent consideration related to previously acquired businesses and direct costs from terminated divestments.

Business restructuring comprises exceptional costs or profits associated with the Excellence in Delivery programme.

A reconciliation of operating profit and profit before taxation to the respective underlying numbers is shown on page 12.

2. Numbers for the six months ended 30 June 2012 are restated due to the impact of adopting IAS 19 (revised). For further details see note 1 on page 26.

3. Operating cash flow is defined as cash generated from operations after cash flows from the purchase or disposal of property, plant, equipment and intangible assets. Operating cash conversion is defined as operating cash flow as a percentage of trading profit, excluding profit from joint ventures. Free cash flow is operating cash flow after net interest, taxation, dividends received from joint ventures and the cash cost of business restructuring.

 Net debt is defined as borrowings less the net of cash and cash equivalents at the balance sheet date. 

4. Organic revenue growth is defined as revenue growth 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 there is no R&D activity.

6. A Group-wide brand charge of up to 1% is charged to the Divisions from Head Office.

OVERVIEW OF THE HALF YEAR

The Group has delivered results consistent with its full year guidance, in a US defence/security market that continues to be challenging, and has taken important steps in the first half towards achieving its stated strategic objectives.

At the period end, the Group's order book was £2.5bn (31 December 2012: £2.4bn) with strong order intake in the period, including a number of multi-year orders for the Aviation Services business, with a Group book-to-bill ratio of 1.13 times. Excluding the Group's longer cycle businesses, book-to-bill was solid at 0.96 times.

Group revenue increased 2% to £864m (2012: £843m), primarily due to the favourable net impact of acquisitions and divestments. Overall, organic revenue fell by 3% as a result of a decline in defence/security markets. However, commercial organic revenue grew by 8%, including a strong contribution from the Aviation Services business in Australia and increasing revenue from antennas and other products for commercial aircraft. US defence/security organic revenue was down 7%, with weakness in certain short cycle land markets. Organic revenue in the non-US defence/security market was down 9%, almost entirely due to recognition in the prior period of a revenue milestone on the UK Future Strategic Tanker Aircraft (FSTA) programme. Excluding this revenue milestone, non-US defence/security revenue was broadly flat on the prior period.

The underlying Group trading margin decreased, as anticipated, to 17.8% (2012: 18.7%). This was principally due to lower US defence/security volumes, changing product portfolio mix and increased technology and other investments being made, which offset the impact of Excellence in Delivery (EiD) efficiency benefits. The Group trading margin in organic operations fell just 30bps.

EiD, which is the Group's programme to re-engineer and streamline operations, continues to generate positive momentum and deliver its targeted operational and customer benefits. As a result of the Group accelerating its integration activity, it now expects to achieve £19m (previously £17m) of year-on-year efficiency savings during 2013, bringing total annualised benefits to £67m since the programme began in 2010. Reinvestment of EiD savings in the Group is underway to support the drive for organic revenue growth.

Private venture (PV5 or company funded R&D - research and development) investment in the Group's core businesses increased to £42m (2012: £33m), representing 6.1% (2012: 5.0%) of core revenue, with investment increasingly targeted towards higher growth markets. Total R&D investment, including customer funded projects, was £85m (2012: £66m), including significant development work undertaken on aerial refuelling programmes.

Key management capabilities have been strengthened with the appointment of three new Executive Vice Presidents in the critical areas of business development and technology, life cycle and programme management, and corporate strategy and mergers and acquisitions. The Group has continued to increase its overall investment in enhancing skills and capabilities. 

Cobham has continued to make progress towards its strategic objective of bringing more balance to its portfolio. It completed the acquisition of Axell Wireless Limited (Axell), a leading global provider of distributed antenna systems wireless solutions for buildings and critical infrastructure applications, for up to £85m in cash, including contingent consideration. After the period end, the Group also acquired full ownership of FBH, the 50% owned helicopter services joint venture, for a cash consideration of £74m. This has further strengthened its exposure to attractive non-US defence/security markets.

Underlying EPS fell by 3%, at constant translation exchange rates, to 10.3p (2012: 10.6p), consistent with the Group's trading performance.

The operating cash flow conversion rate was satisfactory at 84% (2012: 89%). The Group generated £65m of free cash flow after EiD payments and remains conservatively geared at the period end, at 1.2 times net debt/EBITDA, after £82m of net acquisition investment.

MARKETS

Cobham operates in three broad market segments: US defence/security, non-US defence/security and commercial, which comprises aerospace, marine and land/industrial markets. The proportion of Group revenue attributable to each market segment is set out in the table below.

* Non-US defence/security for the first half of 2012 includes a revenue milestone on the FSTA programme, on the aircraft's introduction to service with the Royal Air Force.

