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2006

Ann

ual R

epor

t & A

ccou

nts

Errata

Following review, minor typographical errors were found in the Annual Report on pages 33 and 38.

On page 33 the companies listed under ‘Long Term Incentive Plan’ were ordered incorrectly and should read as follows:

Market price at Exercise date of Date from At Number of options during the year At price exercise which Expiry 1.1.06 Granted Exercised Lapsed 31.12.06 – pence – pence exercisable date

A E Cook 16,600 – – 16,600 84 – 01/02/09 01/08/09 3,780 – – 3,780 93.9 – 01/02/11 01/08/11 228,230* – – 228,230 134.73 – 20/09/07 20/09/14 246,820* – – 246,820 133.7 – 11/05/08 11/05/15 269,789* – – 269,789 185.33 – 20/04/09 20/04/16 4,620 4,620 153 – 01/02/10 01/08/10 495,430 769,839

A J Hannam 7,420 – – 7,420 93.9 – 01/02/09 01/08/09 4,930 – – 4,930 107.6 – 01/02/08 01/08/08 128,030* – – 128,030 134.73 – 20/09/07 20/09/14 138,000* – – 138,000 133.7 – 11/05/08 11/05/15 – – 278,380 278,380

W G Tucker 16,610 – – 16,610 107.6 – 01/02/12 01/08/12 155,860* – – 155,860 134.73 – 20/09/07 20/09/14 180,070* – – 180,070 133.7 – 11/05/08 11/05/15 186,154* – – 186,154 185.33 – 20/04/09 20/04/16 352,540 538,694

A J Stevens 15,350 – – 15,350 107.6 01/02/10 01/08/10 167,000* – – 167,000 134.73 20/09/07 20/09/14 180,070* – – 180,070 133.7 11/05/08 11/05/15 202,341* – – 202,341 185.33 20/04/09 20/04/16 362,420 564,761

* Granted under the Cobham Executive Share Option Scheme 2004. All other options were granted under the Cobham Savings Related Share Option Scheme.

BAE Systems plc Bodycote International plc Rotork plcChemring Group plc Castings plc Senior plcMeggitt plc Charter plc Severfield-Rowen plcRolls-Royce plc Cookson Group plc Spirax-Sarco Engineering plcSmiths Group plc Enodis plc Tomkins plcUltra Electronics Fenner plc Morgan Crucible plcHoldings plc FKI plc Vitec Group plcUMECO plc Halma plc Weir Group plcVT Group plc Hill & Smith Holdings plcAGA Foodservice IMI plcGroup plc Metalrax Group plc

On page 38 within Table 3(b) (‘Directors’ share options’) the number of options granted during the year for W G Tucker and A J Stevens were shown incorrectly. The table should read as follows:

1,200

1,000

800

600

400

200

004

489.

5

395.

9

533

619.

8

557

976

1,01

5.7

1,09

0

05 06

Mili

tary

Non

mili

tary

Analysis of revenue

£m

12

10

8

6

4

2

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9.12

11.6

6

10.5

8

05 06

Earnings per Ordinary Share – underlying

Pence

4

3

2

1

004

3.10

3.75

3.41

05 06

Dividend

Pence

489.

5

Annual Report & Accounts 2006 �

Corporate and financial highlights

Record order intake of £�.4bn

Strong organic growth across technology divisions

Strong trading profit growth in Cobham Flight Operations and Services

Group trading margin increased two percentage points as a result of operational efficiencies and portfolio reshaping

Company funded PV investment as a percentage of technology division revenues increased to 6.0% (£49m) from 5.3%

Double-digit earnings per share and dividend per share growth

Strong operating cash conversion continues

Orders received

£1,390.5m (2005: £1,318.6m)

+5.5%

Total revenue*

£1,015.7m (2005: £1,090.4m)

-6.9%

Trading profit*

£186.3m (2005: £177.7m)

+4.8%

PV investment

6% (2005: 5.3%)

+0.7pts

Underlying profit before taxation*

£182.9m (2005: £167.0m)

+9.5%

Earnings per Ordinary Share

Basic 13.13p (2005: 8.71p)

+50.7%

* In order to assist with the understanding of earnings trends, trading profit and underlying earnings have been defined to exclude the impact of the amortisation of intangible assets arising on acquisition and the impact of marking to market of foreign exchange derivatives not realised in the period. All underlying measures include the operational results of both continuing and discontinued businesses up to the point of sale, but exclude exceptional profits or losses arising on disposals actually completed in the period. None exist in the current period or comparatives, but any impairments of goodwill would also be excluded from underlying measures. Details of these adjustments may be found in the table on page 18. Margin refers to Group trading margin throughout.

Underlying* 11.66p (2005: 10.58p)

+�0.2%

profi

leCobham plc is an international company engaged in the development, delivery and support of advanced aerospace and defence systems in the air, on land, at sea and in space. The Company has five technology divisions and one service division that collectively specialise in the provision of components, subsystems and services that keep people safe, improve communications and enhance the performance of aerospace and defence platforms.

Contents1 Corporate and financial highlights 2 Group at a glance 4 Chairman’s statement 5 Chief Executive’s review 8 Strategy in action

Business review 10 Cobham Air Refuelling and Auxiliary Mission Equipment 11 Cobham Antennas 12 Cobham Avionics and Surveillance 13 Cobham Defence Electronic Systems 14 Cobham Life Support 15 Cobham Flight Operations and Services 16 Financial review 21 Corporate Responsibility

24 Board of directors 26 Directors’ report 28 Corporate governance 32 Directors’ remuneration report 39 Statement of directors’ responsibilities

Group financial statements40 Independent auditors’ report 41 Accounting policies 46 Consolidated income statement 47 Consolidated balance sheet 48 Consolidated cash flow statement 49 Statement of recognised income and expense 50 Notes to the Group financial statements 86 Group financial record

Parent company financial statements87 Independent auditors’ report 88 Accounting policies 90 Parent company balance sheet 91 Statement of total recognised gains and losses 91 Reconciliation of movements in shareholders’ funds 92 Notes to the parent company financial statements

IBC Shareholder information

Front cover: A Cobham COM-201B VHF/UHF antenna fitted to a High Mobility Multipurpose Wheeled Vehicle (HMMWV) in Iraq.

1,200

1,000

800

600

400

200

004

489.

5

395.

9

533

619.

8

557

976

1,01

5.7

1,09

0

05 06

Mili

tary

Non

mili

tary

Analysis of revenue

£m

12

10

8

6

4

2

004

9.12

11.6

6

10.5

8

05 06

Earnings per Ordinary Share – underlying

Pence

4

3

2

1

004

3.10

3.75

3.41

05 06

Dividend

Pence

489.

5

Annual Report & Accounts 2006 �

Corporate and financial highlights




Group trading margin increased two percentage points as a result of operational efficiencies and portfolio reshaping

Company funded PV investment as a percentage of technology division revenues increased to 6.0% (£49m) from 5.3%


Strong operating cash conversion continues

Orders received

£1,390.5m (2005: £1,318.6m)

+5.5%

Total revenue*

£1,015.7m (2005: £1,090.4m)

-6.9%

Trading profit*

£186.3m (2005: £177.7m)

+4.8%

PV investment

6% (2005: 5.3%)

+0.7pts

Underlying profit before taxation*

£182.9m (2005: £167.0m)

+9.5%

Earnings per Ordinary Share

Basic 13.13p (2005: 8.71p)

+50.7%

* In order to assist with the understanding of earnings trends, trading profit and underlying earnings have been defined to exclude the impact of the amortisation of intangible assets arising on acquisition and the impact of marking to market of foreign exchange derivatives not realised in the period. All underlying measures include the operational results of both continuing and discontinued businesses up to the point of sale, but exclude exceptional profits or losses arising on disposals actually completed in the period. None exist in the current period or comparatives, but any impairments of goodwill would also be excluded from underlying measures. Details of these adjustments may be found in the table on page 18. Margin refers to Group trading margin throughout.

Underlying* 11.66p (2005: 10.58p)

+�0.2%

2 Cobham plc

Group at a glanceCobham. Six Divisions. One Standard.

Cobham Air Refuelling andAuxiliary Mission Equipment

Cobham Antennas Cobham Avionics and Surveillance

An all speed drogue for high and low speed refuelling under test. Cobham’s radome covered antennas fitted to The Boeing Company’s Sea Launch Odyssey platform.

Cobham’s EFIS is now certified on the EC-120B.

With operations in the USA and UK, the Division is the market leader for air refuelling, providing innovative fourth generation nose-to-tail solutions to defence customers around the world. From tactical tanking for helicopters, buddy-buddy and special operations, to strategic tanking for deployment and sustainment of fixed and rotary wing aircraft, the Division has an enviable track record for solutions that people can trust. Specialising in wing-tip to wing-tip solutions, the Division also designs and manufactures a range of sophisticated weapons carriage and release equipment including missile launchers units, pneumatic and pyrotechnic bomb ejection systems, defensive aids, chaff and flare systems and pneumatic multi-store carriers.

With facilities on three continents, Cobham Antennas designs and manufactures off-the-shelf and custom state-of-the-art antenna components and sub-systems that accommodate frequencies from 2 MHz to 60 GHz. Designs include space-saving single band, multi-band and combination antennas to meet communication requirements for aviation, space, vehicular, watercraft and ground-based systems for military and civil applications worldwide. The antenna products are complemented by a range of RF and digital applications including miniature interference cancellation (mINCAN), direction finding products and systems that meet the increasing demand for communications on the move.

Cobham Avionics and Surveillance designs, manufactures, qualifies, certifies and supports a broad range of electronic products for airborne, marine, land and special purpose applications. The Division serves three principle markets: Avionics, Law Enforcement/National Security (LENS) and Search and Rescue. Included in the product base are fully certified Electronic Flight Instrument Systems with complete cockpit communication/navigation and sensor capability, COSPAS/SARSAT certified marine, air and land Search & Rescue devices and state-of-the-art law enforcement tracking, monitoring and surveillance equipment.

£90.4mRevenue

9% of Group revenue

£�82.2mRevenue

18% of Group revenue

£206.0mRevenue


£�2.8mTrading profit

7% of trading profit

£4�.2mTrading profit


£32.2mTrading profit


Principal locations: UK, USA

Number of employees: 830

Principal locations: UK, USA, RSA, Finland

Number of employees: �,378

Principal locations: UK, USA, France, Canada, Denmark

Number of employees: 2,�73

Annual Report & Accounts 2006 3

Cobham DefenceElectronic Systems

Cobham Life Support Cobham Flight Operationsand Services

Cobham provides advanced technology components and sub-systems that enhance the range and capability of the F-35.

Cobham’s improved passenger restraint systems are fitted to High Mobility Multipurpose Wheeled Vehicle (HMMWVs).

A Falcon 20 conducting air warfare training with a Eurofighter Typhoon.

Cobham Defence Electronic Systems designs and manufactures microwave components, integrated assemblies and sub-systems for the US Department of Defense and other military and government customers around the world. It is a leading developer of all classes of air, ground and shipboard antenna sub-systems, positioners, radomes, high-power microwave components and integrated assemblies and is the market leader for many niche microwave products. Cobham Defence Electronic Systems is also the world leader in advanced tactical military vehicle intercom systems and soldier and ground vehicle situational awareness products.

One of the world’s leading producers of aviation oxygen to the military and civil markets, the Cobham Life Support Division uses the latest technology to take oxygen from the atmosphere and regulate the flow, to allow pilots and passengers to breathe at altitude. In addition, pneumatic technology is used for fin actuation in missiles, with a core position in cryogenic cooling for various land and aviation markets. In the personal survival market, the Division provides specialist products for naval and land applications, including aircrew restraints, parachute release mechanisms and flotation gear.

Operating more than 150 fixed and rotary wing aircraft around the world, services include the largest civil maritime surveillance contract in the world, covering more than 37,000km of coastline in Australia, and training of all UK helicopter pilots for the Royal Navy, Royal Air Force and British Army. The Group provides modern battlespace air warfare training and essential flight inspection services for civil and military airports in the UK, mainland Europe and beyond. It also specialises in the conversion and support of a wide range of civil and military platforms including the Nimrod MR2, R1 and Sentry E3-D fleets, and operates a fleet of aircraft providing passenger and freight services.

£�9�.6mRevenue


£�4�.4mRevenue


£�88.4mRevenue






£20.�mTrading profit


Principal locations: UK, USA, Sweden


Principal locations: USA

Number of employees: 858

Principal locations: UK, Australia, France, Germany, Malaysia


4 Cobham plc

Chairman’s statement

The year saw the Group’s order intake increase to approximately £1.4bn (2005: £1.3bn), reflecting success in winning new land, sea and air orders. Excluding businesses acquired or disposed of in 2005 and 2006, order intake for continuing businesses has grown by 27.2% from some £1bn in 2005 to £1.2bn.

Total revenue (continuing and discontinued) decreased by 6.9% to £1,015.7m (2005: £1,090.4m) primarily due to disposals in 2005 and 2006. Trading profit rose by 4.8% to £186.3m (2005: £177.7m) and underlying profit before tax rose by 9.5% to £182.9m (2005: £167.0m). Profit before taxation increased by 43.3% to £199.1m (2005: £138.9m).

Underlying earnings per share of 11.66p (2005: 10.58p) were 10.2% higher than the previous year and your directors have recommended a final dividend of 2.64p per share (2005: 2.40p). Together with the interim dividend of 1.11p per share (2005: 1.01p) which was paid in December 2006, this represents an increase of 10% compared to 2005. Subject to shareholders’ approval, the final dividend will be paid on 6 July 2007 to all shareholders on the register at 1 June 2007.

It gives me great pleasure to report another set of strong results which benefit from the strategic review of the Group’s operations which was completed in 2005. Further information on these results is detailed in the Financial review on page 16.

Corporate developmentComplementary growth by technology based acquisitions is a key component in our growth strategy. Activity in 2006 was less than in previous years reflecting both the timing of certain opportunities and the application of disciplined acquisition criteria to ensure that shareholder returns are not diluted.

Benefits of the review in 2005 feeding through


Seeking acquisitions that are a strong fit with the Group’s strategy

Mark Ronald appointed a Non-executive Director

Gordon Page, Chairman

PeopleSir Michael Cobham, Life President of the Group, passed away in April. A memorial service was held at St Clement Dane’s Church in June which culminated with a fly past by two of FR Aviation’s multi-mission Falcon 20 aircraft.

Mark Ronald previously President and Chief Operating Officer of BAE Systems Inc. was appointed a Non-executive Director of the Group on 8 January 2007. He brings wide ranging and relevant experience to the Board, particularly in the development of defence business in the USA. We welcome him to the Board.

On 1 March 2007 Andy Stevens assumed full responsibility and accountability for the five technology divisions, to allow Warren Tucker and Allan Cook to place even greater emphasis on the long term growth of Cobham and the development of our staff.

Outlook2006 saw the completion of a more focused organisation and a renewed drive for high technology research and development. Prospects in this area for 2007 and beyond are exciting. You will also see in this report evidence of our continuing commitment to corporate responsibility and to the adoption of best practice in corporate governance affairs. I am encouraged by the mix of skills and experience at Board and executive management level, and the initiatives taken towards career development across the Group.

These results and our prospects going forward are based on the performance of our employees worldwide. On behalf of the Board, I thank them sincerely.

G F Page CBEChairman 28 March 2007

2005 2006USA 40% 46%Mainland Europe 19% 16%Australia 12% 12%UK 20% 15%Rest of world 9% 11%

Group revenues


IntroductionThis section in conjunction with the Directors’ report addresses the requirements of the statutory business review, to provide a fair review of the business of the Group and an analysis of development and performance during 2006 and position at year end.

Overall business performanceCobham has again achieved double-digit growth in underlying earnings and dividend per share, with margin increased by two percentage points due to portfolio reshaping and operational efficiencies. Organic growth in the technology divisions has been strong overall, compensating for the anticipated dip in business in Air Refuelling and Auxiliary Mission Equipment associated with major procurement cycles. Across all technology divisions, 58% of revenues are destined for the USA of which 61% is for the military. Improvements in the form of cost and working capital efficiencies are tracking to plan, helping to offset currency headwind and fund further investment in Research and Development (PV) which has increased to 6.0% of technology division revenues.

The Group continues to maintain a balanced position across geographic and product markets, with a range of technologies being developed and leveraged. The development of Cobham’s employees remains key, with new talent attracted to positions across the Divisions and investment in training increased to 14 hours per employee (2005: 12 hours).

Key contractsThere has been strong organic growth in ground communication antennas, with a multi-year contract worth up to US$49m awarded for the COM-201B portable VHF

Allan Cook, Chief Executive

Chief Executive’s review




Group trading margin increased two percentage points

Company funded PV investment as a percentage of technology division revenues increased to 6.0%

antenna for the US Army. This was followed by Cobham’s largest military antenna award to date for COM-231 vehicle mounted microwave antennas. Whilst the award is on an Indefinite Delivery Indefinite Quantity basis with an initial one year contract and four one year options, it could be worth up to US$248m.

A further mINCAN order was won from Lockheed Martin for the US Marine Corp Light Armoured Vehicle Command and Control (LAV-C2) programme. This reflects the growing need for secure multiple communication systems to operate in close proximity.

Orders for the Division’s HMMWV Improved Restraint System have been strong with approximately 45,000 ship sets ordered to date for retrofit. An indefinite quantity order was received in November to install the restraint system at the vehicle’s original equipment manufacturer (AM General) and a US$16m order received in December from the US Marines.

The Group’s avionic systems continue to show excellent potential, with the EFIS (Electronic Flight Instrument System) being the cornerstone. The EFIS is factory fitted on Bell platforms with the first contract worth US$10m secured in August.

Contracts were secured for Direction Finding (DF) and Tetra products for the UK Coast Guard S92 and AV139 Helicopters respectively, and for a high gain antenna for the Airbus EADS-CASA A400M programme. Supply of the 15 different radome types for tranche two of Typhoon aircraft commenced production.

In air refuelling, further orders were received for equipment to be fitted to the South African and Malaysian tanker versions of the A400M. The first deliveries of A400M air refuelling equipment are scheduled to commence in 2010.

Contracts worth more than US$20m were received for microclimate cooling unit (MCU) sales to the US Army. MCUs were ordered for use in helicopters on the Air Warrior programme and on various ground vehicles to help improve the effectiveness of on-board personnel.

In January, Cobham Flight Operations and Services received two major contracts in Australia. An AUS$80m extension

6 Cobham plc

Chief Executive’s review continued

to the air freight contract for Australian Air Express (AaE) was agreed and an AUS$1bn contract to provide surveillance activities around the Australian coastline, called Project Sentinel (formerly Coastwatch). In December a supplementary AUS$80m contract was received for a Surveillance Information Management System to be fitted to all ten Sentinel aircraft.

Major programmesAcross the Group a number of facilities have been integrated in line with the strategy to increase collaboration and improve operating performance. In Cobham Life Support, the programme to integrate operations at H Koch & Sons in California with existing facilities in Florida, is on schedule and planned to complete in the first half of 2007. In Cobham Antennas, Marlow, production facilities previously in five separate buildings are being consolidated into one purpose designed facility and five composite sites have been consolidated to two.

Engineering and development work has continued with the 90X technology platform, which forms the basis for the A330MRTT and A400M refuelling systems. Following successful customer reviews, the first units have been delivered to support ground and flight testing of the A330-200 MRTT for Australia.

Focus remains on high priority advanced tactical programmes for the US Department of Defense (DoD). Microwave modules continue to be supplied for ongoing production requirements for radar, EW, and communications, and navigation systems for the F-16, F-18, F-22 and the F-35 aircraft programmes, as well as several missile programmes. A number of key R&D programmes started in the year, using funding from primes and the US DoD.

Ground Vehicle Intercom Communication system sales remain extremely strong, with an additional production capability established in an existing facility in the USA to meet demand. The unique Air Warrior personal cooling system, originally designed for helicopter applications, is proving successful in land based systems for the US Army

in Light Utility Vehicle (LUV) and HMMWV applications.In Australia, the conversion of the first of ten fully electronic Bombardier Dash 8 aircraft for the Sentinel contract was completed, as was the transition from a BAe 146 fleet to an eight aircraft B717 fleet operating on QantasLink regional routes.

In the UK, the 20-year E-3D Sentry Airborne Warning and Control Systems (AWACS) support contract completed its first full year on time and to budget. The contract to provide air warfare training to the UK’s Royal Air Force and Royal Navy to 2014 continued to operate at high performance levels.

The AirTanker FSTA project made encouraging progress in negotiations with the MoD and its suppliers and should progress to contract closure in 2007.

Achieving our goalsAfter 18 months into the anticipated three year transformation programme, progress implementing the three elements of the strategy has been excellent. Portfolio reshaping has resulted in the Group exiting three low growth niche markets and exiting seven companies which were not a strategic fit. The proportion of the business in faster growing technologies and markets has increased and resources have been concentrated on further development of core technologies. During 2006 Cobham opened an office in India and expanded its presence in South Africa.

The five technology Divisions have established clear identities with teams strengthened to enable participation in cross-Cobham initiatives. These include the development of technology roadmaps, strategic marketing and key initiatives around lean manufacturing, procurement and working capital improvements.

The Key Performance Indicators (KPIs) in the table above are used to monitor progress implementing the three underpinning elements of Group strategy: focus, capabilities and performance. Scorecards incorporating an appropriate subset of these indicators are used to manage each of the Divisions.

