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ISSN 1416-300X Volume 11, Issue 3 December 2008

COBHAM - EXPLORING TECHNOLOGY OPPORTUNITIES
By Julian Nettlefold

BATTLESPACE Editor Julian Nettlefold meets Cobham Plc CEO and SBAC Chairman Allan Cook CBE

Allan Cook has had a long and distinguished career in the defence and aerospace industry. He joined Cobham in 2000 as CEO and was appointed to the Board in 2001. He joined the Group from BAE Systems where he was group managing director of programmes and managing director of Eurofighter. He was formerly group managing director of GEC-Marconi Avionics and chief executive of Hughes Aircraft (Europe). He is also President of The Society of British Aerospace Companies Ltd, President Elect of ASD, Chair of the National Skills Academy for Manufacturing, a member of the Apprenticeship Ambassadors Network (AAN), board member of the Industrial Forum and committee member of the UK Ministerial Advisory Group for Manufacturing.

“What persuaded you to take up the helm as CEO of Cobham? The Editor asked.

“When I was approached to join Cobham the decision was very simple - it gave me the opportunity to become a main board director of a fast growing major defence and aerospace Plc with a great heritage and fantastic products and services. It was a matter of days between the initial approach and my acceptance and it’s a remarkable fact that Cobham has only had four Chief Executives since the Company was founded nearly 75 years ago.”

“Why did you instigate a strategic review in 2005? ?”

“The Company has always returned an excellent return for its shareholders but what I saw was a need to slim down and refine our Operating Divisions and structure. In 2005 we embarked on a strategic review which resulted in a refocusing of our portfolio and the creation of six divisions. The fluid and air and countermeasures businesses were sold as a consequence of this review.”

“What else did your strategic review conclude?”

“The strategic review announced in September 2005 concluded that Cobham should focus more rigorously on areas where it could exploit and enhance its technological leadership in high-growth segments of the aerospace and defence market. This strategy has helped Cobham to consolidate and improve its market leadership, allow for an increase in R&D investment, reinforce the Group’s upper quartile aerospace and defence margins and increase the organic profit growth through market cycles. So 2005 was a key year and provided the road map for the future development of the company.”

The Group set out a plan which included a drive for increased collaboration across and within the divisions, a flatter simplified divisional structure and a new Chief Operating Officer function with responsibility for driving and co-ordinating efficiency improvements in procurement, integration, programme management and working capital. All six divisional heads were appointed from within the Group.

“Did this strategy boost sales and profitability?”

“Yes, Cobham has grown in turnover from £450 million when I arrived to some £1.3 billion today with a Market Cap of £2.4 billion. The strategy had an immediate impact which was reflected in our Preliminary Results for the year ended 31 December 2005 announced in March 2006. We now have partners and customers in more than 100 countries and 12,000 highly skilled people operating in five continents. The implementation of our strategy resulted in the admission to the FTSE 100 in March 2008.”

“2005 was a successful year for Cobham with double-digit growth in revenue, trading profit (formerly underlying operating profit) and earnings per share and an improvement in cash conversion to almost 100%. Across the Group contracts were won that were significant both in size and market position, and new order intake increased by 24%. The order book stood at £1.8 billion including the new Coastwatch contract in Australia. Implementation of this strategy continued to proceed very well with good progress in portfolio reshaping and value already being derived from disposals. Profit after tax for the period was £98.1 million and earnings per share were 8.71p.”

A further refinement of the strategy in December 2007 took place with the creation of four divisions and the establishment of Strategic Business Units within each division. The divisions are Aviation Services which includes FR Aviation, Defence Systems, Avionics & Surveillance, and Mission Systems which includes Flight Refuelling. A new President of the Cobham Defence Systems Division was appointed recently, who takes over a business that has some 5,000 people and pro forma U.S. revenues of $1.4bn.