The Group has continued to make further progress in strengthening its exposure to commercial markets. On 10 May 2013 the Group announced that the acquisition of Axell had been completed. Axell predominantly operates in commercial and public safety communication markets and is complementary to a number of the Group's existing communications businesses, further building on the Group's capabilities following the acquisition of the Thrane & Thrane SATCOM business in 2012.

US defence/security market

The US defence/security market environment remains highly uncertain, with no congressional agreement reached to avoid sequestration, which was mandated in the 2011 Budget Control Act (BCA). Notwithstanding this, the 2014 presidential budget request has been set at a level which ignores the budget cuts set out in the BCA. This lack of progress in agreeing a budget, together with a lack of visibility in confirming strategic and programme priorities, increases the potential for some short term demand volatility. The Group continues to believe that, notwithstanding these uncertainties, ongoing fiscal constraints mean that the US defence/security market is likely to continue its current cyclical down-turn in any case.

Nevertheless, the Group remains well positioned in this market with a range of differentiated technologies and good positions on key platforms, which will provide significant growth opportunities as and when US market conditions improve and which also provide export opportunities. Many of the Group's capabilities are in likely areas of current priority, such as the KC-46 tanker aircraft, the F-35 Joint Strike Fighter, the AEGIS Ballistic Missile Defence system and the Standard Missile. During the period, the Group increased its ship set on AEGIS, with the latest variant of the Standard Missile also incorporating more Cobham content. Cobham's capabilities also position it as a key subsystem and component supplier on upgrade programmes, which are an efficient means of keeping critical capabilities current, including communications, radar and electronic warfare, on platforms already in service.

Non-US defence/security market

Demand from non-US defence/security markets remains relatively robust. Significant opportunities exist for the Group in faster growth geographies including Asia, the Middle East and South America, although European markets are expected to remain weaker.

Cobham has good ship set positions on a range of platforms in the non-US defence/security market, including the Airbus A330 Multi Role Tanker Transport (MRTT), the Embraer KC-390 tanker and the Eurofighter Typhoon aircraft. In addition, the Group has been expanding its presence around the world to support and grow direct sales of its capabilities to international customers. A network of sales offices has been developed over time, including in Asia, the Middle East and South America to increase focus on faster growth markets and these also support development of further opportunities in commercial markets.

Aviation Services has continued to win long term contracts for critical services, adding significantly to its order book during the period. Most notably, the UK Ministry of Defence (MoD) extended its contract to provide electronic warfare training for the Royal Navy and Royal Air Force through to 2019, for an anticipated value of some £200m, building on a 25 year partnership for essential readiness training. This market sector is expected to continue to benefit from a trend towards increased outsourcing and the Group is well positioned in this market going forward.

Commercial markets

Cobham uses its differentiated technology and know-how to continue strengthening its presence in a number of attractive commercial markets. These include specialist aviation services in Australia, marine (principally the satellite communication (SATCOM) market), together with other aerospace and land/industrial markets. Cobham has strong technology positions in large transport aircraft, helicopters, regional and smaller aircraft and land/industrial markets.

Demand across Cobham's commercial markets is driven by the desire for greater fuel efficiency and improved operational effectiveness by increasing demand for new and improved communication products and by an increasing focus on safety. Demand is also driven by activity in the oil and gas and natural resources industries, notably in the Australian aviation and marine SATCOM markets.

During the period Cobham made further progress in expanding its commercial aviation services business, being awarded an AUS$150m scope extension to its current contract with QantasLink, with an increase to the number of Boeing 717 aircraft operated by Cobham from 13 to 18 through to 2018. Additional flying activity is expected to commence in the fourth quarter of 2013.

STRATEGY

The Group's strategy is to leverage its innovative technology, know-how and understanding of customer needs to build and maintain leading positions in the second and third tiers of the global defence/security and commercial aerospace, marine and land/industrial markets, underpinned by sector leading customer delivery and operational performance. This enables it to generate sustainable top and bottom line growth, relative to the markets in which it operates, while consistently generating good free cash flow, thereby creating shareholder value.

The Group has continued to make good progress during the period across its strategic objectives of investing in management capabilities, in technology, in operational excellence and in acquisitions.

Investment in Management Capabilities

Key management capabilities have been strengthened with the appointment of three new Executive Vice Presidents in the critical areas of business development and technology, lifecycle and programme management, and corporate strategy and mergers and acquisitions.

The Group has continued to increase investment in the period to achieve its objective of enhancing skills and capabilities in the business. It has done considerable work on developing its strategic workforce planning process, which closely links staffing and skills requirements to the business planning process, so that appropriate skills are in place within the business. The Group has been reinvigorating its approach to training and development and is deploying an integrated talent management programme, including an enhanced plan for high potential employees, accredited management standards training and online learning. In addition, it is expanding its graduate recruitment programme and increasing the number of apprentices in the business.