Key performance indicators

Performance indicator Definition

Results Strategy

2005 actual

2006 actual Target Fo

cus

Cap

abil

itie

s

Per

form

ance

Technology division organic growth

Organic revenue growth represents the growth of technology division companies for the period they are within the Group’s control, translated at constant exchange rate

8.9% 5.8% High single digit

Underlying EPS growth

Underlying profit after tax divided by the average number of shares in issue

16.0% �0.2% High singledigit

Operating cash conversion

Operating cash flow after capex and R&D as a percentage of trading profit, excluding profit from joint ventures

98.6% 84.3% > 80%

PV investment Company funded investment in R&D as a percentage of the five technology division revenues

5.3% 6.0% 7% mid term

Staff safety The total number of reportable injuries and other occurrences per 100,000 employees

677 720 < 800


Supporting narrative for the measures can be found in the Financial review on page 16, Corporate Responsibility on page 22 and below.

employees and driving operating performance to create the capacity for further investment in our employees, facilities and technology. The KPIs relate to these mitigating activities.

The markets we operate inThe US defence budget represents more than 50% of global defence spending and continues to dominate the overall military landscape. Overall, the outlook for US defence budgets remains positive. Defence electronics spending is continuing to grow faster than spending on new platforms and programmes, reflecting the need by the armed forces for greater capability, but on fewer platforms. The trend towards life extension programmes by using electronic upgrades rather than replacing ageing but still competitive platforms continues.In the USA and Europe, much of the defence spending is channelled towards new technologies that enable the use of smaller, better equipped, rapid reaction forces with higher precision weapons. In countries such as India, where Cobham has supplied equipment for 20 years, the military aerospace market is anticipated to grow by approximately 8%.

The commercial aerospace industry enters 2007 with strong underlying delivery fundamentals already established. Air traffic growth remains the core driver for the commercial aerospace cycle and current overall growth is estimated to be 4.8% per year over the next 25 years. However, within this overall figure, there are wide variations, from high growth economies, such as India (12% growth per annum) to more mature markets such as domestic USA (2.7% growth per annum). Following the record year in 2005, order intake for 2006 held up very well, with over 1,800 new aircraft booked between The Boeing Company and Airbus, resulting in a record industry order book of over 4,300 aircraft.

The outlook for communications equipment for the general aviation, business jet and marine markets remains strong, driven by the requirement for communication on the move. Although the Law Enforcement and National Security (LENS) market is still relatively immature and fragmented, it is a growing and attractive market.

Outlook and future prospects2006 has been a successful year for Cobham, during which the Group has again achieved strong organic revenue growth and double-digit growth in earnings and dividend per share. A year ago, it was indicated that there would be additional benefits from portfolio reshaping, operational performance improvements and increased PV investment. All three have been realised in 2006, with management actions contributing to a two percentage point trading margin improvement. Increased PV investment underpins record order intake.

Entering 2007, Cobham’s businesses are well placed in growth markets, where there are many opportunities to leverage the Group’s products, services and technologies. Further benefits are expected to be realised from ongoing operational improvements and the Group remains committed to further investment. Cobham will continue to focus on PV investment and seek acquisitions that are a strong fit with the Group’s strategy.

Given the strength of the business portfolio, balance sheet and order book, the Board remains confident of achieving further growth in 2007.

PV investment continues to be a major area of focus for the Group with company funded investment achieving the near term goal of 6% of technology Division revenues. This in line with the target to increase investment by 25% from 2005 levels.

Work is ongoing to develop a standardised performance measure effective across the Group to reflect staff retention and development.

A consistent approach to measuring customer satisfaction across the Group has yet to be fully developed. However, tangible third party evidence does exist of improvements during the year. For example, Lockheed Martin and Northrop Grumman presented a Cobham Defence Electronic Systems (CDES) Division company with an Outstanding Supplier Award in December 2006, for its support of the B-2 Modernisation Program (RMP). This was followed by a Supplier Recognition Performance plaque from General Dynamics in January 2007. In February 2007 a Cobham Air Refuelling and Auxiliary Mission Equipment Division company was recognised with The Boeing Company by the US Air force with the award of the 11th William J Perry Precision Strike Award for exceeding expectations.

To enable the Chief Executive to give greater focus to the strategy and long term growth of the Group, talent management and senior customer relationships, Andy Stevens, the Chief Operating Officer, assumed full day- to-day responsibility and accountability for the operational management and performance of the five technology Divisions from the 1 March 2007.

Across the Group there is a common goal, Six Divisions, One Standard – bringing the best of Cobham to the customer.

The challenges we faceCobham’s risk management process is designed to identify, manage and mitigate business risk. The following comprises a summary of the main risk factors that could impact the Group’s operating and financial performance.

Cobham operates in global competitive markets and has a portfolio of businesses competing across a range of geographic and product markets. The Group may be adversely affected if it does not:

continue to develop innovative products that satisfy customer needs and preferences develop new technology or enhance existing technology that supports product development retain and attract skilled employees who are key to achieving these objectives.

Cobham’s strategy mitigates these risks and uncertainties by focusing on technology, developing the capabilities of

Our vision: To be the pre-eminent supplier of leading technology products and through life support in each of our markets.

8 Cobham plc

Strategy in action

Progress to date implementing the three elements of the strategy has been excellent. Management teams have been strengthened, companies rationalised, PV investment increased and collaboration between the divisions radically improved. There is a common goal, six divisions, one standard – bringing the best of Cobham to the customer.

Portfolio reshaping has removed a number of underperforming businesses from the Group and enabled resources to be concentrated on core technologies. For example, Cobham’s new Integrated Digital Soldier System (IDSS) which provides command, control, communications and tactical situational awareness capability to infantryman has now gone into service with the UK Army. It will form the basis of the FIST C4I Lite system, which is scheduled for evaluation by the UK MoD in 2007.

Encouraging progress has been made strengthening the capabilities of people across the organisation to help ensure that products are developed that meet the current and future needs of customers. The advert produced by The Boeing Company is testimony to the progress made.

“It takes an excellent company to do one thing well. It takes an extraordinary company to do many things well. Which is precisely why Boeing values its partnership with Cobham. A partnership that produces state-of-the-art results on projects ranging from Unmanned Air Vehicles to Future Combat Systems. One of the many things Cobham does well, is being a good partner.”

focu

s

9

The drive to improve the operational performance of the Group is delivering tangible benefits. In Marlow, UK, production facilities previously in five separate buildings are being consolidated into one purpose designed facility, significantly reducing the handling time and movement needed for each product. For the highest volume electronic assembly, a reduction in travel of 21km per assembly is projected throughout the production process with a 90% reduction in lead time.

capa

bilit

ies

perfo

rman

ce

200

120

160

80

40

0

45

27

36

18

9

005 06 05 06

Revenue Trading profit

£m £m

127.

1

90.4

26.5

12.8

�0 Cobham plc

Further orders for A400M tanker equipment

First refuelling pods delivered for A330-200 MRTT trials for Australia

Small Diameter Bomb carriage entering full scale production

Follow-on orders received for the telescopic refuelling probe on the V-22 Osprey

Cobham Air Refuelling andAuxiliary Mission Equipment

The financial performance in 2006 reflects the anticipated dip in business prior to new programmes progressively coming on stream and the expected significant re-capitalisation programme for many of the world’s air forces. This follows strong performances in 2004 and 2005. The Division has continued to win all major refuelling programmes and to position its technology and products for new market opportunities and benefited in the second half year from work associated with tranche two of Eurofighter Typhoon. The Division should at least maintain its trading profit in 2007 and start to revert to its medium term growth trend in 2008 as new orders are won and programmes already secured come on stream.

Air refuellingIn air refuelling, further orders were received for equipment to be fitted to the South African and Malaysian tanker versions of the A400M. The Division’s first deliveries of A400M equipment are scheduled to commence in 2010. Engineering and development work has continued with the 90X technology platform, which forms the basis for the A330MRTT and A400M refuelling systems. The 90X technology is the foundation for an all speed drogue which will allow refuelling of helicopter, rotorcraft and fast jets in a single mission.

Follow-on orders were received for the Division’s space saving telescopic refuelling probe for the V-22 Osprey and significant investment in new technology for the emerging UAV market continues, using a probe and drogue system. Good progress has been made demonstrating autonomous air refuelling of two unmanned air vehicles.

Auxiliary mission equipment Auxiliary mission equipment sales continue to grow. In the USA, Cobham is producing the weapons carriage and release system for the Small Diameter Bomb and secured a US$20m production contract from The Boeing Company for over 300 units enabling full rate production to start.

In the UK, following PV investment in a new generation of missile launchers, the Division received its first order for equipment to be fitted to the Hungarian Air Force’s Gripen aircraft. The contract covers the supply of 45 NATO Multi Mission Launchers (NMML) and a comprehensive support package. The Division has continued to invest in pneumatic technology for weapons carriage and release systems. Further successful trials were held of a pneumatic multi-store carrier ‘Viper’ in advance of the US Navy Multi- Purpose Bomb Rack competition to be held in 2007.

Management remain focused on implementing lean manufacturing and plans are being finalised to relocate operations in Wimborne to a purpose built facility on an adjacent Cobham owned site.

Business review

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CobhamAntennasRecord trading year despite considerable currency headwind

Growth reflects increased demand for mobile communication systems

Lean manufacturing improvement programme generating benefits

Right: Cobham provides the Satcom antenna for the Embraer Legacy.

Left: Cobham is producing the weapons carriage and release system for the Small Diameter Bomb.

Improvements in orders, revenue and trading profit helped the Division to achieve a record trading year despite considerable currency headwind following the expiry of particularly favourable US dollar hedging rates. Overall growth reflects increased demand for mobile communication systems for land, sea and airborne applications, particularly broadband satellite, and the positive impact of Cobham’s lean manufacturing improvement programme.

LandThere continues to be a growing need for secure multiple communication systems to operate in close proximity, with limited space on mobile platforms. Reflecting this demand, an order for the Group’s innovative interference cancellation system (mINCAN) was secured from Lockheed Martin for the US Marine Corp Light Armoured Vehicle Command and Control (LAV-C2) programme.

The Satcom-On-The-Move (SOTM) market is expected to grow significantly and first deliveries of a medium profile tracking antenna were made to ViaSat in the USA during the year.

Contracts were also secured for mobile Ku band auto-tracking TX/RX systems for use in emergency and hostile environments by the US National Guard,

the Veterans Administration Hospitals, the State of Florida and the Red Cross.

SeaIn the satellite communication market orders and sales have been strong for broadband internet at sea products, in particular stabilised marine antenna systems.

AirThe Division’s products were also selected by The Boeing Company and Embraer for a number of major aerospace programmes.

In Europe, contracts were secured for Direction Finding (DF) and Tetra products for the UK Coast Guard S92 and AV139 helicopters respectively, and for a high gain antenna for the Airbus EADS-CASA A400M programme. Supply of the 15 different radome types for tranche two of Typhoon aircraft commenced production.

Synergies are now being realised as a result of Group and Division led rationalisation of product development, manufacture and sales and marketing. In Marlow, production facilities previously in five separate buildings are being consolidated into one purpose designed facility, significantly reducing the handling time and movement needed for each product. Five composite sites have also been consolidated to two.

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�2 Cobham plc

Cobham Avionics and SurveillanceAchieved EFIS certification for the EC-�20B and AS350/355 family of helicopters

Acquired domo Limited with digital wireless video technology

Secured navigation and communications system contract for the UH-�45 Light Utility helicopter

Strong financial performance in the second half of the year reflected growth in the covert tracking Law Enforcement and National Security (LENS) markets and the upturn in the commercial market for audio management and avionics technology. Without the impact of Chelton Telecom and Microwave (CTM) in France reducing its telecom revenue, organic growth is 8%.

AvionicsFollowing successful selection of the Division’s Synthetic Vision EFIS (Electronic Flight Instrument System) for Bell Helicopter platforms in 2005, the EFIS has now achieved FAA Supplemental Type Certification for the Eurocopter EC-120B helicopter and the Eurocopter AS 350/355 family of rotorcraft. The next generation navigation and communications system, FliteLine, achieved full FAA certification.

A 10 million South African rand order was secured to supply, install and support seven dual EFIS for the Safair fleet of C130 / L382 aircraft. A contract was also won to supply the navigation and communications system for the EADS UH-145 Light Utility Helicopter.

Law Enforcement and National SecurityFollowing the acquisition of domo Limited, a handheld video transmitter has completed development using domo’s technology. The product is effectively a ‘video flashlight’ transmitting images in the path of the beam and is a tool for first responders, government, military and law enforcement teams. Domo’s capability is being exploited across the Division and into adjacent areas within Cobham Antennas and Cobham Defence Electronic Systems.

In the second half of 2006, the Division began the integration of two LENS companies, Orion and Micromill, and one complementary search and rescue company, Seimac. The new entity, Cobham Tracking & Locating, has been well received by customers. Operational issues in the French telecom business, CTM, have been addressed through management changes and the telecoms market exited.

Search and rescueIn the search and rescue market, Cobham’s covert beacon technology is showing promise for the military market. In January 2006, a contract worth more than C$3m was received from Canada’s Department of National Defence for personal locator beacons (PLBs) to be used by Canadian Air Force aircrews during operational and training missions. Further orders for PLBs were secured from the US Army and Danish Air Force.

Business review continued

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Cobham Defence Electronic Systems

Left: Cobham’s handheld video transmitter is a tool for first responders, government, military and law enforcement teams.

Right: A COM-201B VHF antenna fitted to a HMMWV in Iraq.

Excellent growth in vehicle intercom sales

Received largest military antenna award to date

Strengthened microwave component sales and R&D development programmes

The Division had another excellent year with exceptional margins and very strong organic growth in revenue and the full year impact of REMEC. The Middle East war continues to affect specific programmes for funding priorities with particular emphasis placed on soldier safety and ground vehicles as a consequence of the on-going ground conflict. Whilst some large airborne and shipboard radar, EW (Electronic Warfare) and communication programmes have slipped, the ground communication programmes in support of the US Army have more than compensated for these delays. 2007 will be another year for revenue growth, but this is likely to revert to trend in 2008 particularly if operations in the Middle East reduce. It is anticipated that the exceptional margins achieved in 2006 will start to revert back to trend in 2007.

Situational awarenessGround Vehicle Intercom Communication system sales remain extremely strong with units being installed in most of the US Army’s fleet of Main Battle Tanks, Armoured Personnel Carriers and Light Tactical Vehicles currently deployed in theatre. New network-centric products have been developed to support future programmes which will provide a basis for further growth in the future. The new Integrated Digital Soldier System which provides Command, Control, Communications and Situational Awareness capability has now gone into service with the British Army and will also form the basis of the FIST C4I Lite system, which is scheduled for evaluation by the UK MoD in 2007.

MicrowaveIn the microwave market, the Division remains focused on high priority advanced tactical programmes for the US Department of Defense. Microwave modules continue to be supplied for ongoing production requirements for radar, EW, and communications, and navigation systems for the F-16, F-18, F-22 and the F-35 aircraft programmes, as well as several missile programmes. A number of key R&D programmes started in the year, using funding from primes and the US DoD. These advanced technology developments will strengthen the Division’s technical position in the antenna and RF (Radio Frequency) front end of Electronically Scanned Arrays of the future.

Antenna subsystemsThere has been strong organic growth in ground communication antennas, with a multi-year contract worth up to US$49m awarded for the COM-201B portable VHF antenna for the US Army. This was followed In December by the largest military antenna award to date for COM-231 vehicle mounted microwave antennas for the US Army, Navy, Air Force, and Marine Corps. Whilst the award is on an Indefinite Delivery Indefinite Quantity basis with an initial one year contract and four one year options, it could be worth up to US$248m. Good organic growth continued in airborne electronic warfare antennas, shipboard radar components, and support of US air traffic control radars.

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Cobham Life Support

45,000 ship sets of HMMWV restraint systems ordered to date for the US Army

C-�7 On-Board Inert Gas Generating System (OBIGGS) position and B787 positions secured

Record year for infrared cryocooling systems

Strong growth in orders, revenue and trading profit partly reflected the full impact of the acquisition of H Koch & Sons (“Koch”) and strong organic growth for improved passenger restraints. Progress integrating the operations of Koch in California with existing facilities in Florida has been good and is largely complete. Demand for vehicle restraints is expected to be sustained into 2007, but at moderated levels.

Aviation oxygenSales of On Board Oxygen Generating Systems on tactical military aircraft were steady throughout the year. Supplies to new aircraft combined with retrofit opportunities will continue to provide a reliable and significant revenue stream. The C-17 On-Board Inert Gas Generating System is being installed on all new production aircraft with the retrofit programme phase beginning in 2007. This programme will provide good growth through to 2015.

Safety and survivalOrders for the Division’s HMMWV Improved Restraint System have been strong with approximately 45,000 ship sets ordered to date for retrofit. An indefinite quantity order was received in November to install the restraint system at the vehicle’s original equipment manufacturer (AM General) and a US$16m order received in December from the US Marines.

Cooling systemsRecord levels for order intake, sales and production were achieved for the Division’s one watt linear cryocoolers. The Division’s cooling system technology continues to be a key component in the upgrade of US Army and US Marine Corps platforms as they seek to improve their effectiveness in the global war on terrorism.

Following PV investment in innovative microclimate cooling technology, contracts worth more than US$20m were received in the year for microclimate cooling unit (MCU) sales to the US Army. This technology has now been successfully transferred from rotary aircraft under the Warrior programme to a range of ground vehicles to help improve the effectiveness of on-board personnel.

Actuation and controlA multi-million dollar contract was received for laser-guided bomb manifold assemblies, which was supplemented with an order from the UK MoD for 2,300 enhanced laser-guided bomb manifold modifications. Orders were also received from Lockheed Martin for pneumatic actuation assemblies for the Longbow Hellfire and JASSM missiles. Space systemsDiscussions have commenced to develop the pressure control system components on NASA’s Orion Launch Vehicle as part of the Environmental Control Life Support System integration.

Business review continued

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Cobham Flight Operations and Services

Left: Cobham’s On Board Inert Gas Generating System is being installed on new and existing C-17s to improve safety.

Right: First of the new Sentinel fleet of Bombardier Dash 8-aircraft ready to go into service.

Strong trading profit growth

Twelve year A$�bn Australian ‘Sentinel’ contract awarded

Transition from Qantas BAe�46 to B7�7 fleet complete

40% increase in closing order book

Revenue was marginally lower in 2006 as anticipated, largely reflecting the removal of £6m ‘pass through’ lease revenues as Qantas introduced its own aircraft for Cobham to operate. Cobham’s share of profits achieved in its joint venture companies, particularly those associated with the buoyant helicopter market, increased over the year to £4.7m (2005: £3.1m). Major bid activity has returned to normal levels following the award of the Sentinel contract. This combined with an improvement in fuel terms had a positive impact on margin and contributed to overall recovery in 2006.

Special mission flight operationsFollowing the award of the A$1bn Australian Sentinel contract, the conversion of the first of ten fully electronic Bombardier Dash 8 aircraft was completed on time. The new aircraft entered into service in February 2007 and the remaining aircraft are on schedule for conversion. In November a further A$80m contract was received for a Surveillance Information Management System (SIM) to be fitted to all ten Sentinel aircraft.

The performance of the Flight Inspection companies has exceeded expectations, reflecting acquisitions in the year. Major contract wins included confirmation from the UK MoD of the extension of the contract for the calibration of all military airfields to the end of 2011.

The FB Heliservices 50/50 joint venture also had another good year with a £7.5m contract extension to its support contract to the British Army Training Support Unit in Belize.

Military trainingIn the UK, an order was won to provide aerial targets against which the Royal Navy’s new Type 45 Destroyer’s weapon system will be tested over a two year integration and test programme. High performance levels were maintained on the air warfare training contract which runs to 2014.

Aircraft engineering The 20 year E-3D Sentry Airborne Warning and Control Systems (AWACS) support contract completed its first full year with 12 aircraft inputs completed on time and to budget. Discussions are ongoing to extend the existing Nimrod MR2 contract to a similar output based model through to 2012.

Outsourced commercial aviationIn outsourced commercial aviation, the resources sector continued to show good growth as new mining operations started throughout Australia. The transition from a BAe 146 fleet to an eight aircraft B717 fleet operating on QantasLink regional routes was completed and discussions are at an advanced stage with Qantas to extend the fleet from eight aircraft to 13 operating through to 2012. An A$80m extension to the air freight contract for Australian Air Express (AaE) was agreed in January.

�6 Cobham plc

Basis of reportingIn line with the regulatory requirements for UK listed companies, the Group financial statements in this report have been prepared in accordance with International Financial Reporting Standards (IFRS), together with the associated International Financial Reporting Interpretation Council (IFRIC) interpretations and those parts of the Companies Act 1985 applicable to entities reporting under IFRS. As currently permitted, the Group has elected to prepare its UK statutory filings under the local GAAP format.

To assist with the understanding of earnings trends, underlying profit and earnings have been defined to exclude the impact of the amortisation of intangible assets recognised on acquisitions and the impact of marking to market of foreign exchange hedges of future revenues not realised in the period.

All underlying measures also include revenue and operational results of both continuing and discontinued businesses, until the point of sale, but exclude exceptional profits or losses arising on business exits actually completed in the period.

Financial record Share price increased by 14.3% which, with the dividend, enabled Cobham to deliver total shareholder return of 16.4% Recommended dividend per share increased by 10% Total revenue for the Group grew organically by 3.6% (2005: 6.9%), partially offsetting declines caused by disposals and translation of US results Underlying profit before tax increased by 9.5% to £182.9m (2005: £167.0m) Underlying earnings per share increased by 10.2% to 11.66p Operating cash flow of £153.0m (2005: £172.1m), which is a conversion rate of 84.3% (2005: 98.6%) to trading profit, excluding profit after tax from joint ventures Free cash flow £103.8m (2005: £122.4m)

Accounting policies The Board has reviewed the accounting policies in accordance with lAS 8 and determined that they are appropriate for the Group.

Acquisitions and investments in associates During 2006, in line with the Group’s strategy of streamlining its portfolio, the Group purchased the remaining minority interest in two of its partially owned subsidiaries. In February 2006, agreement was reached to acquire the minority interest in the Group’s 51% owned subsidiary, Flight Precision Limited for €4.5m, together with the equity of Aerodata Flight Inspection GmbH for €6.9m.