Cobham’s growth was confirmed in the most recent figures for the half-year to June 30th 2008, presented in August 2008. Order intake was £818m +42% from £575m; total revenue £632m +28% from £494m; Underlying profit before tax (PBT) £107m +24% from £86m; Underlying1 earnings per share (EPS) 6.7p +22% from 5.5p; Basic earnings per share 5.5p from 4.4p; Interim dividend 1.345p +10% from 1.22p; order intake, including UK FSTA programme, drives order book higher to £2.2bn (2007: £1.7bn) ; organic revenue growth of 14% across Technology Divisions; five strategic acquisitions completed or agreed in period – integration on or ahead of plan

“I was delighted with these results, which demonstrate the progress made in the implementation of our strategy and the strength of our markets. Organic revenue growth in the first half benefited from particularly strong demand for vehicle intercoms and the conclusion, after many years, of the FSTA contract with the UK Government. The outlook for our US military and national security markets remains robust and we are confident that we will be slightly ahead of our growth targets for 2008. We are ahead of plan on integrating Sensor and Antenna Systems, Lansdale and extracting growth synergies and we have successfully completed the acquisition of SPARTA, whose emphasis on high-tech national security solutions will be a significant growth driver. Preparations for the integration of M/A-COM and the onward sale of its commercial business are well advanced. Looking forward, we continue to seek acquisition opportunities in a consolidating industry, which are likely to allow us to accelerate further our strategy.”

“Is the U.S. a key growth area?”

“Yes, figures show that Cobham has the largest US revenue, by percentage, in our peer group. 51% of our revenue is now derived from the USA and we continue to see further opportunities for growth organically and through further strategic acquisitions.”

“Previously aerospace systems dominated Cobham’s portfolio, has the focused changed to defence electronics?”

“Cobham is historically an engineering company and we are continually recruiting new engineers to manage product development across the company, including software and systems engineering. Defence electronics is a key area which we are developing in the UK and the USA. Cobham Defence Communications headed by Steve Collier is growing organically with the development of the new eagle infantry radio, the Battlehawk battle management system and new software is being developed by Cobham Defence Systems’ Exeter based Soldier Systems team formerly WA Systems, who became part of Cobham group in 1999. ERA continues to be a centre of excellence for antenna R&D, headed by Vincent Mifsud, whilst Chelton is now the largest land systems antenna supplier in the world, managed by Fred Cahill. We also have an exciting new range of broadcast technology at Domo and Micromill, part of our Avionics and Surveillance Division.”

Cobham launched the Eagle Close Combat Radio (CCR), a full-duplex networked radio specifically designed to provide a cost effective solution for modern voice and data transmission requirements in the urban, rural and mixed environments of the battlefield at DSEi in 2007. The Eagle CCR was developed by Cobham Defence Communications (CDC) and Cobham’s ERA Technology and was launched at DSEi 2007. It interfaces directly with CDC’s ROVIS (AN/VIC-3) Intercom and Integrated Digital Soldier System (IDSS) to provide customers with a fully networked, integrated voice and data capability for both mounted and dismounted soldiers.

“Is Systems Engineering and application software a key area for development?”

“Yes, our recent acquisition of SPARTA, a U.S. company specialising in missile defence and intelligent systems, in January of this year, was our largest U.S. acquisition to date. SPARTA achieved software CMM level 3 and we have software engineers embedded in all our divisions. We continue to scour the world for new recruits.”

SPARTA was an ‘employee-owned’ US company which was SEC registered, but unquoted. The cash consideration for SPARTA was up to $416 million on a debt and cash free basis, of which US$381 million was payable on completion and satisfied from Cobham’s existing cash and debt facilities, with the balance of up to $35 million to be paid over the next three years to holders of unvested options who remain with the company.

SPARTA's core business areas include strategic defense and offense systems, tactical weapons systems, space systems. SPARTA’s major intelligence credentials include intelligence production, computer network operations, and information assurance. We have been recognized nationally in all these areas for our commitment to technical excellence, our innovative approaches, and our dedication to both our employees and customers.

“Cobham has always operated using brand names such as Flight Refuelling, so why are you changing?”

“Recent experience and research have shown that long term growth in our key markets is best achieved by presenting a single, unified face, rather than the fragmented picture of more than 80 brands. I know from personal experience that this will help customers to understand the great products and services we can offer and it will help us to attract and retain the talented people will need for our growth. Although it will be a phased transition, by the end of 2009 the only company logo in the marketplace will be Cobham.”

“A number of City commentators commented that Cobham was being tidied up for sale following your reorganisation, particularly given current industry consolidation?”

“Exactly the opposite, we can achieve far better shareholder return by remaining independent. We aim to continue to grow the Company organically and by acquisition?”

“In your role as Chairman of the SBAC are you concerned by the lack of interest being shown by the Government in industry and defence in particular?”

“Yes, although the events of early September of this year where the Government emphasised the importance of manufacturing to our national economy and exports was a turning point. However, in the defence sector, we remain concerned that, in the event of further conflicts and UOR requirements, that the UK does not have the indigenous knowledge and production base to meet some of these vital requirements to protect our national interest.”

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