Technology Investment

In line with the Group's previously announced plans to increase its investment in technology in 2013, PV investment in the Group's core businesses increased to £42m (2012: £33m), representing 6.1% (2012: 5.0%) of core revenue. Total R&D investment, including customer funded projects, was £85m (2012: £66m) including significant development work undertaken on aerial refuelling programmes.

During the period the Group increased its technology investment in a number of areas, with focus on attractive commercial markets such as SATCOM, antennas and aerospace communications, in line with its strategy. In addition, it increased its investment in selected, critical defence/security technologies and it continued to leverage its defence/security technology into other markets through PV investment. During the period, Cobham has released its latest internet protocol based, high definition encoding technology, Nano Tx, for application in both surveillance and broadcast markets. This product establishes bi-directional connectivity in the extended frequencies sought by broadcasters, from any broadband connection. The product complements Cobham's light weight and rapid set-up MediaMesh product.

Within SATCOM, the integration of Thrane & Thrane continues to progress well, with the product base now combined, a future technology development plan now completed and a number of major development programmes under way. There is ongoing major investment in high-performance antenna systems ahead of the launch of the future high speed Ka band system, or Global Xpress, with customer demand for these products driven by Inmarsat's plans for global satellite coverage by the end of 2014. In addition to significant work on Global Xpress related products, the SATCOM business units are investing in the development of a new family of systems designed for future, data-connected transport aircraft, a next generation, high data rate SATCOM terminal for the land market and new safety based products for the marine market.

Operational Excellence

The Group's programme to re-engineer and streamline operations, EiD, continues to generate positive momentum and deliver targeted operational and customer benefits. The programme consists of three components: the implementation of a standard operating framework across a set of principal manufacturing sites or principal locations; the rationalisation and integration of manufacturing sites and the implementation of a standard Enterprise Resource Planning (ERP) system.

Implementation of the production standard operating framework has now been completed in all the principal locations as planned with the supply chain and engineering frameworks expected to be completed by the year end, as anticipated. Following the June 2012 Thrane & Thrane acquisition, plans are being put in place for the implementation of the standard operating framework in the principal location in Copenhagen. Encouragingly, significant improvements continue to be delivered in the principal locations across a range of operational and customer related metrics including on time delivery, quality and productivity.

The ERP implementation remains on schedule with the system build completed and system testing and user acceptance phase now underway. This activity is expected to continue until the first quarter of 2014 and will be followed by the first pilot deployment of the ERP system into the Orchard Park, New York principal location. Implementation of the ERP system will help consolidate the operating and customer benefits from the standard operating framework activity.

The Group is working on its previously announced plan for the additional streamlining of operations to reduce its fixed cost base, so as to remain competitive through the US defence/security down cycle. This year to date, the Group has now commenced rationalisation at 10 sites, bringing to 26 the total number of sites subject to rationalisation since 2010. The majority of the additional savings in 2013 are being reinvested in the business to help generate incremental organic revenue.

The Group has accelerated its integration and downsizing activity and now expects to achieve £19m (previously £17m) of year-on-year efficiency savings during 2013, bringing total annualised benefits to £67m since the programme began in 2010, slightly ahead of the original plan. Cobham continues to expect that by the end of 2016, EiD will be delivering some £100m of annualised benefits with expected costs over the life of the programme remaining at £191m. EiD costs in the first half of the year were £26m, with costs in the year now expected to be £56m (previously £50m), consistent with the acceleration of the integrations.

Capital Allocation and Mergers and Acquisitions

After making appropriate investment in the business for organic growth, Cobham's capital allocation priority remains to continue its long standing progressive dividend policy. After dividend payments, it will use the significant amount of cash generated and its strong balance sheet, to reinforce its technology and market positions through the acquisition of businesses with differentiated technology and know-how. Cobham's strategic objective continues to be to bring more balance to its portfolio and to create value for its shareholders through the disciplined application of its financial criteria.

Consistent with this, in May 2013, Cobham completed the acquisition of Axell for up to £85m in cash on a debt and cash free basis including contingent consideration. The business is a leading global provider of distributed antenna systems and wireless solutions for buildings and critical infrastructure applications for public safety and cellular markets, with growth driven by rapidly increasing demand for indoor mobile data traffic and more stringent public safety regulations. Axell brings technology that is complementary to Cobham's existing Antenna Systems and Tactical Communications and Surveillance businesses.

In July 2013, Cobham acquired full ownership of its 50% owned FBH helicopter services joint venture for a cash consideration of £74m, together with the assumption of the joint venture partner's share of net debt in the business. This acquisition has strengthened Cobham's presence in an attractive market and is highly complementary to the Group's existing fixed wing business, enabling it to offer customers the convenience of a transport solution that includes both types of aircraft. The acquisition further strengthens Cobham's exposure to attractive non-US defence/security markets, with the potential to expand its customer base in government related and other growth markets over time.