In June 2006, agreement was reached to purchase the remaining equity in its 75% subsidiary, WaveCall Communications Inc. for US$2.0m.

Also in June 2006, the Group completed the acquisition of domo Limited, specialists in digital wireless video technology, for £17.8m, of which £10.0m is contingent on performance post acquisition.

Discontinued businesses and business salesDuring the year, the Board decided to dispose of various business operations, in line with the Group’s strategy to focus on key markets and value-added technologies. In 2005 the Board had identified the countermeasures business segment as a disposal target and the sale of FR Countermeasures Inc. was completed in December 2005. In March 2006, the disposal of Countermeasures was completed with the sale of Wallop Defence Systems Limited (WDSL) for £43.8m, of which £10.0m is contingent on the future performance of WDSL.

Warren Tucker, Group Financial Director


Strong profit improvement in Cobham Flight Operations and Services

Double-digit organic revenue growth in three technology divisions

Double-digit growth in underlying earnings and dividend

Operating cash conversion of 84.3%

Financial review


The Board considered it appropriate that both the Countermeasures and Fluid and Air business segments should be treated as discontinued operations. The sale of the Fluid and Air businesses was completed during 2005 and all operating results for these businesses in 2005 and 2006, up to the point of disposal, have been excluded from the reported continuing operations of the business. For segmental reporting, both of these groups of businesses are included within the ‘Other Activities’ segment.

During the period, five other businesses were sold for total proceeds of £53.0m and Chelton Aviation Corp. was closed. The operating results of Slingsby Aviation Limited, Atlas Composites Limited and Chelton Applied Composites AB, prior to disposal, are all reported in the ‘Other Activities’ segment. Precision Antennas Limited is reported in Antennas, Dräger Aerospace GmbH in Life Support and Chelton Aviation Corp. in the Avionics and Surveillance segment.

Other restructuring activityDuring 2006 a number of significant business integration activities were undertaken. The merging of the Group’s remaining composites businesses into Cobham Advanced Composites was completed with the integration of five operating units into two. In addition, the integration of the five Marlow-based antenna operating units into the new Chelton Centre was begun and has been substantially completed. Life Support business operations at the former H Koch and Sons business unit in California has been absorbed within the Division’s existing facilities in Tampa, Florida. The Group intends to continue to identify and deliver this type of restructuring benefit during 2007.

ResultsThe year saw the Group’s order intake increase to approximately £1.4bn (2005: £1.3bn), reflecting success in winning new land, sea and air orders. Excluding businesses acquired or disposed of in 2005 and 2006, continuing businesses order intake has grown by 27.2% from some £1bn in 2005. As well as success in Cobham Flight Operations and Services, the technology divisions had a book-to-bill ratio of 1.1 underpinning future growth.

Total revenue decreased to £1,015.7m (2005: £1,090.4m), primarily due to disposals made in 2005 and 2006. The Group has continued to focus its activities on high-technology, high-growth markets. On a geographical basis, some 46% (2005: 40%) of Group revenue was into the USA. This increases to 58% (2005: 55%) within the Technology Divisions. Trading profit, excluding the impact of the Group’s share in the post-tax results of joint ventures increased by 4.0% to £181.6m (2005: £174.6m). The Company’s share of profit from joint ventures and associates after interest and tax charges rose from £3.1m in 2005 to £4.7m in 2006. Underlying selling, distribution and administration costs were 14.9% of revenue (2005: 12.4%), primarily due to restructuring activity and lower gains on realised hedge contracts.

Group trading profit increased by 4.8% to £186.3m (2005: £177.7m) despite currency headwinds and disposals. The Group underlying trading margin improved by 2.0% points to 18.3% (2005: 16.3%) due to initial delivery of operational efficiencies and the disposal of low margin, non core businesses.

In line with the Group’s strategy for accelerating growth, the Group invested an increased £49.3m (2005: £47.9m, which includes disposals) in company funded Research & Development (PV), representing 6.0% (2005: 5.3%) of the technology divisions’ revenue. Including customer funded expenditure, total PV was £83.4m or 10% of technology revenue.

Profit before taxation increased to £199.1m (2005: £138.9m), benefiting from an increase in the value of currency instruments of £10.8m (2005: £16.1m decrease) as well as lower amortisation of intangible assets recognised on acquisition and increased profits on the disposal of businesses. On an underlying basis, profit before tax increased by 9.5% to £182.9m (2005: £167.0m).

Net finance expense in the period, including interest from pension schemes which was £1.8m improved, was £3.4m (2005: £10.7m) reflecting the benefit of lower average net borrowings and increased interest accrual of the pension schemes.

�8 Cobham plc

Revenue analysis The table below categorises revenue into the various end-market segments for the Group’s technology divisions:

% By market 2006 2005

Military, LENS and Space 67 62Civil 25 29Industrial and other 8 9 % By product 2006 2005

Electro-mechanical systems 27 28Communications and 65 63 aerospace electronicsIndustrial and other 8 9

Cobham Flight Operations and Services revenue represents 19% (2005: 18%) of Group totals.

TaxationThe total tax charge of £50.8m (2005: £40.8m) on the profit before tax of £199.1m (2005: £138.9m) represents a rate of 25.5% (2005: 29.4%). On an underlying basis, the effective rate for the year, calculated after adjusting profit for joint venture profits that have already been taxed, would be 28.7% (2005: 29.2%). Previously the effective underlying tax rate was calculated so as to include joint venture profits that have already been taxed. On this basis, the underlying effective tax rate previously disclosed for 2005 was 28.7%. This adjusted tax charge is lower than the prevailing tax rates across the various countries in which the Group operates, primarily because a benefit has arisen from the tax credit for research and development. Further details on the tax charge can be found in note 4 of the Notes to the Group financial statements.

Total revenue comprises the following:£m 2006 2005

Revenue from continuing activities �,0�2.� 970.3Revenue from discontinued activities 3.6 120.1Total revenue �,0�5.7 1,090.4

Trading profit comprises the following:£m 2006 2005

Result before joint ventures and associates �84.0 133.9Share of post-tax results of joint ventures and associates 4.7 3.1Operating profit from continuing operations �88.7 137.0Adjusted to exclude: Profit on disposal of undertakings (�.5) – (Gain) / loss on revaluation of currency instruments (�0.8) 16.1 Amortisation of intangible assets arising on acquisition 9.� 16.9Trading profit from continuing activities �85.5 170.0Trading profit from discontinued activities 0.8 7.7Trading profit (underlying operating profit) �86.3 177.7

Underlying profit before taxation is as follows:£m 2006 2005

Profit on continuing operations before taxation �85.2 126.0Adjusted to exclude: Profit on disposal of undertakings (�.5) – (Gain) / loss on revaluation of currency instruments (�0.8) 16.1 Amortisation of intangible assets arising on acquisition 9.� 16.9Underlying profit before taxation from continuing operations �82.0 159.0Underlying profit before taxation from discontinued operations 0.9 8.0Underlying profit before taxation �82.9 167.0

The profit after tax used in the calculation of underlying EPS is as follows: £m 2006 2005

Profit after taxation attributable to equity shareholders �48.� 97.6Adjusted to exclude: Profit on disposal of continuing and discontinued undertakings (�5.2) (1.3) (Gain) / loss on revaluation of currency instruments (after tax) (7.6) 11.2 Amortisation of intangible assets arising on acquisition (after tax) 6.3 11.1Underlying profit after tax �3�.6 118.6Underlying EPS (p) ��.66 10.58

Financial review continued


Earnings per shareBasic earnings per share were 13.13p (2005: 8.71p) whilst the fully diluted earnings per share amounted to 13.00p (2005: 8.66p). However, after adjusting for the amortisation of intangibles recognised on acquisition, the gain on revaluation of financial instruments and profits on disposal, underlying earnings per share increased by 10.2% to 11.66p (2005: 10.58p).

DividendsThe directors are recommending a final ordinary dividend of 2.64p (2005: 2.40p) which represents an increase of 10% on last year. If approved by shareholders, this will result in a total dividend of 3.75p per share (2005: 3.41p), also an increase of 10%. The total ordinary dividend for the year will absorb approximately £42.4m (2005: £38.4m).

FinancingAs a result of its business cash inflows and portfolio reshaping, the Group ended the year with net cash of £0.9m (2005: net borrowings £168.3m). This position was aided by the Group having a large proportion of its debt denominated in US dollars. Net movements in exchange rates reduced net borrowings on translation by a total of £37.3m, (2005: increased net borrowings by £19.8m) in comparison to the previous year end. Due to there being a net cash surplus, the Group had no net gearing at the year end (2005: 28.7%). Net interest cover is at a prudent level of 29 times (2005: 17 times).

The Group had two main borrowings outstanding at the end of the year under the following facilities:a) the October 2002 private placement of Cobham

guaranteed senior notes which raised US$225m. The facility comprises two series of notes repayable in seven and ten years from inception respectively. As a result of an interest swap, the interest expense varies with LIBOR;

b) the £300m five year multi-currency credit agreement which was entered into in July 2005. The borrowings carry a variable rate of interest. US$260m of this facility, used to finance the acquisition of REMEC Defense & Space Inc., has been swapped into fixed rate borrowings. At the end of 2006, £217.3m had been drawn under this agreement.

Included with the net cash of £0.9m are significant sterling cash deposits and US dollar-denominated borrowings. The Group continues to hold the US dollar borrowing which funded acquisitions in the USA to act as a natural hedge against the related assets, whilst the sterling cash deposits have arisen as a result of the disposal activity and strong cash flow from operations. In 2006, the interest rate achieved on the deposits was in line with the rate paid on the US dollar borrowings.

Cash flowThe Group gives high priority to cash management. Operating cash inflow in the year, after capital expenditure and PV expenditure, which is fully expensed in the income statement, but before the payment of tax, interest and dividends was £153.0m, representing 84.3% of trading profit before the Group’s share of post-tax results of joint ventures and associates. After the payment of tax, net interest and dividends received from joint ventures, free cash flow was £103.8m (2005: £122.4m).

An additional net cash inflow of £61.1m (2005: net outflow of £64.9m) arose in the year from corporate activity, being the exiting of seven businesses, the acquisition of two businesses and the acquisition of the minority interests in two businesses, in line with the Group’s strategy of focusing the portfolio. The Group’s acquisitions were domo Limited, a leading provider of digital wireless video surveillance technology and Aerodata Flight Inspection GmbH, a company involved in the inspection and calibration of equipment essential to the safe operation of aircraft at commercial and military airfields.

As part of its strategy of operational improvement, the Group has targeted reducing its total working capital balances, after allowing for the effects of growth, over a three year period. At the year end, total working capital balances had reduced to £163.9m (2005: £198.4m). Since the operational improvement programme commenced in 2005, the Group has successfully reduced working capital balances by £19m.

Further detail relating to the cash flows and movements in net debt of the Group is given in the consolidated cash flow statement on page 48 and in note 11 of the Notes to the Group financial statements. A summary of the change in net debt is set out below.

£m 2006 2005

Trading profit (excluding joint ventures) �8�.6 174.6 Depreciation and other movements 35.0 42.3 Increase in working capital and provisions (24.2) (6.6) Net capital expenditure and financial investment (39.4) (38.2)Operating cash flow �53.0 172.1 Operating cash / trading profit

(excluding joint ventures) 84.3% 98.6% Net interest paid (7.3) (11.7) Taxation paid (46.2) (39.2) Dividend received from joint ventures 4.3 1.2Free cash flow �03.8 122.4 Dividends paid (39.7) (36.1) Net cash outflow for acquisitions less disposal proceeds 6�.� (64.9) Movements in funding and exchange movements 44.0 (25.8)Decrease / (increase) in net debt �69.2 (4.4)

Cobham plc20

PensionsThe Group operates a number of defined benefit pension schemes, the most significant being the Cobham Pension Plan. The most recent actuarial valuation for this scheme was carried out as at 1 April 2006 and was updated for accounting purposes to 31 December 2006. At this date, the Group’s net liability relating to its defined benefit schemes had reduced to £29.6m before deferred tax compared to a deficit of £81.0m at 31 December 2005.

During the period the Group made normal contributions to its defined benefits schemes of £1.9m in excess of the current service costs as assessed under lAS 19. In addition, a further special contribution of £5.3m was made as part of the withdrawal agreement with the Cobham Pension Plan trustees relating to the disposal of FR HiTemp Limited and separate special contributions totalling £6.2m were made in respect of the disposal of Wallop Defence Systems Limited and Slingsby Aviation Limited. In both cases these cash outflows are shown as part of investing activities in the cash flow statement.

The Group’s defined benefit pension schemes are closed to new entrants, although alternative defined contribution schemes have been offered in all cases.

Cobham remains committed to the support of the pension schemes within the Group and continues to work with the trustees of those schemes to ensure that net liability issues are managed appropriately.

Foreign exchangeThe Group’s aim has been to reduce, or eliminate wherever practical, foreign exchange risk. The pound sterling/US dollar exchange rate is the most important as far as the Group is concerned. This is primarily due to the level of US dollars which the UK and continental European subsidiaries expect to receive from their business activities, as certain global aerospace and defence contracts are denominated in US dollars.

Additionally, translation exposure arises from operating companies based in the USA, offset partially by dollar-denominated borrowings.

All significant foreign exchange transactions are approved by the parent company. In addition to the currency borrowings, a number of financial instruments are used to manage transactional foreign exchange exposure, such as forward rate contracts and options. Details of the most significant of these instruments are described in note 25 of the Notes to the Group financial statements. The Group has a policy of managing 12 months of potential transactional exposure on a rolling three month basis, together with exposures for firm long term contracts. As a consequence, the majority of the anticipated exposure to the US dollar in the UK and continental European subsidiaries is hedged at an average rate of 1.78 for sterling for 2007.

Going concernThe Group’s finances are sound and the balance sheet remains strong. Accordingly, after making enquiries, the directors have formed a judgement at the time of approving the financial statements that there is a reasonable expectation that the Company and the Group as a whole have 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 Group and parent company financial statements.

Financial review continued

Annual Report & Accounts 2006 2�

Volunteers from Cobham helped to tidy up the grounds for physically disabled residents of James Burns House in England.

Corporate Responsibility

Work is ongoing to ensure that Corporate Responsibility (CR) is an integral part of the Group’s strategy and embedded into day-to-day operations.

To ensure that Cobham’s CR effort is focussed on areas of greatest impact and that most closely align with the Group’s strategy and relevant industry and global initiatives, six focus areas have been identified. For each of the declared focus areas, the strategic intent is shown in the table below.

Whilst data will still be collected on a broad range of CR measures, more resources will be dedicated to implementing initiatives and seeking improvement in the six focus areas.Further details will be available in the Group’s 2006 CR Report, available on the Cobham website in May 2007.

Cobham continues to be a signatory to the Sustainable Aviation Strategy sponsored by the SBAC and to the Supply Chain 21 initiative launched by the aerospace industry in 2006. The first progress report on Sustainable Aviation was issued in December 2006, which Cobham contributed to.

Focus area Our aim

Cobham’s strategyIndustry links

Focu

s

Cap

abil

itie

s

Per

form

ance

Su

stai

nab

le

Avi

atio

n

Su

pp

ly C

hai

n 2

�

Staff safety To provide a safe, healthy work environment

Carbon footprint To accurately measure our carbon footprint and to seek to reduce our contribution by improving energy efficiency and seeking energy sources that do not contribute to climate change

Waste reduction and recycling

To reduce the waste produced at every stage of our products’ lifecycle and, where waste is produced, to reuse or recycle wherever possible

Chemicals and hazardous materials

To ensure that, in the production of our products, we do not adversely affect the health of our employees, neighbours or the environment

Supply chain To ensure that our suppliers have appropriate environmental policies and that appropriate minimum standards for working conditions are met

Bribery and corruption To ensure that our business is free of bribery and corruption

Key areas of focus

Six focus areas identified

Staff safety – reportable injuries down from 75 to 73

Carbon footprint – energy efficiency improved by 4%

Waste reduction and recycling – 29% of waste recycled

1 Reportable injuries and other occurrences mean work-related accidents, illness or disease resulting in more than three days absence.2 Incidence rate is the total number of reportable injuries and other occurrences multiplied by 100,000 divided by the average number of employees.

150

100

005 06

50

Energy efficiency(excluding aviation fuel)

5.7

5.3

125

75

25

(MWh/£m)

7

5

005 06

2

Waste efficiency

5.7

5.3

6

4

3

1

(tonnes/£m)

2,000

1,000

006

500

Energy efficiency

1,96

5

1,89

2

05

1,500

(MWh/£m)

800

600

005 06

200

Incidencerate2

667

720

400

80

60

005 06

40

Reportableinjuries1

75 73

20

22 Cobham plc

Corporate responsibility managementAll Cobham business units report annually on environmental, human resource and health and safety performance. Cobham’s CR team analyses the data and specifies objectives for improvement. The Chief Executive has overall responsibility for CR performance, and ensures the Board takes account of CR issues in its annual risk assessment, and monitors progress throughout the year.

Staff safety Reportable Injuries1 are down from 75 to 73 Injuries from manual handling and hand tools have reduced. However, there has been an increase in incidence rate2 rising from 677 injuries per 100,000 employees to 720 injuries per 100,000 employees. This is due to an increase in accidents relating to being struck by a falling object or moving machinery as well as slips, trips or falls on the same level The 2006 objective to review and further develop the Group’s health & safety policy to ensure it meets best practice and reflects the needs of the business, was achieved. The Group’s health & safety policy is now a safety, health and environment policy, which has been issued to all busines units in the Corporate Framework Two processes are assisting in the dissemination of best practice across the Group; the Corporate Responsibility and the Loss Prevention audit processes. As part of the audit process, recommendations are made to ensure that all business units are moving towards best practice. In 2007, Cobham will further develop its corporate extranet to include best practice resources available to all Group business units H&S workshops in the USA were attended by a large number of US business units and more detailed information has been gathered regarding reportable (three day) injuries.

Carbon footprint Good work across the Group has seen an improvement in overall energy efficiency of 4% from 1,965 MWh/£m revenue to 1,892 MWh/£m revenue. When focussing on energy use excluding aviation fuel, efficiency has improved 21% Progress has been made towards the Group’s target of a 10% improvement in efficiency (from a 2005 base) by the end of 2010. The launch of an energy efficiency programme for all UK business units has the potential to improve energy efficiency In the USA, a business unit achieved a 5% reduction in electricity, gas and water usage in 2006 compared to 2005 In the UK, a business unit commissioned a Building Energy Management System at two of their sites, which is hoped to achieve a 30% reduction in heating oil consumption Other business units upgraded heating equipment, improved insulation, used energy efficient replacements, fitted PIR lighting sensors, and had energy surveys carried out.

Waste reduction and recycling Waste generated reduced from 5,770 to 5,563 tonnes, and the amount of waste generated per £m turnover also decreased from 5.7 to 5.3. The recycling rate remains high with 29% of waste recycled in 2006 The 2006 objective was to develop a programme to deliver a 10% reduction of waste generated per £m turnover by 2010, from a 2005 base. In 2006, poor performers were identified, and site targets set for improvement In 2006 progress was made with business units introducing cardboard recycling schemes to reduce the volume of waste going to landfill, electronic build files to reduce paper waste and changing from bottled water to mains supplied cold/hot water filter machines.

Corporate Responsibility continued


Cobham employees in New Hampshire, USA, participated in an 18 hour community event for the American Cancer Society, raising US$5,000.

Chemicals and hazardous materials Although data on chemical and hazardous material was not collected in 2006, over 40% of business units by turnover had their hazardous material storage facilities audited. Where a site did not meet best practice, recommendations for improvement were made, requiring a corrective action plan which is subject to review In 2006, there was one significant fuel spill of 10m3 at a UK business unit, the cause of which was analysed and actions taken to minimise the potential for a reoccurrence.

Supply chain In line with Cobham’s commitment to Supply Chain 21, the Group’s supply chain has been identified as a focus area going forward. Work has commenced to revise the criteria against which suppliers are evaluated.

Bribery and corruptionCobham is committed to complying with legislation in all the countries in which it operates. Cobham has a whistle blowing policy and an ethical business policy, which requires all employees to carry out business with honesty, integrity and fairness. The policies are available to employees in the Cobham Corporate Framework which was updated and reissued during 2006.

CommunityAt the Group level, Cobham directs its community support at national campaigns. Business units are encouraged to engage with local communities where their products and services are sold and in which employees work and live.

Priority is given to causes directly supporting the achievement of educational, engineering and scientific objectives, related to the development of a responsible, sustainable aerospace and defence industry. As more than 50% of Cobham’s revenues are for the military, the Group also supports those who have or are serving in the Armed Forces.

In 2006, Cobham became a corporate sponsor and partner of the following organisations:

Royal Academy of Engineering Soldiers, Sailors, Airmen and Families Association (SSAFA) Forces Help The Science Museum Young Engineers

Data verificationCobham is committed to providing reliable information regarding its Corporate Responsibility performance. An internal verification programme began in 2004, checking compliance with Group standards, monitoring systems and raw data. During 2006, 23 business units, representing 42% of the Group by turnover, across the UK, Europe and the USA were subject to the verification process. Any data errors identified were corrected in the totals for the relevant reporting year. Business units are required to provide an action plan to address any recommendations made, the action plans are reviewed regularly at Group level. Data is reconciled to account for acquisitions and disposals, and changes in foreign exchange rates.

Cobham has become a corporate partner supporting the work of the Soldiers, Sailors, Airmen and Families Association (SSAFA) in the UK.

