Cobham Regulatory News (COB)

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2 March 2017

PRELIMINARY RESULTS FOR THE YEAR ENDED 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.

**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 £573.8m and other charges of £236.8m, 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 £500m (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

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% organic4 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:

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.

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 £130 million on Private Venture5 (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.

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 £1,028.2m, a reduction of £178.6m on the prior year, after the £490.6m net proceeds from the June 2016 rights issue. Net debt also reflects the Group's modest free cash flow generation, £126.1m of dividend payments and adverse exchange rate movements of £236.4m. 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 £500m 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 £2,084.0m (2015: £2,148.0m). 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 £1,943.9m (2015: £2,072.0m), 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 £57.6m 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 £46.2m 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 £36.9m 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 £27.3m 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 £779.1m (2015: £12.0m 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 £573.8m (2015: £26.6m) and £236.8m (2015: nil) of other charges, including a £150.0m 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 £225.0m (2015: £332.2m). 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 £181.8m (2015: £234.6m). Operating cash conversion was 81% (2015: 71%), including capital expenditure of £86.1m (2015: £98.7m). Free cash flow was £50.7m (2015: £105.5m), after £39.8m (2015: £48.2m) relating to prior periods' restructuring programmes.

Below free cash flow, the Group paid dividends of £126.1m (2015: £122.1m). There was a net inflow of £492.9m (2015: £24.9m 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 £1,028.2m (31 December 2015: £1,206.8m) at the year end, including adverse exchange rate movements of £236.4m (2015: £80.1m), 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.

Total Sector revenue decreased by £81.6m. This was driven by a £113.4m 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 £68.7m, which was partially offset by organic revenue, which was £36.9m 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 £60.0m (2015: £108.4m). 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.

Total Sector revenue increased £4.0m, primarily reflecting favourable currency translation of £37.4m. This was partly offset by reduced revenue of £6.1m, due to the divestment of the unmanned systems business in October 2016, and an organic decline of £27.3m 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 £56.5m (2015: £68.0m). 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 £150.0m 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.

Total Sector revenue decreased by £26.4m. This included a £49.3m 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 £69.1m, which was partially offset by organic revenue, which was £46.2m 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 £60.2m (2015: £80.5m). 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.

Total Sector revenue decreased by £32.9m. While currency translation had a £24.7m favourable impact, this was offset by organic revenue, which was £57.6m 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 £38.3m (2015: £57.3m), 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 £2,084.0m (2015: £2,148.0m). 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 £2,946.4m (2015: £2,476.8m), an increase of 19%. Within this, orders due for delivery in the current year are £1,301.7m (2015: £1,130.5m), 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.

*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:

Revenue

A summary of the changes to Group revenue in the year is as follows:

Total Group revenue was lower at £1,943.9m (2015: £2,072.0m) 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 £46.7m or 5.5% lower in the year. Organic revenue in the US defence/security market, which was 34% (2015: 36%) of Group revenue, was £84.4m or 11.2% lower. UK, RoW defence/security organic revenue, which was 25% (2015: 26%) of Group revenue, was £30.0m or 5.9% lower.

Statutory Operating Loss

The Group made a statutory operating loss of £779.1m (2015: £12.0m 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 £573.8m (2015: £26.6m). 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 £196.1m. 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 £185.7m. 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 £192.0m. 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 £33.3m has been taken against other assets in the balance sheet. This includes:

• £20.2m against the inventory balance reflecting ageing stock and lower demand forecasts;

• £3.9m against intangible assets no longer planned to be used;

• £3.9m tangible asset write down against plant and machinery no longer expected to be used;

• £5.3m 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 £179.1m, 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:

• £150.0m against KC-46 reflecting the position announced on 16 February 2017;

• £18.5m on other development contracts within the Mission Systems Sector;

• £7.7m on development contracts within the Advanced Electronic Solutions Sector;

• £2.9m within the Communications and Connectivity Sector.

4) Legal and other provisions:

£24.4m 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 £161.2m (2015: £176.8m);

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 £39.3m (2015: £18.8m);

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 £8.7m related to the integration of the 2014 Aeroflex acquisition (2015: £67.5m 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 £28.6m. It is expected that these costs will be treated as non-underlying in future.

Net Finance Expense

The Group's net finance charge was £68.8m (2015: £51.8m), and this included £19.0m (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 £49.8m (2015: £51.8m). The net expense on cash and debt holdings was £48.0m (2015: £48.7m), 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 £1.8m (2015: £3.1m), and this is expected to remain broadly unchanged in 2017.

Profit Before Tax

The Group made a statutory loss before tax of £847.9m (2015: £39.8m). The Group's underlying profit before tax was £175.2m (2015: £280.4m).

Taxation

The Group's overall tax credit was £52.8m (2015: £2.1m), 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 £39.6m (2015: £60.2m). 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 £87.0m before deferred tax (2015: £56.7m). 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 £181.8m (2015: £234.6m). Operating cash conversion was 81% (2015: 71%), including lower capital expenditure of £86.1m (2015: £98.7m). There was also a modest working capital outflow of £8.2m (2015: £48.9m).

Free cash flow was £50.7m (2015: £105.5m). There was net interest paid of £71.2m (2015: £49.4m), which included £19.0m (2015: £nil) of make-whole payments on senior notes that were paid down following the rights issue. In addition, tax payments were £20.1m (2015: £31.5m), reflecting the lower underlying profits in the year. Also included in free cash flow were payments relating to prior periods' restructuring programmes of £39.8m (2015: £48.2m). 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 £126.1m (2015: £122.1m). In addition, there was a net inflow of £492.9m (2015: £24.9m 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:

Net Debt, Gearing and 2016 Rights Issue

The Group's net debt decreased to £1,028.2m (31 December 2015: £1,206.8m) at the year end, including adverse exchange rate movements of £236.4m (2015: £80.1m), 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/£, 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 £937.9m. 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.

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.

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 £500m. If the equity raise of £500m 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.