BOARD CHANGES

As previously announced, Warren Tucker, Chief Financial Officer, stood down from the Board on 1 May 2013, and was succeeded by Simon Nicholls, previously Group Finance Director at Senior plc.

Marcus Beresford, Non-executive and Senior Independent Director, stood down from the Board at the conclusion of the 25 April 2013 Annual General Meeting, with Michael Wareing assuming the role of Senior Independent Director. Jonathan Flint, Chief Executive of Oxford Instruments plc, joined the Board as a Non-executive Director on 1 May.

Simon and Jonathan have wide ranging skills and experience and a track record of success, and the Board warmly welcomes them to Cobham.

FINANCIAL RESULTS

Orders

At the period end, the Group's order book was £2.5bn (31 December 2012: £2.4bn), including £1.3bn (31 December 2012: £1.1bn) for the Aviation Services business. The Group order book reflected strong order intake in the period, which was £976m (2012: £768m), resulting in a book to bill ratio of 1.13 times.

Order intake in the period included a number of multi-year orders for the Aviation Services business, including in Australia a AUS$150m four year contract from Qantas and a AUS$85m, five year contract extension from Ok Tedi Mining Limited, in Papua New Guinea. A £165m order from the UK MoD was received in May, extending the Group's contract for air support services for the Royal Air Force and the Royal Navy for a further five years, through to 2019.

Excluding the longer cycle, contract related Aviation Services and major programme driven Mission Equipment businesses, book-to-bill was solid at 0.96 times. There was lower order intake in some of the US defence/security businesses, which declined as anticipated, with some additional weakness seen in certain shorter cycle, land focused businesses.

Summary of Underlying Results

A summary of the Group's underlying results is set out below:

A reconciliation of underlying profit to statutory profit numbers is set out on page 12.

Revenue

Total Group revenue increased 2% to £864m (2012: £843m), primarily due to the acquisition of Thrane & Thrane in June 2012 and a favourable US dollar translation exchange rate. This was partly offset by the divestment of the non-core emergency locator beacon businesses in July 2012.

Overall, organic revenue fell by 3%. Organic revenue in the Group's commercial markets grew strongly by 8%, with a continuing strong contribution from the Aviation Services business in Australia and increasing revenue from antennas and other products for commercial aircraft. US defence/security organic revenue was down by 7% with weakness in certain short cycle land markets, including Tactical Communications and Surveillance. Organic revenue in the non-US defence/security market was down 9%, almost entirely due to recognition in the prior period of a revenue milestone on the UK FSTA programme. Excluding this revenue milestone, non-US defence/security revenue was broadly flat on the prior period.

Changes to Group revenue in the period were as follows:

Analysis of Group Revenue

Average H1 2013 US$/£ exchange rate = $1.55/£1. Average H1 2012 US$/£ exchange rate = $1.58/£1.

Trading Profit

Group trading profit in the first half was £154m (2012: £157m). This included the additional partial period contribution from the 2012 acquisition of Thrane & Thrane and from the May 2013 acquisition of Axell, which was partially offset by the divestment of the non-core emergency locator beacon businesses in July 2012.

The underlying Group trading margin decreased, as anticipated, to 17.8% (2012: 18.7%). This was principally due to lower US defence/security volumes, changing portfolio product mix and increased technology and other investments being made, which offset the impact of EiD efficiency benefits. The Group trading margin in organic operations fell just 30bps.

Underlying Net Finance Expense and Underlying Profit Before Tax

The underlying net finance expense was £17m (2012: £16m). The net interest expense on cash and debt holdings was £15m (2012: £14m), with the slight increase resulting from higher average levels of net debt and adverse foreign exchange movements. As anticipated, there was a non-cash net finance charge from pension schemes of £2m (2012: £2m).

The Group's underlying profit before taxation was £137m (2012: £141m).

Taxation

The Group's underlying tax rate is unchanged at 20.0% (2012: 20.0%), from an underlying tax charge of £27m (2012: £27m). The rate is calculated by taking the underlying tax charge and dividing it by the underlying profit before tax of £134m (2012: £137m), excluding its £3m (2012: £4m) share of post-tax results of joint ventures.

Earnings per Share (EPS)

Underlying EPS fell by 3%, at constant translation exchange rates, to 10.3p (2012: 10.6p) consistent with the Group's trading profit performance.

In addition to the above, basic EPS was 4.5p (2012: 7.2p). The period-on-period reduction was driven by a combination of higher non-underlying business restructuring costs and adverse movements in non-cash items including non-hedge accounted derivative financial instruments and higher amortisation of intangible assets. These were partly offset by lower M&A related adjustments.

A full reconciliation of the profit before tax items used in the calculation of underlying EPS is set out on page 12.