24 Cobham plc

Board of directors

1. G F Page CBE, DL, MA, FRAeS, DSc Non-executive ChairmanAppointed to the Board in 1990, Gordon Page, age 63, joined the Group as managing director of Flight Refuelling Limited having previously been Commercial Director – military engines of Rolls-Royce plc. He was appointed Deputy Chief Executive in 1991, Chief Executive in 1992 and chairman in November 2001. He is Chairman of the Department of Trade and Industry’s Industrial Development Advisory Board, non-executive chairman of Hamworthy plc, FKI plc and Air Tanker Holdings Limited and a director of Lockheed Martin UK Holdings Limited. He is president of the Royal Aeronautical Society and is a past-president of The Society of British Aerospace Companies Ltd and of the Chartered Management Institute. He is Chairman of the nomination committee.

2. A E Cook BSc, CEng, FRAeSChief ExecutiveAppointed to the Board in 2001, Allan Cook, age 57, 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 a vice-president of the Society of British Aerospace Companies Ltd. He is a member of the nomination committee.

3. W G Tucker BSc, ACA, MBAGroup Financial DirectorAppointed to the Board in 2003, Warren Tucker, age 44, joined the Group as Group Financial Director. Prior to joining he qualified as a chartered accountant, worked at Lazard,

held senior finance positions at British Airways plc and was deputy group financial director of Cable and Wireless plc.

4. A J Stevens BSc, CEng, FIET, FRAeSChief Operating OfficerAppointed to the Board in 2003, Andy Stevens, age 50, joined the Group as managing director of the Aerospace Systems Group. Prior to joining he qualified as a chartered engineer at Dowty Group and subsequently became chief operating officer of Messier Dowty International before joining Rolls-Royce as managing director, defence aerospace. He was appointed Chief Operating Officer in September 2005.

5. A J Hannam OBE Group Managing Director, Cobham Services Appointed to the Board in 2002, Alex Hannam, age 61, joined the Group as managing director of FR Aviation Group Limited in that year. Prior to joining, he was managing director of Alenia Marconi’s radar systems division, a position he had held since 1995. He is responsible to the Board for the performance of the Cobham Services Division.

6. M Beresford CBE, MAMechSc, FIEE Independent Non-executive DirectorAppointed to the Board as a Non-executive Director and first elected by shareholders in 2004, Marcus Beresford, age 64, is chairman of Ricardo plc and was a non-executive director of Spirent PLC until late 2006. He was an executive director of GKN plc from 1992-2002 and chief executive from 2001-2002. He is the senior independent director and is a member of the nomination, audit and remuneration committees.

2

3 4

1


7. P Hooley FCA, MSc Independent Non-executive DirectorAppointed to the Board as a Non-executive Director in 2002 and first elected by shareholders in 2003, Peter Hooley, who is a chartered accountant, is aged 60 and was group finance director of Smith & Nephew plc until mid-2006. During the year he was appointed non-executive chairman of BSNmedical Luxembourg Holdings Sarl a group engaged in medical textile products. Previously he was a non-executive director of Powell Duffryn plc from 1997 to 2000. He is Chairman of the audit committee and also a member of the nomination and remuneration committees.

8. J S Patterson MBChB, FRCP, Fmed Sci Independent Non-executive DirectorAppointed to the Board as a Non-executive Director in 2005, John Patterson, age 59, qualified in medicine in 1971 and obtained a Membership (now Fellowship) of the Royal College of Physicians in 1974. He joined ICI (now AstraZeneca) in 1975 and in December 2004 John was appointed to the main Board as executive director responsible for development. He is a director of the British Pharma Group and is a former President of the Association of the British Pharmaceutical Industry, a former non-executive director of Amersham PLC and a former member of the supervisory board of the UK Medicines Control Agency. He is Chairman of the remuneration committee and a member of the nomination and audit committees.

9. J W Edington PhD, DSc, FIM, FREngIndependent Non-executive DirectorAppointed to the Board as a Non-executive Director in 1996 and first elected by shareholders in 1997, Jeff Edington, age 67, was, until his retirement, executive director, technology with Corus Group plc (formerly British Steel plc) where he had responsibility for product and process technology, the environment and information technology. Prior to joining British Steel in 1992, he was vice-president, research and technology at Alcan Aluminium Limited based in Montreal. He is chairman of RecovCo Limited, a technology-driven recycling company, and a member of Cobham’s nomination, audit and remuneration committees.

10. M H Ronald CBE, BA, BScEE, MScEE Independent Non-executive DirectorAppointed to the Board as a Non-executive Director in 2007, Mark Ronald, age 65, will be proposed for election by shareholders at the 2007 AGM. He was, until his retirement at the end of 2006, chief operating officer of BAE Systems plc and chief executive officer of BAE Systems Inc, its wholly-owned US subsidiary. Previously he was vice-president, program management with Litton Industries and chief operating officer of AEL Industries. Mark is currently a non-executive director of ATK Inc and DynCorp International Inc and non-executive chairman of BAE Systems Inc. He is a member of the nomination and remuneration committees.

6

8 9

5 7

10

26 Cobham plc

Directors’ report

The directors submit their report and the audited Group and parent company financial statements of Cobham plc for the year ended 31 December 2006.

Business reviewThe Chairman’s statement on page 4 of the Annual Report together with the Chief Executive’s review on pages 5 to 7, the Business review on pages 10 to 15, the Financial review on pages 16 to 20 and the Corporate Responsibility section on pages 21 to 23 contain information that fulfils the requirements of the statutory business review and are incorporated in this Directors’ report by reference. The statutory business review is addressed only to shareholders and its purpose is to provide a review of the business and to explain the principal risks and uncertainties facing the Group.

The Annual Report contains certain forward looking statements with regard to the operations, performance and financial condition of the Group. By their nature, these statements involve uncertainty since future events and circumstances can cause results to differ from those anticipated. Nothing contained in this Annual Report should be construed as a profit forecast.

Principal activitiesCobham’s principal activities are the design, manufacture, qualification and support of:

Air refuelling and auxiliary mission equipment including weapons carriage and release systems Off-the-shelf and custom state-of-the-art antenna components, sub-systems and products that support communications on the move Equipment for the avionics, law enforcement and national security, and search and rescue markets Microwave components, integrated assemblies and sub-systems, tactical military vehicle intercom systems, soldier and ground vehicle situation awareness products Aviation oxygen equipment, safety and survival products, cooling systems, actuation and control mechanisms and components for the space market The operation, modification and maintenance of fixed and rotary wing aircraft in the aerospace and defence markets for military training, outsourced special mission flight operations, freight and passenger services and the maintenance of large military aircraft.

DividendsAn interim dividend of 1.11p per Ordinary Share (2005: 1.01p) was paid in December 2006. The directors are recommending a final dividend of 2.64p per Ordinary Share (2005: 2.40p) payable on 6 July 2007 to ordinary shareholders on the register as at 1 June 2007, making a total ordinary dividend for the year of 3.75p (2005: 3.41p).

Board of DirectorsThe current directors are listed, together with short biographical notes, on pages 24 and 25. They held office throughout the year with the exception of Mark Ronald, who was appointed on 8 January 2007.

The Company’s articles of association require directors who have been appointed by the Board since the previous Annual General Meeting (‘AGM’) or who have held office for three years or more since their previous appointment by shareholders to retire from office. Accordingly, Mark Ronald, Allan Cook, Warren Tucker, Andy Stevens and Marcus Beresford will retire from office at the forthcoming AGM and, being eligible, will offer themselves for re-appointment. Allan Cook, Warren Tucker and Andy Stevens each has a service contract with the Company, details of which can be found in the Directors’

remuneration report on pages 32 to 38. Mark Ronald and Marcus Beresford do not have a service contract with the Company. Jeff Edington will retire from the Board at the conclusion of the forthcoming AGM and will not seek re-appointment.

Directors’ indemnity arrangementsThe Company has entered into qualifying third party indemnity arrangements for the benefit of all its directors in a form and scope which comply with the requirements of the Companies Act 1985.

Directors’ interestsNone of the directors is or was materially interested in any significant contract during or at the end of the financial year particulars of which are required to be disclosed by the Companies Act 1985 or the Financial Services Authority’s Listing Rules.

Details of directors’ share interests and of their rights to subscribe for shares are shown in the Directors’ remuneration report on pages 32 to 38.

Corporate governanceThe Company’s statement on corporate governance is set out on pages 28 to 31.

Share capitalDetails of movements in the share capital of the Company during the year are given in note 26 of the Notes to the Group financial statements and note 7 of the Notes to the parent company financial statements respectively.

At the AGM held on 7 June 2006 the Company was authorised to purchase up to 112,705,565 Ordinary Shares. This authority will expire at the conclusion of the 2007 AGM. Although no Ordinary Shares have been purchased by the Company during the period from 7 June 2006 to the date of this report, a special resolution will be put to shareholders at the AGM to renew the authority to make market purchases of the Company’s shares up to a maximum of 10% of the share capital of the Company.

Research and developmentThe Group continues to invest in the important area of Research and Development. During the year the Group expended £49.3m (2005: £47.9m) on non customer funded Research and Development. The management of each Group business is responsible for identifying and carrying out research and development programmes which are suitable having regard to particular market and product needs.

Further information on research and development appears on pages 7, 8 and 17.

Major interests in sharesMajor interests in the issued Ordinary Share capital of the Company appearing in the register maintained in accordance with Section 211 of the Companies Act 1985 as at 19 January 2007 were as follows:

Percentage Number at date of of shares notification

Legal & General Group plc 73,891,634 6.57Gestión y Asesoramiento Rio Ebro S.L. 57,000,000 5.04Lloyds TSB Group plc 55,033,770 4.87The Estate of Sir Michael Cobham 49,831,000 4.43Aviva plc 44,813,890 3.98Barclays plc 35,223,469 3.13


The following major interests in the Company’s Ordinary Shares have been notified to the Company since 20 January 2007 under the Financial Service Authority’s disclosure rules and transparency rules:

Number of Percentage of Date Shareholder voting rights voting rights

12.02.07 Aviva plc and subsidiaries 42,662,810 3.7707.03.07 Legal & General Group plc 79,350,882 7.0014.03.07 Lloyds TSB Group plc 87,813,744 7.75

Financial instrumentsNote 25 of the notes to the Group financial statements and note 10 of the Notes to the parent company financial statements contain disclosures relating to the use of financial instruments.

PeopleAt the end of 2006, Cobham employed 9,300 people on five continents with major population centres in the UK, continental Europe, North America and Australia.

Across Cobham, progress was made in the implementation of organisational structures designed to support the Group’s declared strategy of building its capabilities across all functions with an emphasis on collaboration to better utilise resources and increase opportunities for personal and professional development. In support of this the Group Director of Human Resources led activity in the areas of long term incentive and benefit design, talent management and employee performance management, as well as supporting strategic staffing initiatives across the Company as a whole.

Cobham is committed to equal opportunities for all of its employees. The Group aims to ensure that the workplace is free from discrimination; recruitment, selection and career development are based on competence and job requirements, irrespective of race, sex, sexual preference, religion, or disability. Cobham recognises that there is work to be done to fully achieve its objectives in this area, but has already achieved some significant successes including the successful implementation of UK pensions simplification legislative requirements as well as a review and upgrading of employment policies to reflect the requirements of UK age discrimination legislation introduced during the year. These build on the successes of previous years which include: the provision of ‘job share’ and part time working opportunities; running internal seminars to increase management awareness of equality issues and attending disability job fairs. With regard to employees who become disabled, the policy is to take all reasonable steps, including retraining, to ensure that they can remain in employment wherever practicable.

The importance of employee development and training is recognised and Group businesses are required to encourage employees to take advantage of available and relevant training programmes and opportunities for advancement.

The Group encourages employee participation and consultation at all levels and also the sharing of relevant business information. Such an approach facilitates the development of new ideas and practices that add value to the business, promotes team member commitment and helps to focus company and employee expectations. In-house newsletters, intranet, extranet and internet communications, Company announcements, team meetings and suggestion schemes all play a part in this process. UK employees are given the opportunity to become shareholders in the Company through the Cobham Savings Related Share Option

Scheme and the Cobham Share Incentive Plan. Under the former, employees can acquire shares through the exercise of options granted at a 20% discount to market value with savings made over three, five or seven years. Under the latter, shares may be purchased out of pre-tax income.

Corporate ResponsibilityInformation in relation to the Group’s commitment to Corporate Responsibility (including additional information in relation to employment matters) is set out on pages 21 to 23.

Creditors payment policyPayment is generally made by Group companies to their creditors in accordance with agreed terms of business provided that those terms have been met. It is the policy of the parent company that all invoices are paid within 30 days following the end of the month in which the invoices are approved. The total amount of the parent company’s trade creditors falling due within one year at 31 December 2006 represents 46 days’ (2005: 45 days) worth as a proportion of the total amount invoiced by suppliers during the year ended on that date.

Political and charitable giftsNo contributions were made to political organisations. The amount donated during the year for charitable purposes was £77,846 (2005: £51,469). Of this sum, donations in excess of £200 to UK charities were made to the value of £13,018 to health charities, £5,425 to rescue service charities, £11,100 to business enterprise charities and £5,114 to local interest charities.

Auditors and disclosure of informationEach director states that:

So far as he is aware, there is no relevant audit information (that is, information needed by the Company’s auditors in connection with preparing their report) of which the Company’s auditors are unaware; and He has taken all the steps that he ought to have taken as a director in order to make himself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information.

The auditors, PricewaterhouseCoopers LLP, have indicated their willingness to continue in office and a resolution to re-appoint them will be proposed at the AGM.

Annual General MeetingThe Company’s AGM will be held at 12 noon on Wednesday, 6 June 2007 at the offices of Dresdner Kleinwort at 30 Gresham Street, London, EC2P 2XY. A circular containing the notice convening this meeting, together with an explanation of the business to be conducted, is enclosed with this Annual Report.

By order of the BoardJohn Pope Company Secretary28 March 2007

28 Cobham plc

Corporate governance

This part of the Annual Report, together with the Directors’ remuneration report set out on pages 32 to 38, describes how the Company has both applied the principles contained in the revised Combined Code on Corporate Governance published in July 2003 (the Code) and complied with the provisions contained in section 1 of the Code.

Board compositionThe Board comprises a Non-executive Chairman (Gordon Page), a Chief Executive (Allan Cook), three other Executive Directors and five other Non-executive Directors of whom Marcus Beresford is the senior independent director. Mark Ronald, a Non-executive Director, joined the Board with effect from 8 January 2007.

All Non-executive Directors, with the exception of the Chairman, are considered to be independent. The Board is, in particular, satisfied, having regard to his character and experience, that Jeff Edington’s independence is not compromised as a result of the fact that he has served on the Board for more than 9 years since the date of his first election. Jeff is planning to retire from the Board at the 2007 AGM.

Biographies of the directors, giving details of their experience and other significant commitments, are set out on pages 24 and 25 and, in relation to those directors offering themselves for re-appointment at the AGM, in the accompanying shareholder circular. The wide ranging experience and backgrounds of the Non-executive Directors enable them to debate and constructively challenge management in relation to both the development of strategy and the performance of the Group. The attendance of directors at Board and principal Board committee meetings during the year is set out in the following table.

Board Audit Remuneration Nomination

Number held 9 4 8 4

Number attendedG F Page 1 8 – – 3A E Cook 9 – – 4A J Hannam 2 8 – – –W G Tucker 9 – – –A J Stevens 3 8 – – –J W Edington 3 8 4 8 4P Hooley 4 8 4 6 4M Beresford 4 8 4 6 4J Patterson 5 5 3 8 2

1 Gordon Page did not attend an unscheduled Board meeting and was not required to attend a nomination committee meeting. The unscheduled Board meeting was called to approve documentation in connection with the disposal of Dräger Aerospace GmbH (the “Dräger meeting”) and was, by agreement, attended only by certain Executive Directors as the disposal had already been agreed in principle by the Board.

2 Alex Hannam did not attend a Board meeting for compassionate reasons.3 Andy Stevens and Jeff Edington did not attend the Dräger meeting.4 Peter Hooley and Marcus Beresford did not attend the Dräger meeting and two

unscheduled remuneration committee meetings.5 John Patterson did not attend two Board meetings and one audit committee

meeting due to conflicts with his commitments to AstraZeneca plc. In addition, he did not attend a Board meeting and two nomination committee meetings, due to absence on holiday, and did not attend the Dräger meeting.

Non-executive Directors are appointed for specified terms of three years which can be extended by agreement provided that the individual’s performance continues to be effective. All Non-executives have confirmed they will have sufficient time to meet what is expected of them and copies of their appointment letters are available on request to the Company Secretary. Under the Company’s articles of association, directors are subject to re-appointment by shareholders at the first AGM after their appointment by the Board; if they have held office for three years or more since their previous appointment by shareholders; and, in the case of Non-executive Directors, if they have held office for nine years or more since first being appointed by shareholders. The nomination committee report on page 29 explains the process for selection of directors and succession planning.

The Chairman is, among other things, responsible for chairing Board meetings and leading the Board. The Chief Executive’s responsibilities include operational performance and the development of strategy. The Board’s policy is that the roles of Chairman and Chief Executive should be performed by different people. The division of responsibilities between the Chairman’s role and that of the Chief Executive is documented and clearly understood and no conflicts arise, in the directors’ view, from the fact that the Chairman held, until 2001, the position of Chief Executive.

With effect from 1 March 2007, Andy Stevens, the Chief Operating Officer, assumed responsibility and accountability for the operational management and performance of the five technology divisions so that Allan Cook can focus more on the long term growth development of the Group, its people and customer relationships.

The senior independent director’s responsibilities include the provision of an additional channel of communication between the Chairman and the Non-executive Directors and another point of contact for shareholders if they have reasons for concern which communications through the normal channels of Chairman, Chief Executive or Group Financial Director have failed to resolve, or where these contacts are inappropriate.

The directors have the benefit of a directors’ and officers’ liability insurance policy and the Company has entered into qualifying third party indemnity arrangements with them, as permitted by the Companies Act 1985. They can take independent legal advice at the Company’s expense within set limits in furtherance of their duties.

The Board and its proceedingsBoard meetings scheduled in accordance with the annual timetable take place eight times a year and otherwise as required. There is contact between meetings to progress the Group’s business as required. Meetings were held during the year for the most part at Wimborne. They also take place at other operational locations and at the Company’s London office from time to time. In addition, meetings take place between the Non-executives in the absence of the Chairman and/or the Executive Directors.


The Board’s role is to lead the Group with a view to the creation of a strong, sustainable financial performance and long-term shareholder value. In doing so, it reviews and agrees Group strategy, ensures that the necessary resources are in place, monitors management performance, and supervises the conduct of the Group’s activities within a framework of prudent and effective internal controls. During the year Board members participated in a meeting held over two days devoted to the consideration and development of the Group’s strategy. This will be repeated during the current year.

The Board has adopted a schedule of matters reserved for its specific approval. The schedule provides the framework for those decisions which can be made by the Board and those which can be delegated either to committees or otherwise. Among the key matters on which the Board alone may make decisions are the Group’s business strategy, its five year plan, its consolidated budget, Group policies, dividends, acquisitions and disposals, and all appointments to and removals from the Board. Authority is delegated to management on a structured basis in accordance with the provisions of the Corporate Framework, which was revised and reissued during the year, ensuring that proper management oversight exists at the appropriate level. Matters delegated in this way include, within defined parameters, the approval of bids and contracts, capital expenditures and financing arrangements.

The Board has adopted procedures relating to the conduct of its business, including the timely provision of information, and the Company Secretary is responsible for ensuring that these are observed and for advising the Board on corporate governance matters. The Company Secretary (John Pope) is appointed, and can only be removed, by the Board.

Board committeesThe Board is supported in its work by a number of committees. Information relating to the nomination and audit committees appears below and the activities of the remuneration committee are described in the Directors’ remuneration report on pages 32 to 38. The Company Secretary, acts as secretary to all Board committees. Committee chairmen provide oral reports on the work undertaken by their committees at the following Board meeting and minutes are made available to all directors.

Other Board committees include the executive committee, the general purposes committee and the price sensitive information (‘PSI’) committee. The Executive Directors are members of these committees.

The terms of reference of the executive committee were reviewed during the year and its purpose is to assist the Chief Executive in the performance of his duties. These include developing the Group’s strategy for Board consideration and approval, making recommendations as to acquisitions and disposals, reviewing operational activities and managing the significant risks faced by the Group. This committee meets on eight occasions during the year and its membership comprises the Executive Directors under the chairmanship of the Chief Executive.

The duties of the general purposes committee are varied and include the discharge of obligations arising under the Company’s share plans, the determination of the remuneration of the Non-executive Directors, and the approval of banking facilities.

The PSI committee’s main function is to establish and implement internal policies, systems and controls to ensure that potential inside information is communicated to it, considered, verified and released to the market where required. The general purposes and PSI committees meet as and when required.

Nomination committee reportGordon Page is the Chairman of this committee. The other members are Jeff Edington, Allan Cook, Peter Hooley, Marcus Beresford, John Patterson and Mark Ronald (appointed 8 January 2007). The majority of the members of the committee are independent. Details of their qualifications and experience are set out on pages 24 and 25. During the year the committee met formally on four occasions.

The committee’s terms of reference, which have recently been reviewed, are available on the Company’s website or on application to the Company Secretary. The committee’s main duties are to review the structure, size and composition of the Board, to consider succession planning for directors and other senior executives and to identify and nominate for Board approval candidates to fill Board vacancies. The committee dealt with all of these matters during the year and, in addition, made recommendations regarding the re-appointment of certain directors at the 2006 AGM, and was engaged in searching, with the assistance of external recruitment consultants, for new Non-executive Directors.

Mark Ronald was appointed a Non-executive Director with effect from 8 January 2007. Mark was initially identified as a potential appointee to the Board by a committee member and was recommended for appointment following meetings with external recruitment consultants, who reported back to the committee on his suitability, members of the committee and, subsequently, other Board members.

Directors’ professional developmentOn appointment, directors undertake a structured induction programme in the course of which they receive information about the operations and activities of the Group, the role of the Board and the matters reserved for its decision, the Company’s corporate governance practices and procedures and their duties, responsibilities and obligations as directors of a listed public limited company. This is supplemented by visits to key locations and meetings with, and presentations by, senior executives.