Retirement Obligations

The Group operates a number of defined benefit schemes, the most significant being the Cobham Pension Plan (CPP). At the period end, the estimated shortfall for accounting purposes between the value of the defined benefit schemes' assets and the present value of the future liabilities had decreased since the year end to £49m before deferred tax (31 December 2012: £73m). The decrease is due to stronger investment valuations and an increased discount rate on liabilities, as a result of higher corporate bond yields.

On 1 July 2013 the liabilities relating to past service of CPP pensioners were subject to a buy-in arrangement whereby the CPP transferred assets in exchange for an insurance policy. This policy has eliminated the Group's exposure to interest, inflation and longevity risks associated with liabilities amounting to £242m. Following the de-risking activity also carried out in 2011 on other,

smaller Groupschemes, 43% of total defined benefit pension liabilities are now covered by insurance policies.

Cash Flow and Net Debt

Operating cash flow, which is stated after net capital expenditure but before net interest and tax payments, was £127m (2012: £136m). The operating cash flow conversion rate (operating cash flow as a proportion of trading profit) was a satisfactory 84% (2012: 89%), before the Group's share of post-tax results of joint ventures. The decline compared to the previous period was in part attributable to an increase in working capital outflows, including a controlled inventory build at a small number of locations, ahead of planned integrations, and a partial unwind of a strong creditor position achieved at the end of 2012.

The Group generated £65m (2012: £76m) of free cash flow. This is stated after £24m (2012: £18m) of EiD payments, net interest payments of £14m (2012: £13m), tax payments of £28m (2012: £33m) and the receipt of dividends from joint ventures.

In addition, Cobham paid its final dividend for 2012 of £68m and invested a net £82m in acquisitions, primarily relating to Axell and the previously announced £24m investment in the FSTA consortium.

The table below sets out the Group's cash flows over the period:

At the period end, net debt which comprises short term cash balances and fixed term borrowings, increased to £484m (31 December 2012: £360m). Included within this increase were exchange movements of £40m, as it is the Group's policy to hold a significant proportion of its borrowings in foreign currency, principally US dollars, as a natural hedge against assets and earnings denominated in those currencies.

At the period end, the Group was conservatively geared at 1.2 times net debt/EBITDA.

Dividends

The Board has approved an interim dividend of 2.64p (2012: 2.40p), an increase of 10%, in line with the Group's long standing, progressive dividend policy. The shares will be traded ex-dividend on 9 October 2013 and the interim dividend will be paid on 8 November 2013 to shareholders on the register at 11 October 2013.

RECONCILIATION OF UNDERLYING PROFIT

DIVISIONAL REVIEW

Group Operating Summary

Cobham Aerospace and Security

Total revenue increased £57m primarily due to the combined impact of the acquisition of Thrane & Thrane in June 2012, a smaller contribution from the Axell acquisition, some benefit from a favourable US dollar exchange rate and modest organic revenue growth of 0.5%. There was good organic revenue growth of 8% in commercial markets, in particular in the aerospace sector from antennas, radio and audio products and in SATCOM operations. The organic growth in commercial markets was largely offset by lower US defence/security revenue, particularly for certain short cycle land related products, including Tactical Communications and Surveillance. There was modest organic revenue growth from non-US defence/security markets.

The revenue profile in this Division included the following:

·; Supply of commercial antennas into Far Eastern markets, with significant orders from several new customers in the region. This is expected to continue as demand increases for on-board cockpit safety services for commercial aircraft;

·; Audio and Radio Management systems for commercial transport customers and also for the modernisation of military helicopters and transport aircraft for a number of export customers;

·; Sales of SATCOM equipment for commercial and business aviation aircraft platforms and deliveries of maritime VHF and MF/HF radio equipment for retrofit projects and fishery vessels, in response to operational and safety requirements;

·; Increasing demand for slip rings used on off-shore wind turbines, together with first qualification as a supplier to GE Wind Energy in the period, with initial orders expected;

·; Declining US surveillance revenue being partly offset by growing revenue in Asia Pacific and South America, including for wireless transmission links for large scale sporting events.

The margin in this Division decreased to 18.6% (2012: 21.2%) principally due to lower US defence/security volumes, the impact of acquisitions and increased technology and other investment in the Division, offsetting the impact of EiD efficiencies.