Training for directors is available as required and is provided mainly by means of external courses or in-house presentations. During the year a presentation was given to the Board as a whole on director liabilities and individual directors received training in a number of areas including the Transparency Directive. In addition, directors’ knowledge of the legal and regulatory environment is updated through the provision of information by the Group’s advisers and by means of regular briefings from the Company Secretary.

30 Cobham plc

Performance evaluationDuring the year, the Board undertook an evaluation of its own performance and that of individual directors and of the audit, remuneration and nomination committees.

Having in previous years carried out evaluations with the assistance of external consultants and by using specialist evaluation software, the Chairman, on this occasion, led at a meeting of the Board a constructive discussion on various questions relating to performance. The Board noted both that progress had been achieved in a number of areas, for example the development and implementation of Group strategy, and that there were areas where performance could be improved, particularly in relation to the efficient despatch of Board business. As a result, various actions have been identified with a view to further improving performance.

The principal Board committees have considered their own performance. The performance of individual directors was considered by the Chairman and the Chief Executive and the senior independent director discussed the Chairman’s own performance with him.

Financial reportingIn the directors’ view, the Annual Report and Accounts for 2006, together with the Interim and other reports made during the year, present a balanced and understandable assessment of the Company’s position and prospects.

The directors have adopted the going concern basis in preparing the Annual Report and Accounts as stated in the Financial review on pages 16 to 20.

Internal control and risk managementThe Group operates under a system of internal controls which has been developed and refined over time to meet its needs and the risks and opportunities to which it is exposed. These controls are contained in the Corporate Framework and the Group Finance Manual. They include a strategic planning process involving the preparation of a five year plan, a comprehensive budgeting system with an annual budget which is approved by the Board, the regular revision of forecasts for the year, the monitoring of financial performance and the appropriate delegation of authorities to operational management.

Risk management is an integral part of the system of internal control. Divisional Managing Directors and Presidents are required to ensure that appropriate processes, including the maintenance of divisional risk registers, exist to identify and manage risks and, as part of the five year planning exercise, to regularly carry out formal risk assessments. The executive committee undertakes a top-level review of significant risks and reports regularly to the Board on their mitigation. In addition, the audit committee monitors the adequacy of internal financial controls and compliance with Group standards through a self-assessment process involving all subsidiaries, supplemented by regular financial assurance reviews and visits (internal audit).

The Board is responsible for the Group’s system of internal control, the aim of which is to manage risks that are significant to the fulfilment of the Group’s business objectives and to contribute to the safeguarding of shareholders’ investment and the Company’s assets. It is also responsible for reviewing the effectiveness of the system. However, such a system is designed

to manage rather than eliminate the risk of failure to achieve business objectives, and can only provide reasonable and not absolute assurance against material misstatement or loss.

The Board confirms that there is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group. This process, which has been in place for the year under review and up to the date of approval of the Annual Report and financial statements, is regularly reviewed and accords with the guidance for directors on internal control issued by the Turnbull Committee.

The Board receives reports on a regular basis from the executive and audit committees in relation to the effectiveness of the Group’s system of internal control and has, accordingly, reviewed the effectiveness of the Group’s system of internal control in respect of 2006.

Audit committee reportThe Chairman of the committee is Peter Hooley. He is an independent director and the Board is satisfied, since he was a finance director of a FTSE 100 company until mid-2006 and is a chartered accountant, that he has ‘relevant and recent financial experience’ as required by the Code.

The other members of the committee, all of whom are independent directors, are Jeff Edington, Marcus Beresford and John Patterson. Details of their qualifications and experience are set out on pages 24 and 25. During the year the committee met on four occasions.

The committee’s terms of reference, which were reviewed during the year, are available on the Company’s website or on application to the Company Secretary. The committee’s main duties are to monitor the integrity of the Company’s financial statements and any formal announcements relating to its financial performance, to consider the effectiveness of the Group’s internal financial control systems, to monitor and review the effectiveness of the Group’s internal audit activities, to make recommendations as to the appointment, remuneration and terms of engagement of the external auditors and to monitor and review the external auditors’ independence and objectivity and the effectiveness of the audit process.

Meetings of the committee are normally attended by the Company Chairman, the Group Financial Director, senior employees with responsibilities in relation to finance and internal control, and the external auditors. In addition, the committee holds sessions with the external auditors and the head of financial assurance in the absence of executive management. Attendance of non-members is at the discretion, and by invitation, of the committee.

At the majority of its meetings the committee considered reports from the external auditors and also on risk management and controls and financial assurance. Management generated reports were also considered on a number of matters including the pension scheme deficit and funding plans, pension accounting assumptions, revenue recognition, appropriateness of accounting policies, provisions, assets held for disposal, the going concern basis for accounts preparation and corporate governance issues. The Group has formal anti-fraud and whistleblowing policies. The committee receives and considers regular reports on these matters. Under the whistle-blowing policy, individuals can obtain independent advice in relation to possible improprieties in financial reporting and other matters from Public Concern at Work, an independent organisation.

Corporate governance continued


The committee believes that the current arrangements comprising a rotational programme of internal financial control review visits to subsidiaries by head office personnel, business reviews carried out by the Chief Executive and Group Financial Director and a process of self-assessment of internal financial controls by all subsidiaries provides appropriate internal audit coverage of the Group’s activities. Internal financial control reviews are carried out by a dedicated function which reports to the audit committee. Where weaknesses have been identified, plans for remedying them are developed and progress monitored.

The committee and the external auditors have safeguards to avoid the possible compromise of the auditors’ objectivity and independence. These include the adoption by the committee of a policy regarding the supply of audit and non-audit services and of a policy on the employment of external audit staff. Non-audit services involving the review of interim financial information, tax services and accounting advice, and acquisition-related due diligence can be supplied subject to pre-approval by the committee where the cost of any individual engagement exceeds a pre-defined limit. The committee has also received reports from the external auditors confirming their independence and objectivity.

Fees paid to the external auditors during the year ended 31 December 2006 are set out in note 2 of the notes to the Group financial statements.

Shareholder relationsDuring the year the Chief Executive and Group Financial Director held regular meetings with institutional investors, fund managers and investors to discuss information made public by the Group.

In April, June and December briefings were given on three of the new Divisions: Cobham Antennas, Cobham Defence Electronic Systems, and Cobham Avionics and Surveillance. These formed part of a series which started in October 2005 with the Cobham Life Support Division.

Presentations were also given on the announcement of the preliminary and interim results. Copies of the presentation materials can be accessed via the Company’s website at www.cobham.com.

The Chairman and John Patterson, Chairman of the remuneration committee, wrote during the year to various major shareholders by way of consultation on proposals relating to executive remuneration.

The Chairman also wrote to a number of major shareholders reminding them of his availability, and that of Marcus Beresford, the senior independent director, should there be issues which they might wish to raise. In the absence of any request from shareholders no meetings involving the Chairman and the senior independent director have in fact taken place. Shareholders were also offered the opportunity to meet Mark Ronald, the recently-appointed Non-executive Director.

The Board is kept informed of investors’ views through the distribution of analysts’ circulars, the receipt of regular reports from the Company’s brokers and updates from the Chief Executive and Group Financial Director. Correspondence with shareholders is also made available.

Communication with shareholders takes place via RNS announcements, the Company’s website, the annual and interim reports and the AGM. The AGM is attended by all directors and shareholders have the opportunity to hear a statement as to progress made during the year, to question the Board on its stewardship of the Company and to meet directors informally. The results of the votes on the resolutions proposed at the AGM are published on the Company’s website.

Responsibility statementsStatements relating to the responsibilities of the directors are on page 39 and those relating to the auditors are on pages 40 and 87.

Compliance statementThe Board confirms that it complied throughout 2006 with all relevant provisions contained in section 1 of the Code.

32 Cobham plc

Directors’ remuneration report

This report provides the information required by the Directors’ Remuneration Report Regulations 2002 (the ‘Regulations’). It also describes how the Company applies the principles of the Code in relation to remuneration. The report has been approved by the Board and shareholder approval will be sought at the forthcoming AGM.

The remuneration committeeThe committee’s main duties are to make recommendations to the Board on the Group’s policies on Executive Directors’ remuneration and to determine, on the Board’s behalf, the specific remuneration packages of the Chairman, Executive Directors and key senior executives, the majority of whom are members of the Cobham Divisional Executive. The committee’s terms of reference are available on the Company’s website or on application to the Company Secretary.

The committee consists exclusively of independent Non-executive Directors and its members are John Patterson (Chairman), Jeff Edington, Peter Hooley, Marcus Beresford and Mark Ronald (from 8 January 2007). The committee met on eight occasions during 2006. The Chief Executive and Chairman of the Company are invited to attend meetings of the committee, other than when their own remuneration is being discussed.

The committee appointed (in April 2006), and received advice during the year from, Kepler Associates on remuneration strategy, incentive design and market data. Additional advice was received from the Group Director of Human Resources and Company Secretary. Inbucon provided total shareholder return monitoring advice to the committee during 2006. Kepler Associates and Inbucon provide no other services to the Group nor have any connection with the Group.

Remuneration policyThe Board’s policy is to recruit, motivate and retain Executive Directors of high calibre by rewarding them for good performance with competitive remuneration packages. In particular, the executive pay policy for the current and subsequent financial years is designed to retain those executives with the skills and experience necessary to enable the Group to achieve its objectives and satisfy shareholder expectations.

The current remuneration strategy is to position base salaries around the median of the market and to provide an opportunity to enhance this through both short term and long term performance-driven objectives. These incentives are selected in line with the Company’s strategic and financial goals.

The main elements of the remuneration package focus on supporting different objectives, as illustrated below:

Element Purpose Based on:

Salary Provide competitive base pay Employment marketplace and individual responsibilities

Annual bonus Motivate achievement of Earnings per share (‘EPS’) key annual objectives growth, cash flow, personal

objectives

Long term incentives Incentivise profitable growth Total shareholder return and sector outperformance (‘TSR’), EPS growth

Reward relative share price and dividend growth

Provide alignment with shareholders’ interests

During the year, the committee undertook a detailed review of the Company’s remuneration policy to ensure that it remains in line with the Board’s policy, shareholder expectations and recent changes in market practice. As a result of the review, certain changes have been made to the annual bonus for 2007 and shareholders will be asked at the 2007 AGM to approve new long term incentive arrangements. These changes are described in more detail later in this report.

In defining Cobham’s remuneration policy, the committee takes into account best practice guidelines set by institutional investor bodies such as the Association of British Insurers. The Chairman of the Company ensures that the Company, through the committee and its Chairman, maintains contact with principal shareholders about remuneration matters.

Around half of each Executive Director’s remuneration is variable and is linked to performance. The following chart illustrates the proportions of the remuneration package comprising fixed (i.e. salary and pension) and variable elements of pay, assuming target annual bonus and expected values of long term incentives are achieved.

DilutionCobham operates its share schemes within an overall dilution limit of 10% of issued share capital in any ten year period. Of this, 5% may be used in connection with the Company’s discretionary share schemes (e.g. the Cobham Long Term Incentive Plan (‘LTIP’) and the executive share option schemes). As of 31 December 2006, 68.6m (6.1%) and 37.6m (3.3%) shares have been, or may be, issued pursuant to awards made in the previous ten years in connection with all share schemes and discretionary schemes respectively. Awards that are made but then lapse or are forfeited are excluded from the calculations.

Base salaryExecutive directors’ salaries are reviewed annually with changes implemented from 1 January. Salaries are benchmarked by the committee’s advisers against comparable roles in (i) global UK-listed aerospace and defence companies and (ii) UK-based companies with a similar market capitalisation as the Company. When reviewing salaries the committee also assesses individual responsibilities, experience, performance and achievement of personal objectives.

Annual bonusThe Company operates an annual cash bonus scheme for its Executive Directors. Bonuses were awarded by the committee in respect of 2006 having regard to the performance of the Group and personal performance objectives for the year. The maximum annual bonus opportunity for Executive Directors was 80% of base salary, of which 81% was determined by financial performance.

Base salaryAnnual bonusLong Term Incentive PlanExecutive share option schemePension

Executive director pay mix, 2006

Base salaryAnnual bonusLong Term Incentive PlanExecutive share option schemePension

Executive director pay mix, 2006


For Executive Directors, financial performance is measured through EPS growth and cash generation against budget. Personal objectives for the Chief Executive are set and assessed by the Chairman, and by the Chief Executive for the other Executive Directors. The committee reviews and approves annual bonus awards for the Executive Directors and the key senior executives.

The 2006 bonus awards for the Executive Directors other than Alex Hannam were in the range of 58% to 61% of base salary. As disclosed in last year’s report, the maximum annual bonus opportunity for Alex Hannam for 2006 was increased to 120% of base salary following his agreement to continue in office for a year beyond his normal retirement date and in recognition of the fact that he is not eligible to receive further LTIP or executive option awards. His actual bonus award for 2006 accordingly amounted to 98% of base salary.

Long term incentivesExecutive Directors, senior managers and certain other staff are eligible to participate in the Company’s long term incentive arrangements. In 2006, these included the LTIP and the Cobham Executive Share Option Scheme (‘ESOS’). The aggregate value of shares awarded to any individual (excluding senior executives in the USA) under the LTIP and ESOS in any year is not to exceed 1.5 times base salary unless warranted by exceptional circumstances, for example, the recruitment or promotion of a senior executive.

Long Term Incentive PlanConditional share awards of up to a maximum value of 75% of base salary may be granted annually under the LTIP. During 2006, awards were made to 28 senior executives, including the Executive Directors. Vesting of LTIP awards is based on the Company’s three year TSR relative to a comparator group comprising companies in the FTSE engineering and machinery sectors, and the aerospace and defence sectors. Companies in the comparator group for awards granted in 2006 were:

AGA Foodservice Group plc Senior plcBAE Systems plc Halma plc Severfield-Rowen PlcBodycote International plc Hill & Smith Holdings plc Smiths Group plcCastings plc Holdings plc Spirax-Sarco Engineering plcCharter plc IMI plc Tomkins plcChemring Group plc Meggitt plc Ultra ElectronicsCookson Group plc Metalrax Group plc UMECO plcEnodis plc Morgan Crucible plc Vitec Group plcFenner plc Rolls-Royce plc VT Group plcFKI plc Rotork pl.c

Awards vest only if Cobham’s TSR over the three year performance period achieves at least median, at which point 30% of an award would vest. Awards vest in full at upper quartile performance. Awards vest on a straight-line sliding scale for performance between median and upper quartile; no awards vest if performance is below median. In addition, no awards vest unless the Company’s underlying EPS growth has exceeded inflation by an average of 3% per annum over the performance period. To the extent that the performance target is not met over the three year performance period, awards will lapse, i.e. there is no re-testing of the performance condition.

In the event of a change of control, vesting of LTIP awards is not automatic and would depend on the extent to which the TSR-based performance condition had been met at the time.

The committee believes that the use of TSR as a performance measure is justified because it aligns the interests of directors with shareholders by requiring superior TSR performance compared to those companies in the comparator group. The committee will ensure that EPS is calculated on as consistent a basis as is feasible following the transition to International Financial Reporting Standards (IFRS), and that any arbitrary results (driven by such things as the fair valuing of derivative financial instruments) are avoided.

In assessing whether performance conditions have been met, the committee during 2006 relied upon performance status and verification reports prepared by Inbucon. In respect of the LTIP awards made in 2004 and for which the performance period ended 31 December 2006, the Company’s TSR was below median of the comparator group, with the result that none of these awards will vest on 28 April 2007, their third anniversary.

Executive share option schemeThe ESOS was approved by shareholders at the 2004 AGM and includes an ‘Approved’ plan, which has been approved by the Inland Revenue, and an ‘Unapproved’ plan which is not designed for Inland Revenue approval. Options to acquire Cobham Ordinary Shares may be offered to participants up to a maximum annual value of 100% of base salary. Options are granted at a price not less than the market value of the Company’s Ordinary Shares on, or shortly before, the date an option is granted. These can be exercised between three and ten years after grant, subject to certain conditions as described below.

The vesting of options is conditional upon the Company’s underlying EPS growth exceeding inflation by at least 3% per annum over a three year period. If average real EPS growth over three years is between 3% and 5% per annum, shares under option with a value between 50% and 100% of the participant’s base salary would become exercisable. If average real EPS growth exceeds 5% per annum, the option would become exercisable in full. If the performance target is not met, the options lapse. Re-testing of the performance condition is not permitted.

During 2006, options were granted to 84 directors and senior executives.

In the event of a change of control, vesting of ESOS awards is not automatic and would depend on the extent to which the committee determines the performance conditions had been met at the time. Any vested awards not exercised within one month of the change of control would lapse.

EPS growth is considered by the committee to be an appropriate measure of the Company’s performance for the purposes of the ESOS as it is based on underlying financial performance and complements the share price growth needed for the ESOS to have any value.

Other share schemes The Cobham Savings Related Share Option Scheme is an Inland Revenue approved scheme open to UK employees. The maximum that can be saved each month is £250 and savings plus interest may be used to acquire shares by exercising the related option. Options have been granted at a 20% discount to market value. The Executive Directors are permitted to participate in the scheme.

34 Cobham plc

The Company also operates another Inland Revenue approved all-employee share scheme, the Cobham Share Incentive Plan. This scheme operates within specific tax legislation and enables participants to buy Cobham Ordinary Shares out of pre-tax income. The Executive Directors are permitted to participate in the scheme and details of their participation are included in the Table 3(a) on page 37.

Performance graphThe following graph illustrates the TSR performance (share price growth plus dividends) of the Company against the FTSE 350 Index over the past five years. The FTSE 350 Index was chosen as it is a recognised broad equity market index of which the Company is a member.

Remuneration in 2007During the year, the committee undertook a detailed review of the Company’s remuneration policy to ensure that it remains in line with the Board’s policy, shareholder expectations and recent changes in market practice. As a result of the review, certain changes have been made to the annual bonus for 2007 and shareholders will be asked at the 2007 AGM to approve new long term incentive arrangements, as described below.

A benchmarking exercise conducted for the committee by its advisers indicated that the annual bonus opportunity was below median of the selected comparators used for benchmarking salaries. Consequently, the annual bonus opportunity for Executive Directors in the 2007 financial year was increased to 100% of salary, with 50% of salary available to be earned for on-target performance. Awards will continue to be earned for achieving stretching targets linked to EPS and cash flow, and for personal performance against agreed objectives.

250

Cobham

Source: Kepler Associates

100

Valu

e (£

)

150

0

31 Dec 01 31 Dec 02 31 Dec 03 31 Dec 04 31 Dec 05 31 Dec 06

Value of £100 invested over the five year period ending 31 Dec 2006

200

50

FTSE 350

250

Cobham

Source: Kepler Associates

100

Valu

e (£

)

150

0

31 Dec 01 31 Dec 02 31 Dec 03 31 Dec 04 31 Dec 05 31 Dec 06

Value of £100 invested over the five year period ending 31 Dec 2006

200

50

FTSE 350

The committee wishes to encourage Cobham’s executives to invest in Cobham shares. To support this, a new bonus co-investment plan will be presented to shareholders for approval at the 2007 AGM. The proposed plan will allow executives to defer up to 50% of their earned annual bonus into Cobham shares in return for an opportunity to earn matching shares after three years subject to stretching three year economic profit performance.

It is also proposed that the LTIP, which expires in 2007, be replaced by a new performance share plan (‘PSP’), subject to shareholder approval at the 2007 AGM. The proposed PSP allows for annual grants of conditional shares which vest 50% on three year TSR relative to a sector comparator group and 50% on three year real EPS growth.

The committee intends that certain revisions also be made to the ESOS for awards in 2007 and future cycles, subject to shareholder approval at the 2007 AGM. It is proposed that awards to Executive Directors and other senior executives be made over a fixed number of shares to better align the interests of executives and shareholders over time. Awards will continue to vest on three year real EPS growth.

The committee believes that the changes summarised above will help ensure the Company’s incentive arrangements are competitive and help motivate executives to deliver the stretching performance targets incorporated in the Company’s plans. Further details of the proposed bonus co-investment plan, PSP and revisions to the ESOS are contained in the notice of the 2007 AGM.

Directors’ pensionsExecutive Directors participate in the Cobham Executives’ Pension Plan (the ‘Plan’). The Plan provides benefits on final pay principles against a normal pension age of 60 subject to actuarial reduction for earlier retirement. Pension accrues at 1/30th of pensionable earnings, i.e. base salary, for each year of service and participants contribute at the rate of 7% of pensionable earnings.

All pensions in payment relating to post-April 1997 rights are increased in line with the retail prices index, subject to a minimum of 3% per annum and a maximum of 5% per annum, with the balance of pension being increased at 3% per annum. On death in service, a lump sum of four times pensionable earnings is payable together with a spouse’s pension of two-thirds of the member’s prospective pension. On death after retirement, a spouse’s pension is paid at the rate of two-thirds of the member’s pre-commutation pension. Similar spouse’s pensions are payable on the death of a deferred pensioner prior to retirement.

The pension benefits of directors who are members of the Plan were restricted by the Inland Revenue’s earnings cap until 5 April 2006 and thereafter by a scheme specific salary cap. Contributions in respect of such members, with the exception of Warren Tucker, were paid into funded unapproved retirement benefit schemes (FURBS) until 5 April 2006, or the member’s 60th birthday if earlier, and details of the amounts paid are set out in Table 2(b) on page 37. Cash payments in lieu of contributions to a FURBS are made to Warren Tucker as mentioned in the notes to Table 1 on page 36. Following Gordon Page’s retirement as an Executive Director in 2003, no further contributions have been paid into his FURBS.

Directors’ remuneration report continued


The committee reviewed the impact on Executive Directors of the UK tax changes to pensions effective from 6 April 2006. As a result, it was decided that a scheme specific salary cap – which will be 7.5% of the lifetime allowance and similar to the previous earnings cap – would be introduced into the Plan and that no further contributions would be made to FURBS after 6 April 2006. With effect from that date, members, with the exception of Alex Hannam, were offered the choice of directing payments previously made to a FURBS to an approved defined contribution top-up arrangement or of receiving such payments as a non-pensionable cash allowance. These arrangements are anticipated to be broadly cost neutral. All relevant directors have elected for payments since 6 April 2006 to be paid as a non-pensionable cash allowance and these are referred to in the notes to Table 1 on page 36. In the case of Alex Hannam, a sum was paid to a personal pension as set out in the notes to Table 2(b) on page 37. The policy in respect of newly-appointed directors is that payments by the Company to a defined contribution top-up arrangement or in the form of non-pensionable cash allowances should normally be 2% of annual basic salary per month.

Details of directors’ pension benefits as required by the Regulations are set out in Table 2(a) on page 36.

Service contractsThe Board’s policy on notice periods for new directors is that these should not normally exceed one year. It recognises, however, that it may be necessary in the case of new executive appointments to offer a longer initial notice period which would subsequently reduce to one year. Allan Cook’s service contract (dated 13 June 2001) is terminable on one year’s notice by either party. Alex Hannam’s service contract (dated 13 February 2003 and subsequently amended) is currently due to expire on 31 December 2007. Warren Tucker’s and Andy Stevens’ service contracts (both of which are dated 1 January 2004) are terminable on one year’s notice by, and six months’ notice to the Company. Service contracts are being reviewed in light of recent changes to legislation on age discrimination.

The Company may elect to terminate directors’ service contracts by making payments in lieu of notice. Such payments are calculated by reference to the base salary otherwise payable during the notice period. Payments in respect of annual bonus for the relevant periods may also be payable. In the case of Warren Tucker, any payment in lieu of notice shall include a sum equal to the value of his annual benefits. The Company recognises and endorses the obligation of departing directors to mitigate their own losses.

No Executive Director currently holds a Non-executive Directorship with any other company.

Personal shareholdingExecutive Directors are encouraged to acquire and hold, over time, Cobham Ordinary Shares to the value of at least one year’s salary. The committee recognises, however, that shares have not been released from the LTIP in recent years and that this has affected the ability of directors to build up personal shareholdings.

Non-executive DirectorsThe Board aims to recruit Non-executive Directors of a high calibre with broad commercial, international or other relevant experience. The Non-executive Directors do not have service contracts. Details of the terms of the appointment of the current Non-executive Directors are as follows:

Director Commencement date Expiry date

Gordon Page 1 December 2003 17 November 2008Jeff Edington 2 October 1996 30 June 2007John Patterson 1 November 2005 31 October 2008Marcus Beresford 1 March 2004 28 February 2010Mark Ronald 8 January 2007 7 January 2010Peter Hooley 12 June 2002 30 June 2008

Except in Gordon Page’s case, no compensation is payable in the event of an appointment being terminated early. Under Gordon Page’s letter of appointment, six months’ notice of termination is required to be given by either party. As a result, compensation might be payable for earlier termination. Each Non-executive Director has given an undertaking that he has sufficient time to meet what is expected of him as a director.

The general purposes committee, the membership of which comprises Executive Directors only, is responsible for determining the remuneration of the Non-executive Directors with the exception of the Chairman, whose remuneration is determined by the remuneration committee. Fee levels were increased in January 2006 in recognition of the increasing demands being placed on the Non-executive Directors and the need for competitive fees to be paid to attract and retain directors of the appropriate quality. The fees payable are as follows:

Fees payable from

1 January 2006

Chairman £160,000Basic Non-executive Director fee £39,000Chairman of audit committee £10,000Chairman of remuneration committee £10,000Senior Independent Director £10,000Membership of audit and remuneration committees £2,500

Non-executive Directors do not participate in any of the Company’s share schemes, pension schemes or bonus arrangements with the exception of Gordon Page who receives a pension under the Plan.

With effect from his appointment on 8 January 2007, Mark Ronald receives an allowance of £5,000 in respect of the additional travelling required to ensure his attendance at Board meetings.

Auditable partThe auditable part of this Directors’ remuneration report is set out on pages 36 to 38.

36 Cobham plc


Table 1: Directors’ emolumentsThe remuneration of the directors, including the Chairman and the highest paid director, was as follows:

Executive directors’ Fees and Benefits Total base salaries other payments Bonus excluding pension excluding pension 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000

G F Page1 – – 171 194 – – 29 29 200 223A E Cook2 500 440 132 – 292 343 34 26 958 809G C Cooper3 – 213 148 125 – 30 – 22 148 390A J Hannam4 262 246 13 13 258 130 1 1 534 391W G Tucker5 345 321 77 77 212 266 21 23 655 687A J Stevens6 366 321 97 30 210 128 24 24 697 503J D M Smith – – – 13 – – – – – 13J W Edington – – 44 25 – – – – 44 25P Hooley – – 51 30 – – – – 51 30M Beresford – – 54 25 – – – – 54 25J S Patterson – – 51 5 – – – – 51 5Total Remuneration 1,473 1,541 838 537 972 897 109 125 3,392 3,101

Subject as follows, benefits relate to the provision of Company cars and fuel, medical insurance, telephones and subscriptions. Allan Cook’s benefits include the provision of professional advice and life assurance. Alex Hannam’s benefits relate to medical insurance. Warren Tucker’s benefits do not include subscriptions. Andy Stevens’s benefits do not include telephones.

1 Emoluments include – under fees and other payments (‘Payments’) – the sum of £9,000 (2005: £34,000) paid as a gratuity in view of Gordon Page’s inability until 6 April 2006 to draw pension benefits whilst continuing to act as a director.

2 Emoluments for 2006 include – under Payments – the sum of £132,000 in lieu of payments into an approved defined contribution top-up arrangement.3 On 17 June 2005 Geoff Cooper gave 12 months’ notice of his intention to resign. The Board considered that it was in the Company’s interests for the resignation to be

accepted with immediate effect. A compensation payment of £125,000 was paid and is included in emoluments for 2005 under Payments. A further compensation payment amounting to £148,000 was paid during 2006.

4 Emoluments for 2005/6 include – under Payments – a cash allowance of £13,000 (2005: £13,000) in respect of the provision of a car and fuel. This payment is not taken into account in calculating bonus and share scheme entitlements.

5 Emoluments for 2005/6 include – under Payments – a cash payment of £19,000 (2005: £77,000) in lieu of payments into a funded unapproved retirement benefits scheme and the sum of £58,000 (2005: nil) in lieu of payments to an approved defined contribution top-up arrangement. These payments are not taken into account in calculating bonus and share scheme entitlements.

6 Emoluments for 2005/6 include – under Payments – the sum of £67,000 (2005: nil) in lieu of payments to an approved defined contribution top-up arrangement and £30,000 (2005: £30,000) in connection with the acceptance of office. These payments are not taken into account in calculating bonus and share scheme entitlements.

Table 2(a): Directors’ pensions

Increase Transfer value in accrued of pension Additional pension from Additional accrued transfer value previous pension in excess Transfer accrued in year end earned of inflation value of Transfer excess of Accrued (with no in excess and members’ accrued value of members’ pension at adjustment of inflation contributions pension at accrued contributions 31/12/06 for inflation) during 2006 during 2006 31/12/05 pension during 2006 £ p.a. £ p.a. £ p.a. £ £ £ £

G F Page 41,870 0 0 0 1,185,116 1,093,431 -91,685A E Cook 22,188 4,881 4,414 73,444 292,182 452,744 143,946A J Hannam 13,778 1,751 1,426 17,710 263,221 314,879 47,698A J Stevens 11,563 4,229 4,031 46,058 78,420 179,767 84,731W G Tucker 13,750 4,363 4,110 42,904 76,559 169,480 85,167

Gordon Page received benefits from the Plan from 6 April 2006. The pension figure shown for him is at this date after payment of a cash sum of £158,044.

The accrued pension shown is that which would be paid annually on retirement based on service to the end of the financial year. The transfer values represent the present value of future payments from the pension plan rather than remuneration currently due to the individual and cannot be meaningfully aggregated with annual remuneration. Members of the pension plan have the option of paying additional voluntary contributions. Neither the contributions nor the resulting benefits are included in the above.

Inflation during 2006 has been taken to be 2.7% being the statutory increase to deferred pensions from 2005 to 2006.

Transfer values payable are calculated in accordance with Section 4 ‘Minimum Cash Equivalent’ of Guidance Note 11 issued by the Institute and Faculty of Actuaries.


Table 2(b)Allan Cook, Alex Hannam and Andy Stevens were subject to the Inland Revenue capping rules until 5 April 2006 and the following Company contributions, which are taxable benefits, relate to funded unapproved retirement benefit schemes:

20062 2005 £000 £000

A E Cook 38 3141

A J Hannam3 14 57A J Stevens 20 77

1 This includes a one-off contribution of £165,000 in compensation for a shortfall in the value of Allan Cook’s fund compared to the level of benefits originally targeted.2. The contributions made in 2006 relate to the period ending on 5 April (or the member’s 60th birthday if earlier). Subsequently, cash payments in lieu of payments to an

approved defined contribution top-up arrangement were made to directors, other than Alex Hannam, and these are referred to in the notes to table 1.3 In addition, a payment of £97,000 (2005: nil) was made to Alex Hannam’s self-invested pension plan in connection with the extension of his service contract in lieu of

continued pension accrual under the Company’s pension arrangements.

Table 3(a): Directors’ share interestsThe interests of the directors and their families in Cobham plc’s Ordinary Shares were: Ordinary Shares At 1.1.06 At 31.12.06

G F Page 1,811,546 1,812,171A E Cook 46,880 47,669A J Hannam 41,260 42,049W G Tucker 13,885 30,058A J Stevens 1,110 17,099J W Edington – –P Hooley – –M Beresford 15,000 15,000J S Patterson – –

The above interests are all beneficial. Interests in share options and shares provisionally allocated under the Cobham Long Term Incentive Plan are not included in Table 3(a) but are disclosed in Tables 3(b) and 4 respectively.

Interests at 28 March 2007 being a date no more than one month prior to the date of the notice convening the AGM, were the same as at 31 December 2006.

38 Cobham plc

Table 3(b): Directors’ share optionsDetails of directors’ interests in options over Cobham plc’s Ordinary Shares granted under the Cobham Savings Related Share Option Scheme and the Cobham Executive Share Option Scheme 2004 were:

Market price at Exercise date of Date from At Number of options during the year At price exercise which Expiry 1.1.06 Granted Exercised Lapsed 31.12.06 – pence – pence exercisable date

A E Cook 16,600 – – 16,600 84 – 01/02/09 01/08/09 3,780 – – 3,780 93.9 – 01/02/11 01/08/11 228,230* – – 228,230 134.73 – 20/09/07 20/09/14 246,820* – – 246,820 133.7 – 11/05/08 11/05/15 269,789* – – 269,789 185.33 – 20/04/09 20/04/16 4,620 4,620 153 – 01/02/10 01/08/10 495,430 769,839

A J Hannam 7,420 – – 7,420 93.9 – 01/02/09 01/08/09 4,930 – – 4,930 107.6 – 01/02/08 01/08/08 128,030* – – 128,030 134.73 – 20/09/07 20/09/14 138,000* – – 138,000 133.7 – 11/05/08 11/05/15 – – 278,380 278,380

W G Tucker 16,610 – – 16,610 107.6 – 01/02/12 01/08/12 155,860* – – 155,860 134.73 – 20/09/07 20/09/14 180,070* – – 180,070 133.7 – 11/05/08 11/05/15 186,154* – – 186,154 185.33 – 20/04/09 20/04/16 352,540 538,694

A J Stevens 15,350 – – 15,350 107.6 01/02/10 01/08/10 167,000* – – 167,000 134.73 20/09/07 20/09/14 180,070* – – 180,070 133.7 11/05/08 11/05/15 202,341* – – 202,341 185.33 20/04/09 20/04/16 362,420 564,761

* Granted under the Cobham Executive Share Option Scheme 2004. All other options were granted under the Cobham Savings Related Share Option Scheme.

The market price of Cobham Ordinary Shares as at 31 December 2006 was 193.75p per share and the closing price range during the year was 153.0p to 195.5p.

No gains were made by directors on the exercise of share options during the year.

Table 4: Allocations under the Cobham Long Term Incentive Plan

Conditionally Monetary awarded Lapsed Vested value Allocation during during during Allocations of vested at 1/1/06 the year1 the year2 the year at 31/12/06 awards £ Expiry date3

A E Cook 847,320 138,681 351,600 – 634,401 – 20/04/09A J Hannam 473,640 196,010 – 277,630 – 20/04/09W G Tucker 512,010 95,690 162,170 – 445,530 – 20/04/09A J Stevens 616,010 208,021 253,810 – 570,221 – 20/04/09

1 The market price of a Cobham plc Ordinary Share on 20 April 2006, being the date of the awards made during the year, was 182.75p. 2 Lapsed shares comprise those shares conditionally awarded in 2003.3 The expiry date is the last date by which qualifying conditions in respect of any outstanding interests under the LTIP have to be fulfilled. This date may either be the

expiry of any relevant holding period or (where applicable) of any restricted period.

Interests at 28 March 2007, being a date not more than one month prior to the date of the notice convening the AGM, were the same as at 31 December 2006.

By order of the BoardJ S Patterson Chairman of the Remuneration Committee28 March 2007



The following statement sets out the responsibilities of the directors in relation to both the Group and the parent company’s financial statements and the Annual Report. The reports of the independent auditors on page 40 and page 87 set out the auditors’ responsibilities.

The directors are responsible for preparing the Annual Report and the Group financial statements in accordance with applicable law and International Financial Reporting Standards (IFRS) as adopted by the European Union, and for preparing the parent company financial statements and the Directors’ remuneration report in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).

The directors are responsible for preparing financial statements for each financial year which give a true and fair view, in accordance with IFRS as adopted by the European Union, of the state of affairs of the Group and of the profit or loss of the Group and a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of affairs of the Company for that period. In preparing those financial statements, the directors are required to:

select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; state whether the Group financial statements comply with IFRS as adopted by the European Union, and with regard to the parent company financial statements whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business.

The directors confirm that they have complied with the above requirements in preparing the financial statements.

The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and the Group and to enable them to ensure that the Group financial statements comply with the Companies Act 1985 and Article 4 of the IAS Regulation and the parent company financial statements and the Directors’ remuneration report comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Statement of directors’ responsibilities

40 Cobham plc

We have audited the Group financial statements of Cobham plc for the year ended 31 December 2006 which comprise the consolidated income statement, the consolidated balance sheet, the consolidated cash flow statement, the statement of recognised income and expense, the related notes and the accounting policies. These Group financial statements have been prepared under the accounting policies set out therein.

We have reported separately on the parent company financial statements of Cobham plc for the year ended 31 December 2006 and on the information in the Directors’ remuneration report that is described as having been audited.

Respective responsibilities of directors and auditorsThe directors’ responsibilities for preparing the Annual Report and the Group financial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the Statement of directors’ responsibilities.

Our responsibility is to audit the Group financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). This report, including the opinion, has been prepared for and only for the Company’s members as a body in accordance with Section 235 of the Companies Act 1985 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

We report to you our opinion as to whether the Group financial statements give a true and fair view and whether the Group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation. We also report to you whether in our opinion the information given in the Directors’ report is consistent with the Group financial statements.

In addition we report to you if, in our opinion, we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors’ remuneration and other transactions is not disclosed.

We review whether the Corporate governance statement reflects the Company’s compliance with the nine provisions of the Combined Code (2003) specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures.

We read other information contained in the Annual Report and consider whether it is consistent with the audited Group financial statements. The other information comprises only the Chairman’s statement, the Chief Executive’s review, the Business review, the Financial review, the statement on Corporate Responsibility, the statement on strategy, the Directors’ report, the Corporate governance statement and the unaudited part of the Directors’ remuneration report.

We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Group financial statements. Our responsibilities do not extend to any other information.

Basis of audit opinionWe conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Group financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the Group financial statements, and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Group financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the Group financial statements.

OpinionIn our opinion:

the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Group’s affairs as at 31 December 2006 and of its profit and cash flows for the year then ended; the Group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation; and the information given in the Directors’ report is consistent with the Group financial statements.

PricewaterhouseCoopers LLPChartered Accountants and Registered AuditorsSouthampton28 March 2007

Notes:a) The maintenance and integrity of the Cobham plc website is

the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.

b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Independent auditors’ report to the members of Cobham plc


General informationThese financial statements are the consolidated financial statements of Cobham plc, a public limited company registered and domiciled in the United Kingdom and its subsidiaries (‘the Group’). The address of the registered office is Brook Road, Wimborne, Dorset, England BH21 2BJ.

Basis of preparationThese consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU, International Financial Reporting Interpretation Council (IFRIC) interpretations and those parts of the Companies Act 1985 applicable to companies reporting under IFRS.

These financial statements have been prepared under the historical cost convention, as modified by the revaluation of certain borrowings and derivative contracts which are held at fair value.

The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates.

The following amendments to and interpretations of existing standards have been adopted from 1 January 2006:

IAS 39 (Amendment), The Fair Value Option IAS 39 (Amendment), Financial Guarantee Contracts IFRIC 4, Determining whether an Arrangement contains a Lease.

No adjustments were required on adoption of these amendments to and interpretations of existing standards.

The following new standards, amendments and interpretations to existing standards which would be effective for the current year are not considered relevant to the Group’s operations:

IAS 39 (Amendment), Cash Flow Hedge Accounting of Forecast Intra-group Transactions IFRS 6, Exploration for and Evaluation of Mineral Resources (and amendment) IFRIC 5, Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds IFRIC 6, Liabilities arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment.

The principal accounting policies, which have been consistently applied are as set out below. Basis of consolidationThe Group financial statements include the financial statements of the parent company and of all its subsidiaries made up to the end of the financial period. Joint ventures and associates are accounted for using the equity method and include the Group’s share of the total recognised gains and losses of joint ventures and associates from the date that joint control or significant influence commences until the date this ceases.

Businesses acquired are accounted for as acquisitions, with effect from the date control passes. Purchases of minority interests are accounted for using the economic entity method.

Businesses disposed of are accounted for up until control passes at the point of their disposal. The results of businesses disposed of, and of those classified as held for sale at the year end are disclosed as arising from discontinued operations where they meet the criteria to be treated as such.

All intra-Group transactions, balances, income and expenses are eliminated on consolidation.

Underlying measuresTo assist with the understanding of earnings trends, trading profit (formerly underlying operating profit) and underlying earnings have been defined to exclude the impact of the amortisation of intangible assets recognised on acquisition and the impact of marking to market of foreign exchange derivatives not realised in the period. All underlying measures also include the revenue and operational results of both continuing and discontinued businesses until the point of sale, but exclude exceptional profits or losses arising on disposals actually completed during the period and impairments of goodwill.

Revenue recognitionRevenue is measured at the fair value of the right to consideration and is recognised when legal title and the risks and rewards of ownership have been passed to the customer. Revenue for services is recognised as the services are rendered. It excludes inter-Company sales, value added tax and other sales taxes. In the case of long-term contracts, revenue is recognised based upon the fair value of work performed to date assessed with reference to contract milestones.

PensionsThe Group operates a number of defined benefit and defined contribution schemes.

For defined benefit schemes the amounts charged to operating profit are the current service costs. Gains and losses on settlements and curtailments are included in profit on disposal. Past service costs are recognised immediately in the income statement if the benefits have vested. If the benefits have not vested, the costs are recognised over the period until vesting occurs. The expected return on assets and interest cost are shown within finance income and expense. Actuarial gains and losses are recognised immediately in the statement of recognised income and expense.

Defined benefit schemes are funded, with the assets of the scheme held separately from those of the Group, in separate trustee administered funds. Pension scheme assets are measured at fair value and liabilities are measured on an actuarial basis using the projected unit method and discounted at a rate equivalent to the current rate of return on a high quality corporate bond of equivalent currency and term to the scheme liabilities. The actuarial valuations are obtained at least triennially and are updated at each balance sheet date. The resulting defined benefit asset or liability is presented separately on the face of the balance sheet.

For defined contribution schemes the amounts charged to the income statement in respect of pension costs and other post-retirement benefits are the contributions payable in the year. Differences between contributions payable in the year and contributions actually paid are recorded as either accruals or prepayments in the balance sheet.

Accounting policies

42 Cobham plc

Taxation including deferred taxationThe tax expense relates to the sum of current tax and deferred tax.

Current tax is based on taxable profit for the year, which differs from profit before taxation as reported in the income statement. Taxable profit excludes items of income and expense that are taxable or deductible in other years and also excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using rates that have been enacted or substantively enacted at the balance sheet date.

Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising between the tax bases of assets and liabilities and their carrying values in the consolidated financial statements.

Temporary differences arise primarily from the recognition of the deficit on the Group’s defined benefit pension schemes and accelerated tax depreciation. Deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the assets to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled. Tax is charged or credited to the income statement except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

Tax assets and liabilities are offset when there is a legally enforceable right to enforce current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority.

DividendsDividends are recognised as a liability in the period in which they are fully authorised.

Share-based remunerationFor grants made under the Group’s equity-settled share-based remuneration schemes, amounts which reflect the fair value of options awarded as at the time of grant are charged to the income statement over the relevant vesting periods.

The costs of awards made under cash-settled share-based remuneration schemes are measured initially at the grant date and expensed over the vesting period. The liability is remeasured at each balance sheet date up to and including the settlement date with changes in fair value recognised through the income statement.

The valuation methodology for all schemes is based on the Black-Scholes model, modified where required to allow for the impact of market related performance criteria.

The Group has taken advantage of the transitional provisions of IFRS 2 (Share-based payments) in respect of equity-settled awards and has applied IFRS 2 only to equity-settled awards granted after 7 November 2002.