In addition, there were a number of important business developments in the period which it is anticipated will benefit future results:

·; Development of new high-performance antenna systems for Global Xpress, Inmarsat's future high-speed Ka-band SATCOM system, including a programme to upgrade maritime Ku-band VSAT SATCOM antennas;

·; A contract from Piaggio Aero Industries to design and manufacture major composite aero structures for its new multirole patrol aircraft. These include ailerons, fixed trailing edges, outboard wing flaps, horizontal stabilisers, elevators, flap track fairings, main landing gear doors and aerodynamic fairings;

·; Launch of the new High Data Rate Inmarsat BGAN terminal, EXPLORER 710, for the land market. First deliveries of the terminal are expected towards the end of 2013;

·; Contracts have been received to supply waveguides in support of the first three ship sets for the US AEGIS ballistic missile defence Spy-Radar, with further contracts expected in 2013;

·; A competitively won five year indefinite delivery, indefinite quantity contract with US Special Operations Command to supply seven types of UHF SATCOM antennas for special operations forces.

Cobham Defence Systems

Revenue performance in the Defence Systems Division was relatively robust, with total revenue down £5m, even though the Division is almost entirely exposed to the US defence/security market. Excluding the impact of favourable translation exchange rates, organic revenue declined by 5%, principally due to delays in the placement of awards for certain land related programmes.

Despite the underlying organic revenue decline, the Division remains well positioned in this market on a number of key programmes, with growth achieved in the period in the following areas:

·; Full rate production underway on two flight sets for the Wideband Global Satellite programme, increased from the prior period. Full rate production will continue through 2014;

·; Increasing shipments of packaged monolithic microwave integrated circuit subsystems, supporting next generation active electronically scanned array radar programmes. Growth is expected to continue into 2014;

·; Steady revenue growth from F-35 Joint Strike Fighter aircraft radar and electronic warfare microelectronic products, following the latest low rate initial production releases;

·; Increasing shipments of microelectronic assemblies for proprietary electronic intelligence programmes, with a strong backlog supporting continuation of revenue through to 2015.

The margin declined to 15.5% (2012: 16.1%), in part due to the adverse overall impact of underlying volume declines and increased technology and other investment in the Division, offsetting the impact of EiD efficiencies.

In addition, there were a number of important business developments in the period which it is anticipated will benefit future results:

·; Award of the Integrated Defensive Electronic Counter Measures (IDECM) ALQ-214 V4 radio frequency countermeasures system full rate production 10 contract to ITT Exelis. Cobham is anticipating further IDECM orders as a significant supplier of several microelectronic assemblies on this significant upgrade of the US Navy's F-18 aircraft;

·; Award of Lot 27 of the AIM-120 Advanced Medium Range Air-to-Air Missile to Raytheon, with Cobham as a significant supplier of microelectronic assemblies;

·; Award of several microelectronic assembly development wins for a variety of missile data link requirements.

Cobham Mission Systems

Total revenue in the Mission Systems Division fell by £23m, with an organic decline of 13%. Organic revenue reduced due to the recognition in the prior period of a revenue milestone on the FSTA programme, on the aircraft's introduction to service with the Royal Air Force. In addition, there was lower revenue from weapons carriage and release products in the US and from some land related programmes.

The overall revenue profile in the Division included the positive impact of the following:

·; Engineering work on aerial refuelling development programmes, including the US KC-46 and Brazilian KC-390 tankers, reflecting steady progress;

·; Aftermarket business associated with new aerial refuelling programmes;

·; Demand for US tactical aircraft On-Board Oxygen Generating Systems, which has remained strong with additional international sales for the Pilatus PC-7 turbo trainer aircraft, with orders also secured for the Korea Aerospace Industries FA-50 supersonic trainer aircraft;

·; Shipments of Hawk trainer aircraft weapons carriage and release products, supported by a strong order book.

The margin was only slightly lower at 19.1% (2012: 19.5%), with the Division continuing to benefit from EiD savings.

In addition, there were a number of important business developments in the period which it is anticipated will benefit future results:

·; Strong, future opportunities for exports of the A330 MRTT aircraft, for which Cobham provides the wing pod and centre line aerial refuelling equipment;

·; Significant cryocooling contract awards for missile defence, precision guided munitions components, infrared electro optic targeting and countermeasures programmes, reinforced by receipt of the Raytheon Missile Systems 2012 Four Star Excellence Award;

·; Successful completion of Phase 2 of the UK Autonomous System Technology Related Airborne Evaluation and Testing (ASTRAEA) R&D programme, with UK industry partners. Cobham's ASTRAEA focus has been on autonomous aerial refuelling technologies, a future growth market that is expected to be significant. Discussions are ongoing about the next phase of the programme, including airborne tests.

Cobham Aviation Services

Total revenue (which excludes joint ventures) increased by £7m or 4% organic growth, which was driven by Australian commercial and government operations, partly offset by the UK, as FSTA conversion work ended in the period.

Notable areas of growth included:

·; A contract expansion agreed with Qantas to introduce, operate and support five additional Boeing 717s, taking the total fleet to 18. Entry into service of the additional aircraft is planned to occur between November 2013 and June 2014;

·; A service expansion and extension was signed with Ok Tedi Mining Limited in Papua New Guinea. This five year extension will increase the operating fleet from two to three aircraft including an aircraft upgrade, with entry into service around the year end;

·; Contract amendments were signed with Northrop Grumman to provide increased maintenance support at RAF Waddington, through to the end of 2013, on the Sentry E-3D airborne early warning aircraft.