Intangible assetsGoodwillGoodwill represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets and liabilities of a business, subsidiary or joint venture at the date of acquisition.

Goodwill arising on overseas acquisitions since the date of transition to IFRS is treated as a foreign currency asset and revalued at the balance sheet date. Foreign exchange differences arising are taken to the translation reserve and recycled to the income statement when the related subsidiary is sold.

Goodwill arising on acquisitions of businesses, subsidiaries and joint ventures is capitalised and reviewed for impairment at least annually. Any impairment is recognised immediately in the income statement and cannot be subsequently reversed.

Goodwill arising on the purchase of minority interests is taken to reserves under the economic entity method.

On disposal of a subsidiary or joint venture, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.

Research and DevelopmentResearch expenditure not chargeable to customers is written off as incurred. Development costs not chargeable to customers are written off as incurred until it can be demonstrated that the conditions for capitalisation as described in IAS 38 (Intangible assets) are met, at which point further costs are capitalised as intangible assets until the intangible asset is readily available for production and amortised on a straight-line basis over the asset’s estimated useful life.

Other intangible assetsIntangible assets other than goodwill which are acquired by the Group are stated at cost less accumulated amortisation and impairment losses. These include customer lists, technology and software, trademarks, licences and patents. The only internally generated intangible assets are development costs which are capitalised as described above, and internally developed software where asset recognition criteria are met.

All other intangible assets are amortised over the asset’s estimated useful life on a straight line basis as follows:

Customer lists 2 to 15 years Technology and software 2 to 10 years Development costs 2 to 10 years Other intangible assets 6 months to 10 years

Property, plant and equipmentFreehold land is not depreciated, but is reviewed for impairment at least annually.

Freehold and leasehold buildings, plant and equipment are held at historic cost less accumulated depreciation and any recognised impairment losses. Carrying values are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.

Accounting policies continued


All property, plant and equipment other than land is depreciated on a straight-line basis to the estimated residual values over the estimated useful lives. These lives are as follows: Freehold buildings (including investment properties) 50 years Leasehold properties The period of the lease Plant and equipment and other fixed assets 3 to 15 years

Estimated residual values and the estimated useful lives are reviewed annually and adjusted where necessary.

Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease.

The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income statement.

Investment propertiesInvestment properties, which are properties held to earn rentals and/or for capital appreciation, are stated at cost at the balance sheet date. They are depreciated on a straight-line basis to their estimated residual value over their estimated useful lives.

Aircraft overhaul expenditureMajor overhaul expenditure on owned aircraft is capitalised when incurred and the resultant fixed asset depreciated over its useful economic life. Major overhaul costs that are contractually required on aircraft held under operating leases are provided for over the period between the scheduled maintenance events.

Non-current assets held for saleNon-current assets (and disposal groups) classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell. These items are so classified if their carrying amount will be recovered through a sale transaction within 12 months of the balance sheet date rather than through continuing use.

InventoriesInventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Cost is calculated using the first-in, first-out method. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. Payments received and receivable on account of work in progress are deducted from the cost of work carried out at the balance sheet date to the extent of the valuation of the work done. Financial instrumentsFinancial assets and financial liabilities are recognised on the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument. Financial assets are recognised at trade date.

When a financial asset or liability is recognised initially, it is measured at its fair value plus, in the case of a financial asset or financial liability not at fair value through profit and loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability.

Trade receivablesTrade receivables do not carry any interest and are stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts.

Financial liabilities and equity instrumentsFinancial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.

Bank borrowingsInterest-bearing bank loans and overdrafts are recorded at the amount of proceeds received, net of direct issue costs. Borrowing costs, net of amounts capitalised, including premiums payable on settlement or redemption and direct issue costs, are charged to the income statement and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. Borrowing costs that are directly attributable to relevant property, plant and equipment are capitalised as part of the cost of that asset.

Cash and cash equivalentsCash and cash equivalents comprise cash balances and call deposits with an original maturity of three months or less. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the consolidated cash flow statement.

LeasingLeases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. Leases include hire purchase contracts which have characteristics similar to operating or finance leases. All other leases are classified as operating leases.

Assets held under finance leases are recognised as assets of the Group at their fair value or, if lower, at the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income.

Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease.

Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over the lease term.

Derivative financial instruments and hedge accountingDerivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged.

The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. The Group uses foreign exchange forward contracts, interest rate swap contracts and net investment hedges to reduce these exposures. The Group does not use derivative financial instruments for speculative purposes.

The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.

Fair value hedgesChanges in fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The gains or losses relating to interest rate swaps hedging fixed rate borrowings are recognised in the income statement.

If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortised to the income statement over the period to maturity.

Cash flow hedgeThe effective portion of changes in fair value of derivatives that are designated and qualify as cash flow hedges are recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are recycled to the income statement in the periods when the hedged item affects profit or loss.

When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is immediately transferred to the income statement for the period.

Net investment hedgesHedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in equity; the gain or loss relating to the ineffective portion is recognised immediately in the income statement.

Gains or losses accumulated in equity are included in the income statement when the foreign operation is disposed of.

Foreign currenciesThe functional currency of the parent company is sterling. Most Group companies use their local currency as their functional currency. Local transactions in currencies other than the functional currency are translated at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denoted in non-functional currencies are retranslated at the exchange rate ruling at the balance sheet date and any exchange differences arising are taken to the income statement except when deferred in equity as net investment hedges.

In order to manage its exposure to certain foreign exchange risks the Group enters into forward contracts and options which are accounted for as derivative financial instruments.

The Group has determined that the portfolio hedging mechanism that it utilises to cover its forward currency exposures is the most appropriate commercial response to the nature of the risks faced. The Group manages foreign currency exposures on a macro basis and has chosen not to apply hedge accounting for its future foreign exchange transactions under IAS 39. As required by the Standard, these instruments are recorded on the balance sheet at fair value and movements in fair value recorded through the income statement.

For consolidation purposes the assets and liabilities of overseas subsidiary undertakings and joint ventures are translated at the closing exchange rates. Income statements of such undertakings are consolidated at the average rates of exchange as an approximation for actual rates during the year. Exchange differences arising on these translations are taken to translation reserve.

ProvisionsA provision is required when the Group has a present legal or constructive obligation as a result of a past event and it is probable that settlement will be required of an amount that can be reliably estimated.

Provisions for warranty costs are recognised at the date of sale of the relevant products, at the directors’ best estimate of the expenditure required to settle the Group’s liability.

Provisions for onerous contracts are recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract.

Provisions for contingent consideration are recognised when it is considered probable that the conditions attaching to potential payment will be met.

Provisions for major repair and maintenance costs on aircraft held under operating leases are provided over the period to the next inspection so as to match the costs with benefits received.

Long term liabilities and provisions are discounted at an appropriate risk-free rate when the impact is material.

Impairment lossesThe carrying amounts of the Group’s assets are reviewed at least annually to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated.

Accounting policies continued

44 Cobham plc


The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

An impairment loss is recognised where the carrying amount of an asset is less than its recoverable amount. An intangible asset with an indefinite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired. Any impairment losses are recognised in the income statement.

An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. A reversal is recognised in the income statement.

Share capitalPreference share capital is classified as a liability if it is redeemable on a specific date or at the option of the preference shareholders or if dividend payments are not discretionary. Dividends on preference share capital classified as liabilities are recognised in the income statement as finance expense.

Segment accounting policiesFor reporting purposes the results of the Group are allocated between six operating divisions and ‘Other Activities’. These operate in specific market areas and are as described in note 1. The Group accounting policies as described above are applied consistently across all divisions and activities. Trading between Group companies is contracted and priced at arm’s length commercial terms.

Critical accounting estimates and judgementsEstimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

Management judgementIn the process of applying the Group’s accounting policies, management has made a number of judgements, none of which are considered to have a significant effect on the amounts recognised in the financial statements.

Estimation uncertaintyThe Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities in the next financial year are as follows:

Impairment of goodwillThe Group determines whether goodwill is impaired at least on an annual basis. This requires estimation of the value in use of the cash generating units to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash generating units and also to choose a suitable discount rate

in order to calculate the present value of those cash flows. The carrying amount of goodwill at 31 December 2006 was £381.8m (2005: £424.0m), further details are given in note 13.

TaxationThe Group is subject to taxes in numerous jurisdictions. Significant judgement is required in determining the worldwide provision for tax. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current tax provision, deferred tax provisions and income statement in the period in which such determination is made.

Accounting standards not yet effectiveCertain new standards, amendments to and interpretations of existing standards have been published that are mandatory for the Group’s accounting periods beginning on or after 1 January 2007 or later periods but which the Group has not adopted early, are as follows:

IFRS 7, Financial Instruments: Disclosures, and a complementary amendment to IAS 1, Presentation of Financial Statements – Capital Disclosures (applicable from 1 January 2007) IFRS 7 and this amendment to IAS 1 introduce new disclosures of information about financial instruments and capital management. The impact of these changes to the Group is that additional disclosures will be required concerning the sensitivity analysis to market risk and the management of capital. These will be applied for the year ended 31 December 2007 IFRS 8, Operating Segments (applicable from 1 January 2009) IFRS 8 is not expected to have an impact on the Group’s reporting of segmental information IFRIC 7, Applying the restatement approach under IAS 29 financial reporting in hyperinflationary economies IFRIC 7 is not relevant to the Group’s operations IFRIC 8, The Scope of IFRS 2 There is no impact of IFRIC 8 on the Group’s operations IFRIC 9, Reassessment of embedded derivatives There is no impact of IFRIC 9 on the Group’s operations IFRIC 10, Interim financial reporting and impairment This will be assessed at each appropriate accounting period IFRIC 11, IFRS 2 Share-based payment – Group and Treasury Share Transactions There is no impact of IFRIC 11 on the Group’s operations IFRIC 12, Service Concession Arrangements Management is currently assessing the impact of IFRIC 12 on the Group’s operations.

46 Cobham plc

£m Note 2006 2005

Continuing operations

Revenue 1, 2 1,012.1 970.3Cost of sales (679.2) (682.2)Gross profit 332.9 288.1 Selling and distribution costs (57.1) (54.7)Administrative expenses (102.6) (83.4)Share of post-tax results of joint ventures and associates 4.7 3.1Gain / (loss) on revaluation of currency instruments 25 10.8 (16.1)Operating profit 1 188.7 137.0

Finance income 3 47.2 31.6Finance expense 3 (50.7) (42.6)Profit on continuing operations before taxation 185.2 126.0Tax on continuing operations 4 (50.7) (35.3)Profit on continuing operations after taxation 134.5 90.7Discontinued operationsProfit after taxation from discontinued operations 30 13.8 7.4Profit after taxation for the year 148.3 98.1

Profit attributable to equity shareholders 148.1 97.6Profit attributable to minority interests 0.2 0.5Profit after taxation for the year 148.3 98.1

Earnings per Ordinary Share 6 – Basic 13.13p 8.71p – Fully diluted 13.00p 8.66p Earnings per Ordinary Share from continuing operations 6 – Basic 11.90p 8.05p – Fully diluted 11.79p 8.01p

Trading profit is calculated as follows: £m Note 2006 2005

Operating profit from continuing operations 1 188.7 137.0Adjusted to exclude: Profit on disposal of undertakings 31 (1.5) –(Gain) / loss on revaluation of currency instruments 25 (10.8) 16.1Amortisation of intangible assets arising on acquisition 9.1 16.9Trading profit from continuing operations 185.5 170.0Trading profit from discontinued operations 30 0.8 7.7Trading profit 7 186.3 177.7

Consolidated income statementFor the year ended 31 December 2006


£m Note 2006 2005

AssetsNon-current assetsIntangible assets 12 482.6 528.1Property, plant and equipment 14 187.6 202.8Investment properties 15 6.4 4.0Investments in joint ventures 16 15.7 14.7Trade and other receivables 18 9.2 8.5Derivative financial instruments 25 8.6 4.5Deferred taxation assets 22 6.9 6.8 717.0 769.4Current assetsInventories 17 160.2 167.2Trade and other receivables 18 182.6 208.5Corporation tax 3.2 2.1Derivative financial instruments 25 7.0 1.7Cash and cash equivalents 19 364.3 251.8Assets classified as held for sale 33 – 18.1 717.3 649.4LiabilitiesCurrent liabilitiesBorrowings 23 (231.2) (276.9)Trade and other payables 20 (182.6) (174.2)Derivative financial instruments 25 (1.8) (3.5)Corporation tax (45.1) (48.1)Provisions 21 (38.0) (42.7)Liabilities classified as held for sale 33 – (14.2) (498.7) (559.6)Non-current liabilities Borrowings 23 (132.2) (151.6)Trade and other payables 20 (7.8) (7.8)Derivative financial instruments 25 (2.5) (2.0)Deferred taxation liabilities 22 (25.6) (8.8)Provisions 21 (22.9) (20.9)Retirement benefit obligations 9 (29.6) (81.0) (220.6) (272.1)Net assets 715.0 587.1

Capital and reserves Called up share capital 26 28.3 28.1Share premium account 27 94.2 87.5Translation reserve* 27 (8.9) 1.9Other reserves 27 16.0 11.3Retained earnings* 27 585.3 456.8Total shareholders’ equity 714.9 585.6Minority interest in equity 0.1 1.5Total equity 715.0 587.1

Net cash / (debt) 11 0.9 (168.3) * The translation reserve and retained earnings as at 31 December 2005 have been restated (see note 27).

Approved by a duly appointed and authorised committee of the Board on 28 March 2007 and signed on its behalf by:

Gordon PageWarren TuckerDirectors

Consolidated balance sheetAs at 31 December 2006

48 Cobham plc

£m Note 2006 2005

Cash flows from operating activities

Cash generated from operations 11 192.4 210.3Corporation taxes paid (46.2) (39.2)Interest paid (27.6) (23.6)Interest received 20.3 11.9Net cash from operating activities 138.9 159.4

Cash flows from investing activities

Dividends received from joint ventures 4.3 1.2Proceeds on disposal of property, plant and equipment 15.2 6.4Purchase of property, plant and equipment (52.9) (38.9)Purchase of intangible assets 12 (1.4) (4.0)Capitalised expenditure on intangible assets 12 (0.3) (1.7)Acquisition of subsidiaries net of cash acquired 29 (12.2) (189.0)Acquisition of minority interests (4.2) –Payment of deferred consideration (7.3) (2.3)Disposal of undertakings 31 83.5 149.4Contingent consideration received 31 2.9 –Special pension contributions relating to disposals 9 (11.5) (24.0)Investment in joint ventures and associates – 1.0Net cash from / (used in) investing activities 16.1 (101.9)

Cash flows from financing activities

Issue of share capital 6.9 6.1Dividends paid 5 (39.7) (35.8)Dividends paid to minority interests – (0.3)New borrowings 78.6 569.0Repayment of borrowings (81.9) (432.9)Repayment of obligations under finance leases (0.2) (12.8)Net cash (used in) / from financing activities (36.3) 93.3

Net increase in cash and cash equivalents 118.7 150.8Cash and cash equivalents at start of year 246.6 101.4Initial application of IAS 21, 32 and 39 – (7.6)Exchange movements (4.9) 2.0Cash and cash equivalents at end of year 19 360.4 246.6

Cash and cash equivalents as at 31 December 2005 include £8.3m cash held in discontinued businesses as detailed in note 33. A reconciliation of cash and cash equivalents to the balance sheet is detailed in note 19.

Consolidated cash flow statement For the year ended 31 December 2006


Statement of recognised income and expenseFor the year ended 31 December 2006

£m Note 2006 2005

Profit after taxation for the year 148.3 98.1 Net translation differences on investments in overseas subsidiaries (10.8) 3.2Actuarial gain / (loss) on pensions 9 32.8 (46.5)Actuarial loss on other retirement obligations 9 (0.5) –Movement on cash flow hedges 25 0.4 1.7Deferred tax relating to items charged directly to retained earnings (9.7) 13.5Deferred tax credit relating to share-based payments 27 1.3 2.5Net income / (expense) recognised directly in equity 13.5 (25.6)

Total income for the year 161.8 72.5Initial application of IAS 21, 32 and 39 – 7.3Total recognised income for the year 161.8 79.8

Attributable to: Equity holders of the parent 161.6 79.3Minority interest 0.2 0.5 161.8 79.8

50 Cobham plc

1. Business and geographical segmentsBusiness segmentsFrom 1 January 2006, the Group was organised into six operating divisions. These divisions are the basis on which the Group reports its primary segmental information. The principal activities of the Group’s operating divisions are:

Cobham Air Refuelling and Auxiliary Mission Equipment Air refuelling equipment and pneumatic weapons carriage release systemsCobham Antennas Antenna components and sub-systemsCobham Avionics and Surveillance Electronic products for airborne, marine and land applicationsCobham Defence Electronic Systems Air, ground and shipboard antenna sub-systems, positioners, radomes

and high-power microwave componentsCobham Life Support Aviation oxygen, pneumatic technology for fin actuation in missiles and

cryostatic cooling productsCobham Flight Operations and Services Operation and maintenance of aircraft in aerospace and defence markets

‘Other Activities’ include head office, the central research facility, the central project costs relating to the Future Strategic Tanker Aircraft project and the results of the composites and countermeasures operations disposed of during 2005 and 2006.

The comparative figures for 31 December 2005 have been re-presented in accordance with this new divisional structure.

Details for these primary segments are shown below: Air Refuelling and Auxiliary Defence Flight Mission Avionics and Electronic Operations Other £m Equipment Antennas Surveillance Systems Life Support and Services Activities Total

RevenueYear to 31 December 2006Revenue 90.4 182.2 206.0 191.6 141.4 188.4 28.7 Inter-segmental revenue (1.1) (6.5) (6.0) (2.9) – (0.1) – Third party revenue – continuing operations 89.3 175.7 200.0 188.7 141.4 188.3 28.7 1,012.1Third party revenue – discontinued operations – – – – – – 3.6 3.6Total third party revenue 89.3 175.7 200.0 188.7 141.4 188.3 32.3 1,015.7Year to 31 December 2005Revenue 127.1 173.9 196.3 130.9 129.9 197.0 32.5 Inter-segmental revenue (2.7) (7.2) (6.4) (1.2) – 0.2 – Third party revenue – continuing operations 124.4 166.7 189.9 129.7 129.9 197.2 32.5 970.3Third party revenue – discontinued operations – – – – – – 120.1 120.1Total third party revenue 124.4 166.7 189.9 129.7 129.9 197.2 152.6 1,090.4

ResultYear to 31 December 2006Result before joint ventures and associates 12.8 39.8 28.7 43.2 26.4 15.3 17.8 184.0Share of post-tax results of joint ventures and associates – – – – – 4.7 – 4.7Operating profit from continuing operations 12.8 39.8 28.7 43.2 26.4 20.0 17.8 188.7Profit on disposal of undertakings – – – – – – (1.5) (1.5)Gain on revaluation of currency instruments – – – – – – (10.8) (10.8)Amortisation of intangible assets on acquisition – 1.4 3.5 3.2 0.9 0.1 – 9.1Trading profit from continuing operations 12.8 41.2 32.2 46.4 27.3 20.1 5.5 185.5Trading profit from discontinued operations – – – – – – 0.8 0.8Total trading profit 12.8 41.2 32.2 46.4 27.3 20.1 6.3 186.3Year to 31 December 2005Result before joint ventures and associates 26.4 38.0 25.0 19.5 21.2 13.8 (10.0) 133.9Share of post-tax results of joint ventures and associates – 0.2 – – – 2.9 – 3.1Operating profit from continuing operations 26.4 38.2 25.0 19.5 21.2 16.7 (10.0) 137.0Loss on revaluation of currency instruments – – – – – – 16.1 16.1Amortisation of intangible assets on acquisition 0.1 1.3 2.9 11.3 1.3 – – 16.9Trading profit from continuing operations 26.5 39.5 27.9 30.8 22.5 16.7 6.1 170.0Trading profit from discontinued operations – – – – – – 7.7 7.7Total trading profit 26.5 39.5 27.9 30.8 22.5 16.7 13.8 177.7

Notes to the Group financial statements


1. Business and geographical segments (continued)Assets and liabilities Air Refuelling and Auxiliary Defence Flight Mission Avionics and Electronic Operations Other £m Equipment Antennas Surveillance Systems Life Support and Services Activities Total

As at 31 December 2006AssetsSegment assets – continuing operations 101.8 140.7 223.1 232.2 99.9 152.3 78.6 1,028.6Interests in joint ventures and associates – – – – – 15.7 – 15.7 101.8 140.7 223.1 232.2 99.9 168.0 78.6 1,044.3Unallocated assets – continuing operations 390.0Consolidated total assets 1,434.3LiabilitiesSegment liabilities – continuing operations 51.3 26.2 53.0 24.4 13.4 48.3 34.7 251.3 51.3 26.2 53.0 24.4 13.4 48.3 34.7 251.3Unallocated liabilities – continuing operations 468.0Consolidated total liabilities 719.3

As at 31 December 2005AssetsSegment assets – continuing operations 90.6 153.9 214.0 255.3 127.6 147.5 130.4 1,119.3 – discontinued operations – – – – – – 9.8 9.8Interests in joint ventures and associates – – – – – 14.7 – 14.7 90.6 153.9 214.0 255.3 127.6 162.2 140.2 1,143.8Unallocated assets – continuing operations 266.7Unallocated assets – discontinued operations 8.3Consolidated total assets 1,418.8LiabilitiesSegment liabilities – continuing operations 43.5 29.4 51.8 30.6 17.6 49.1 23.6 245.6 – discontinued operations – – – – – – 13.6 13.6 43.5 29.4 51.8 30.6 17.6 49.1 37.2 259.2Unallocated liabilities – continuing operations 571.9Unallocated liabilities – discontinued operations 0.6Consolidated total liabilities 831.7

Other informationThe following segmental information is presented for continuing and discontinued operations.