The margin including joint ventures of 13.0% (2012: 11.6%) benefitted from increased activity in Australian operations. The margin also benefitted in part from the lower margin FSTA conversion work being completed in the period, with the prior period additionally including redundancy costs unrelated to EiD.

In addition, there were a number of important business developments in the period which it is anticipated will benefit future results:

·; The UK MoD 020 electronic warfare (EW) training contract was extended through to the end of 2019, providing training for service personnel on operating platforms including the Eurofighter Typhoon and Type 45 Destroyer. The extension involves the introduction of a Diamond DA 42 aircraft and enhanced EW capabilities for the fleet of 14 specially modified Falcon business jets;

·; With the UK contract secure, there is increased focus on exporting EW capability. The service is already supplied to NATO and, while the majority of 020 flying is undertaken in UK airspace, Cobham also supports UK MoD detachments to North America, the Middle East and Asia, presenting opportunities to showcase this capability;

·; A further 12 month extension was secured with Australian Customs and Border Protection Command, to continue operating two F406 surveillance aircraft until June 2014;

·; In July 2013, Cobham acquired full ownership of the FBH helicopter services joint venture, strengthening Cobham's presence in an attractive market, which is also highly complementary to the Group's existing fixed wing business. 

Non-core Businesses

The Group's remaining non-core business is its small avionics business. Despite organic growth in this business, non-core results were lower with revenue of £11m (2012: £26m) and trading profit of £2m (2012: £4m) in the period due to the divestment of the non-core emergency locator beacon businesses in July 2012.

OUTLOOK

The Group has delivered results consistent with its full year guidance, in a US defence/security market that continues to be challenging, and has taken further important steps in the first half towards achieving its strategic objectives.

The outlook for the US defence/security market remains highly uncertain. The Group continues to expect a period of declining US Government budgets, consistent with previous down cycles, and anticipates that its US defence/security revenue will decline by mid-to-high single digits in 2013. By contrast, growth prospects in its commercial markets continue to be strong and, with the Group's broad geographical spread, it also has access to faster growth defence/security markets in the rest of the world. In line with its previous guidance, organic growth in its commercial markets

is expected to partially offset the decrease in defence/security revenue in 2013, with Group revenue declining organically by low-to-mid single digits in 2013. Operating margins are expected to be slightly lower than in 2012.

Cobham has made significant progress in bringing more balance to its portfolio with the acquisition of Axell during the period, followed by taking full ownership of its FBH joint venture in July, strengthening its exposure to non-US defence/security markets. These acquisitions bring differentiated and complementary capabilities and know-how and help reinforce the Group's positions in attractive markets.

In addition, the EiD programme continues to generate positive momentum, delivering targeted operational and customer benefits. Reinvestment of savings is underway across a number of areas to drive incremental organic growth and gain market share. These include increasing investment in PV, in programme management, in enhancing other skills and capabilities in the business and in business development. Accordingly, the Group anticipates it will continue to perform in line with its previous full year guidance for 2013 and, on the basis of current market trends, there is the potential to deliver modest organic growth in 2014. It is anticipated that there will be mid-single digit organic growth thereafter.

Cobham continues to benefit from a highly cash generative business model and a strong balance sheet. These enable it to maintain its long standing policy of a 10% progressive annual dividend increase. It will also invest in carefully selected acquisitions, with disciplined application of its financial criteria to bring more balance between its defence/security and commercial businesses, promoting long term growth through the cycles.

- E n d s -

Forward Looking Statements

Nothing in this press release should be construed as a profit forecast or be interpreted to mean that the future earnings per share of Cobham will necessarily be greater or less than, the earnings per share for completed financial periods.

This document 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 their 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'. 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 currency 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. Cobham does not intend to update these forward-looking statements.

Notes to the Interim Financial Information

For the half year ended 30 June 2013

1. Basis of preparation

This unaudited condensed interim financial information for the half year ended 30 June 2013 has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority, and with IAS 34, Interim Financial Reporting, as adopted by the European Union (EU). It comprises the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated Balance Sheet, the Consolidated Statement of Changes in Equity, the Consolidated Cash Flow Statement and the related notes ("the interim financial report"). This information should be read in conjunction with the annual financial statements for the year ended 31 December 2012, which have been prepared in accordance with IFRS as adopted by the EU.

The Directors believe, after making enquiries they consider to be appropriate, that the Company has adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the financial statements. The Directors have made this assessment after consideration of the Company's forecast operating cash flows and related assumptions, undrawn debt facilities, debt maturity review, analysis of debt covenants and in accordance with the Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009, published by the Financial Reporting Council.

This interim financial report and the comparative figures for the year ended 31 December 2012 do not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006. Full accounts for that year have been delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.

This interim financial report was approved by the Board of Directors and approved for issue on 7 August 2013. The report is being sent to shareholders on request and will be available to members of the public at Cobham plc's registered office at Brook Road, Wimborne, Dorset, BH21 2BJ, UK and on the Company's website, www.cobham.com.

Accounting policies

Other than as stated below, the accounting policies applied are consistent with those published in the financial statements for the year ended 31 December 2012 and are expected to be applied for the year ended 31 December 2013. In the interim periods, taxes on income are accrued using the tax rate that is expected to be applicable to the total earnings for the period.

A number of new standards, amendments to standards and interpretations which have been endorsed by the EU have been adopted with effect from 1 January 2013 and have impacted the accounting policies or presentation as follows:

Amendment to IAS 19 Employee Benefits

This amendment changed the basis of calculating the expected return on assets held in pension schemes from an expected market yield basis to a high quality corporate bond yield basis. The amendment is required to be applied retrospectively by the transitional provisions included within IAS 19 (revised). Administrative costs relating to pension schemes are now charged to administrative expenses within the Consolidated Income Statement as incurred rather than netted against expected return on pension scheme assets. Expected return on pension scheme assets and interest on pension scheme liabilities are now replaced with interest on net retirement benefit obligations, charged at the discount rate. Actuarial losses, accounted for within Other Comprehensive Income, are restated accordingly. These adjustments are tax effected. The retirement benefit obligation recorded in the Consolidated Balance Sheet is unchanged. The change in profit after taxation impacts on Earnings per Share and underlying measures. The Consolidated Statement of Changes in Equity, the Consolidated Cash Flow Statement and various notes to the financial statements are also impacted.

The impacts can be summarised as follows:

IFRS 13 Fair Value Measurement

The adoption of this standard requires some amendments to disclosures but will not affect the fair value measurements used. Additional disclosures have been provided in note 11.

Amendment to IAS 1 Financial Statement Presentation

The amendment to IAS 1 requires items within other comprehensive income to be presented based on whether they can, or cannot, be subsequently reclassified to profit or loss.

The following new standards, amendments to standards and interpretations have also been endorsed by the EU and adopted with effect from 1 January 2013; however no changes to previously published accounting policies or other adjustments were required on their adoption:

·; Amendment to IAS 12 Deferred tax: Recovery of Underlying Assets

·; Amendment to IFRS 7 Financial Instruments: Disclosures - offsetting Financial Assets and Financial Liabilities

·; Amendment to IFRS 1 First time adoption - Government loans

·; Annual Improvements 2011

·; IFRIC 20 Stripping Costs in the Production Phase on a Surface Mine

Underlying measures

In addition to the information required by IFRS, and to assist with the understanding of earnings trends, the Group has included within its published statements non-GAAP measures including trading profit and underlying earnings results.

Trading profit has been defined as operating profit from continuing operations excluding the impacts of certain M&A related costs and business restructuring costs as detailed below. Also excluded are changes in the marking to market of non-hedge accounted derivative financial instruments, impairments of intangible assets and items deemed by the Directors to be of an exceptional nature. Underlying earnings are defined as trading profit less net underlying finance costs, which excludes the unwinding of acquisition related discounting, and after deducting taxation and non-controlling interests.

M&A related costs excluded from trading profit and underlying earnings include the amortisation of intangible assets recognised on acquisition and the writing off of the pre-acquisition profit element of inventory written up on acquisition. M&A related costs also include other direct costs associated with business combinations, adjustments to contingent consideration related to previously acquired businesses and direct costs arising from terminated divestments.

Business restructuring costs comprise exceptional items associated with the restructuring of the Group's portfolio. It also includes the costs of re-engineering operations as part of Excellence in Delivery including the costs of integrating sites into principal locations and the additional streamlining under the two year extension of the EiD programme to the end of 2015.

All underlying measures include the revenue and operational results of both continuing and those operations being sold until the point of sale.

Net debt is defined as the net of borrowings less cash and cash equivalents at the balance sheet date.

Operating segments

The chief operating decision making body for the Group has been identified as the Board. It reviews the Group's internal reporting in order to assess performance and allocate resources. The internal reporting structure forms the basis of the Group's segmental reporting and the segments are disclosed in note 2. All operating segments meet the definition of reportable segments. Details of the composition and purpose of the Board can be found on pages 37 and 38 of the 2012 Annual Report and Accounts.

The Board assesses the performance of operating segments based on revenue, trading profit as defined above and operating cash generation. Finance income, finance costs, and taxation are not segmented and are reviewed by the Board on a Group basis.