Capital additionsYear to 31 December 2006 2.2 6.3 3.8 4.7 2.1 32.1 3.4 54.6Year to 31 December 2005 3.8 3.9 6.7 4.5 2.0 16.0 7.4 44.3

Depreciation and amortisationYear to 31 December 2006 2.6 4.4 6.8 8.3 2.7 19.6 1.2 45.6Year to 31 December 2005 2.2 4.6 6.2 15.2 3.4 24.1 7.0 62.7

Average number of employeesAs at 31 December 2006 760 1,539 2,082 1,855 944 1,718 611 9,509 As at 31 December 2005 743 1,679 2,022 1,399 976 1,756 2,140 10,715

52 Cobham plc

1. Business and geographical segments (continued)Geographical segmentsSecondary segmental information is presented by geographical area. The main locations of the Group’s operating divisions are as follows: Other EU Rest of UK countries USA Australia the world

Air Refuelling and Auxiliary Mission Equipment Antennas Avionics and Surveillance Defence Electronic Systems Life Support Flight Operations and Services

Other EU Rest of £m UK countries USA Australia the world Total

RevenueRevenue is analysed by geographical market, irrespective of the origin of the goods and services.

Year to 31 December 2006Continuing operations 153.0 166.4 464.9 119.7 108.1 1,012.1Discontinued operations 3.3 – – – 0.3 3.6 156.3 166.4 464.9 119.7 108.4 1,015.7

Year to 31 December 2005Continuing operations 159.8 182.8 406.4 127.1 94.2 970.3Discontinued operations 55.2 21.1 27.3 0.3 16.2 120.1 215.0 203.9 433.7 127.4 110.4 1,090.4

Segment assetsSegment assets (including continuing operations, discontinued operations and joint ventures and associates but excluding unallocated segment assets), are analysed by the geographical area in which the assets are located.

As at 31 December 2006 379.9 118.3 437.8 72.2 36.1 1,044.3As at 31 December 2005 404.1 109.4 514.1 75.6 40.6 1,143.8

Capital additionsAdditions to property, plant and equipment and intangible assets, including additions from both continuing and discontinued operations, are analysed by the geographical area in which the assets are located.

Year to 31 December 2006 18.1 2.0 8.4 24.4 1.7 54.6Year to 31 December 2005 23.3 2.5 8.1 9.8 0.6 44.3

Average number of employees by geographic areaThe following analysis includes staff numbers from both continuing and discontinued operations.

As at 31 December 2006 2,922 1,221 3,605 988 773 9,509As at 31 December 2005 4,348 1,320 3,416 1,047 584 10,715

Notes to the Group financial statements continued


2. Revenue and profit for the yearRevenueRevenue, both from continuing and discontinued operations, comprises income from the sale of goods and services during the year.

Sales of services arise primarily in the Cobham Flight Operations and Services Division. The Group’s revenue from continuing operations can therefore be analysed as follows:

£m 2006 2005

Revenue from sale of goods 802.4 753.6Revenue from services 209.7 216.7 1,012.1 970.3

Profit for the yearThe profit for the year from continuing operations is after charging / (crediting):

£m Note 2006 2005

Property rental income (1.9) (1.4)Staff costs 8 323.4 304.9Net realised foreign exchange gains (2.7) (11.7)Research and development costs 49.1 41.2Depreciation of property, plant and equipment 14 – owned assets 36.0 39.6 – under finance leases – 0.1Amortisation of intangible assets 12 – acquired intangible assets 9.1 16.9 – other intangible assets 0.5 1.3Operating lease rentals – Aircraft 7.3 11.0 – Other including plant & machinery and property 8.9 7.1Profit on disposal of property, plant and equipment (2.6) (2.1)Materials costs of goods sold 318.0 334.2

Amortisation of intangible assets is included in administration expenses.

Research and development costs for discontinued operations were £0.2m (2005: £6.7m).

During the year the Group (including overseas subsidiaries) obtained the following services from the Group’s auditors at costs as detailed below: 2005 £m 2006 Restated

Fees payable to the Company’s auditor for the audit of the Company’s annual accounts 0.7 0.5 Fees payable to the Company’s auditor and its associates for other services: The audit of the Company’s subsidiaries pursuant to legislation 0.8 0.6 Other services relating to taxation 0.6 0.3 All other services 0.1 0.1 Amounts paid to other auditors 0.1 0.3 In addition to the amounts shown above, the auditors received fees of £26,078 (2005: £23,890) for audit of the Group’s pension schemes.

A description of the work of the audit committee is set out in the Corporate governance statement on pages 28 to 31 and includes an explanation of how auditor objectivity and independence is safeguarded when non-audit services are provided by the auditors.

54 Cobham plc

3. Finance income and expense

Continuing operations Discontinued operations Total

£m Note 2006 2005 2006 2005 2006 2005

Finance income:Bank interest 21.1 10.2 0.1 0.3 21.2 10.5Other interest 0.8 0.4 – – 0.8 0.4Expected return on pension scheme assets 9 25.3 21.0 – – 25.3 21.0Total finance income 47.2 31.6 0.1 0.3 47.3 31.9

Finance expense: Interest on bank overdrafts and loans (27.5) (21.1) – – (27.5) (21.1)Interest on obligations under finance leases – (0.9) – – – (0.9)Other interest (0.7) (0.6) – – (0.7) (0.6)Interest on pension scheme liabilities 9 (22.5) (20.0) – – (22.5) (20.0)Total finance expense (50.7) (42.6) – – (50.7) (42.6)Net finance expense (3.4) (10.7)

Other interest includes £1,182 (2005: £1,182) paid in respect of non-equity second cumulative preference shares (note 26).

Net finance expense excluding interest on pension schemes amounts to £6.2m (2005: £11.7m).

Borrowing costs of £1.6m (2005: £nil) have been capitalised on qualifying assets at the Group’s external borrowing rate.

4. Income tax expense

Continuing operations Discontinued operations Total

£m Note 2006 2005 2006 2005 2006 2005

Current tax 43.9 35.9 0.3 5.3 44.2 41.2Deferred tax 22 6.8 (0.6) (0.2) 0.2 6.6 (0.4)Income tax expense for the year 50.7 35.3 0.1 5.5 50.8 40.8

The total income tax expense is analysed between the UK and overseas tax as follows:

£m 2006 2005

United Kingdom 33.7 22.8Overseas 17.1 18.0Total tax charge for the period 50.8 40.8Tax charge included in share of post-tax results of joint ventures and associates 1.4 0.9

Income tax for the UK is calculated at the standard rate of UK corporation tax of 30% (2005: 30%) of the estimated assessable profit for the year. Taxation for other jurisdictions is calculated at the rates prevailing in the relevant jurisdictions.

The total charge for the year can be reconciled to the accounting profit as follows:

£m 2006 2005

Profit before tax:– continuing operations 185.2 126.0– discontinued operations 13.9 12.9 199.1 138.9

Tax at the domestic income tax rate of 30.0% (2005: 30.0%) 59.7 41.7Tax effect of share of results of joint ventures and associates (1.4) (0.9)Tax disallowed items 0.2 1.7Profit on disposals and other income not subject to tax (5.8) –Overseas tax rates higher than UK rates 3.5 2.1Expenditure qualifying for additional R&D tax deduction (2.3) (1.9)Adjustments to tax charge in respect of prior years (3.1) (1.9)Total tax charge for the year 50.8 40.8

In addition to the income tax expense charged to the income statement, a deferred tax charge of £8.4m (2005: £16.0m credit) has been recognised in equity in the year as shown in the statement of recognised income and expense and as shown in note 22.



5. Dividends

£m 2006 2005

Dividends on Ordinary SharesFinal dividend per share for the year ended 31 December 2005 (2005: 31 December 2004) 2.40p 2.18pInterim dividend per share for the year ended 31 December 2006 (2005: 31 December 2005) 1.11p 1.01p

Total final dividend authorised 27.1 24.5Total interim dividend authorised 12.6 11.3Total dividend authorised 39.7 35.8

In addition to the above, the directors are proposing a final dividend in respect of the financial year ended 31 December 2006 of 2.64p per share which will absorb an estimated £29.8m of shareholders’ funds. This dividend is subject to approval by shareholders at the AGM and has not been included as a liability in these financial statements. If authorised, it will be paid on 6 July 2007 to shareholders who are on the register of members as at 1 June 2007.

6. Earnings per Ordinary ShareFrom continuing and discontinued operations

2006 2005

Weighted Weighted average average number Per-share number Per-share Earnings of shares amount Earnings of shares amount £m million pence £m million pence

Basic earnings per share (EPS)Earnings attributable to ordinary shareholders 148.1 1,128.3 13.13 97.6 1,120.7 8.71Effect of dilutive securities:Options 10.9 5.7 Fully diluted EPS 148.1 1,139.2 13.00 97.6 1,126.4 8.66

From continuing operations 2006 2005

Weighted Weighted average average number Per-share number Per-share Earnings of shares amount Earnings of shares amount £m million pence £m million pence

Basic earnings per share (EPS) Earnings attributable to ordinary shareholders (as above) 148.1 97.6 Earnings from discontinued operations (13.8) (7.4) Earnings from continuing operations 134.3 1,128.3 11.90 90.2 1,120.7 8.05Effect of dilutive securities: Options 10.9 5.7 Fully diluted EPS 134.3 1,139.2 11.79 90.2 1,126.4 8.01

56 Cobham plc

7. Underlying profit and earnings per shareIn addition to the information required by IAS 33 (Earnings per share), the directors believe that it is helpful to calculate an underlying earnings per share figure based on profits excluding profits and losses on disposal of undertakings, amortisation of intangible assets recognised on acquisition and unrealised changes in the fair value of currency derivative instruments.

2006 2005

Continuing Discontinued Continuing Discontinued £m Note operations operations Total operations operations Total

Revenue 1,012.1 3.6 1,015.7 970.3 120.1 1,090.4Operating profit 188.7 0.8 189.5 137.0 7.7 144.7(Gain) / loss on revaluation of currency instruments 25 (10.8) – (10.8) 16.1 – 16.1Profit on disposal of undertakings 31 (1.5) – (1.5) – – –Amortisation of intangible assets arising on acquisition 9.1 – 9.1 16.9 – 16.9Trading profit 185.5 0.8 186.3 170.0 7.7 177.7Net finance income / (expense) 3 (3.5) 0.1 (3.4) (11.0) 0.3 (10.7)Underlying profit before taxation 182.0 0.9 182.9 159.0 8.0 167.0Taxation charge on underlying profit (51.0) (0.1) (51.1) (46.0) (1.9) (47.9)Minority interest (0.2) – (0.2) (0.5) – (0.5)Underlying profit after tax attributable to equity shareholders 130.8 0.8 131.6 112.5 6.1 118.6Underlying EPS (basic) 11.66p 10.58pUnderlying EPS (fully diluted) 11.55p 10.53p

8. Staff Employment costs (continuing and discontinued operations)

£m 2006 2005

Wages and salaries 273.6 297.5Social security costs 31.0 33.3Pension costs – defined benefit 7.2 6.6 – defined contribution 9.3 7.6Share incentive schemes 3.0 2.7 324.1 347.7

Employment costs – continuing operations 323.4 304.9Employment costs – discontinued operations 0.7 42.8 324.1 347.7

Analysis of the average number of employees can be found in note 1.

9. Retirement benefit schemesDefined contribution schemesThe Group manages a number of defined contribution pension arrangements.

The total expense recognised in the income statement of £9.3m (2005: £7.6m) represents contributions payable to these schemes by the Group at rates specified in the rules of the schemes.

There were no significant contributions outstanding at the end of 2005 or 2006 for either the defined benefit or defined contribution schemes.

Other retirement benefit schemesA number of the Group’s subsidiaries based in France contribute to a retirement indemnity scheme. The liabilities of the scheme have been valued by an independent actuary as at 31 December 2006 at €2.9m (2005: €2.1m) and are included in other liabilities in note 20. The actuarial loss for the year to 31 December 2006 as recognised in the statement of recognised income and expense was £0.5m (2005: £nil).



9. Retirement benefit schemes (continued)Defined benefit schemesThe Group operates a number of defined benefit schemes, the most significant being the Cobham Pension Plan (CPP), which is a funded defined benefit scheme. The assets of all of these schemes are held separately from those of the Group in funds under the control of trustees. From 1 January 2003, new employees in the UK have only been able to join the defined contribution scheme. In the USA, the Carleton Technologies defined benefit scheme has been closed to new members from 13 December 2003.

In 2005, as a part of the settlement of the disposal of the Fluid and Air group, a special contribution of £24m was made to the main Cobham defined benefit scheme and a curtailment benefit of £5m and a settlement gain of £1m were recognised as part of the profit on disposal. A further special contribution of £5.3m was paid to the pension fund during 2006 in connection with these disposals.

In addition, as part of the settlement of the disposals of Wallop Defence Systems Limited and Slingsby Aviation Limited, further special contributions totalling £6.2m were made during 2006 to the main Cobham defined benefit scheme. A settlement gain of £1.7m was recognised as part of the profit on the disposal of Dräger Aerospace GmbH, and a curtailment gain of £1.0m was recognised as part of the profit on the disposal of Wallop Defence Systems Limited and Slingsby Aviation Limited (note 31).

Actuarial valuations of scheme assets and the present value of the defined benefit obligations for the CPP are carried out on a triennial basis by qualified independent actuaries, the most recent valuation was as at 1 April 2006. The actuarial valuations were updated by qualified independent actuaries for accounting purposes to 31 December 2006. Actuarial valuations of other schemes have been carried out at regular intervals as required by the applicable country regulations.

For the purposes of IAS 19, the principal assumptions used for the purpose of the actuarial valuations were as follows:

2006 2005

UK USA UK USA schemes schemes schemes schemes

Rate of increase in salary costs 3.50% 3.50% 3.50% 3.50%Discount rate 5.10% 5.60% 5.00% 5.50%Inflation assumption 3.00% 3.00% 2.90% 3.00%Expected return on scheme assets 6.95% 7.10% 7.07% 7.25%Pensions increase unless overridden by specific scheme rules 3.00% n/a 2.90% n/a

The mortality assumptions used for the CPP are based upon actual recent mortality experiences of members within the scheme and also allow for future mortality improvements. The mortality assumption used is denoted by actuaries as “PA92 projected by individual year”. In practical terms this is demonstrated in the table below:

Further life Gender Year of birth Year age 65 expectancy

Male 1940 2005 19.5 yearsMale 1980 2045 21.7 years

At 31 December 2006 it has been assumed that members will commute on average 20% of their pension for cash at retirement. This implies a full take-up of the permitted 25% commutation by approximately 80% of eligible members on retirement.

The impact of A-Day changes were minimal and have been reflected in the actuarial assumptions.

The amounts recognised in the balance sheet in respect of the Group’s defined benefit schemes are as follows:

£m 2006 2005

Present value of funded obligations (447.8) (451.3)Fair value of scheme assets 418.2 370.3Net liability (29.6) (81.0)

The net liability at 31 December 2005 includes £1.7m in relation to one of the European schemes which is unfunded. The company to which this scheme relates has been disposed of during the year to 31 December 2006.

The scheme assets do not include any of the Group’s own financial instruments, nor any property occupied by, or other assets used by, the Group.

58 Cobham plc

9. Retirement benefit schemes (continued)Amounts recognised in operating profit in respect of the defined benefit scheme are as follows:

£m Note 2006 2005

Current service cost included in operating profit 6.9 6.6Past service cost 0.3 –Gain on curtailment included in profit on disposal 31 (1.0) (5.0)Gain on settlement included in profit on disposal 31 (1.7) (1.0)

Amounts credited / (charged) to other finance income / expense:£m Note 2006 2005

Expected return on pension scheme assets 3 25.3 21.0Interest on pension scheme liabilities 3 (22.5) (20.0)Net return 2.8 1.0

Amount recognised in the statement of recognised income and expense (SORIE):£m 2006 2005

Actual return less expected return on pension scheme assets 13.2 33.1Experience gains / (losses) arising on scheme liabilities 0.8 (9.9)Exchange differences 0.2 (0.1)Changes in assumptions underlying present value of scheme liabilities 18.6 (69.6)Actuarial gain / (loss) recognised in SORIE 32.8 (46.5)

The cumulative amount of actuarial gains and losses recognised in the statement of recognised income and expense since transition to IFRS is £18.4m loss (2005: £51.2m loss).

The actual return on scheme assets was £38.5m (2005: £54.1m).

Changes in the present value of the defined benefit obligations are as follows:

£m 2006 2005

Opening defined benefit obligations 451.3 363.3Current service cost 6.9 6.6Past service cost 0.3 –Interest cost 22.5 20.0Actuarial (gains) / losses (19.4) 79.5Expenses (1.3) –Contributions by members 2.8 4.2NI rebates 1.0 1.1Gains on curtailments (1.0) (5.0)Gains on settlements (1.7) –Obligation transferred on disposal of undertakings – (7.6)Exchange differences (1.3) 1.4Benefits paid (12.3) (12.2)Closing defined benefit obligations 447.8 451.3

Changes in the fair value of scheme assets are as follows:

£m 2006 2005

Opening fair value of scheme assets 370.3 294.2Expected return 25.3 21.0Actuarial gains 13.2 33.1Expenses (1.3) (1.0)Assets distributed on settlements – (6.6)Contributions by members 2.8 4.2NI rebates 1.0 1.1Contributions by employers 8.8 11.0Special contributions 11.5 24.0Exchange differences (1.1) 1.5Benefits paid (12.3) (12.2)Closing fair value of scheme assets 418.2 370.3

The Group expects to contribute £17.3m to its defined benefit pension schemes in 2007.



9. Retirement benefit schemes (continued)The fair value of major categories of scheme assets, and as a percentage of total scheme assets are as follows:

2006 2005

£m % £m %

Equity instruments 243.2 58.1% 254.1 68.6%Debt instruments 118.6 28.4% 81.7 22.0%Property 27.9 6.7% 15.0 4.1%Other assets 28.5 6.8% 19.5 5.3% 418.2 100.0% 370.3 100.0%

The expected rates of return on individual categories of scheme assets are determined by reference to relevant indices published by, for example, the London Stock Exchange. The overall expected rate of return is calculated by weighting the individual rates in accordance with the anticipated balance in the scheme’s investment portfolio.

The history of the scheme for the current and previous four periods is as follows:

£m 2006 2005 2004 2003 2002

Present value of defined benefit obligations (447.8) (451.3) (363.2) (326.1) (231.8)Fair value of scheme assets 418.2 370.3 294.2 254.9 165.3Deficit (29.6) (81.0) (69.0) (71.2) (66.5)Experience adjustments on scheme liabilities 0.8 (9.9) (5.4) 2.1 (8.0)Experience adjustments on scheme assets 13.2 33.1 8.8 20.3 (50.3)

Note that historical data for 2002 and 2003 is as stated under UK GAAP, FRS 17 (Retirement benefits).

10. Share-based paymentsEquity settled share-based payment schemesThe Group operates two incentive schemes for certain senior executives, the Cobham Long Term Incentive Plan (LTIP) and the Cobham Executive Share Option Scheme (ESOS).

Under the LTIP scheme awards are made at nil cost, vesting over a three year performance period based on the Group’s Total Shareholder Return relative to that of a comparator group and also conditional upon the Group’s EPS growth over the same period.

Under the ESOS, options are granted at a price not less than the market value of the Group’s Ordinary Shares on, or shortly before the date the options are granted. Exercise is conditional upon the Group’s EPS growth over a three year period.

Further details of these schemes can be found in the Directors’ remuneration report on pages 32 to 38.

In addition, entry to the Cobham Savings Related Share Option Scheme (ShareSave), is available to all employees of participating subsidiaries. Employees may purchase the Group’s shares at 80% of the closing market price on the date of grant during a two-week period each year, up to a maximum contribution value of £3,000 in any one year. The shares so purchased are generally placed in the employee’s share savings plan and will only be released to employees who remain in the Group’s employment for a period of three years from the date of grant.

Details of the share options outstanding during the year are as follows:

LTIP 2006 2005 Number of share options Number of share options

Outstanding at the beginning of the year 3,867,536 3,383,730 Granted during the year 1,183,165 1,526,990 Forfeited during the year (60,095) (430,410)Exercised during the year – (93,014)Expired during the year (963,590) (519,760)Outstanding at the end of the year 4,027,016 3,867,536Exercisable at the end of the year – –

The options outstanding at the year end have a weighted average remaining contractual life of 1.34 years (2005: 1.53 years). During 2006, the effective dates for options granted were 12 May and 14 November, with estimated fair values of £0.903 and £0.909 respectively. During 2005, options were granted on 11 May with an estimated fair value of £0.551.

60 Cobham plc

10. Share-based payments (continued)These fair values were calculated using the Black-Scholes option pricing model modified by a Monte Carlo simulation to determine the likely impact of market-related performance conditions. The inputs into the model were as follows:

2006 2005

Weighted average share price £1.832 £1.335Weighted average exercise price Nil NilExpected volatility 22% 22%Expected life 3 Years 3 YearsRisk free rate 4.5% 4.4%Expected dividend yield 1.9% 2.3%

Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous three years. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.

ESOS 2006 2005

Weighted Weighted Number average Number average of share exercise of share exercise options price options price

Outstanding at the beginning of the year 16,081,427 1.224 16,106,770 1.109 Granted during the year 2,927,328 1.855 4,728,927 1.432 Forfeited during the year (516,218) 1.433 (972,850) 1.248 Exercised during the year (2,982,728) 1.032 (3,781,420) 0.984 Expired during the year (92,360) 1.194 – – Outstanding at the end of the year 15,417,449 1.375 16,081,427 1.224 Exercisable at the end of the year 4,950,112 1.060 4,633,950 0.941

Options are awarded with a vesting period of three years and may be exercised at any time up to seven years after the vesting date.

Share options were exercised throughout the year and the average share price was £1.777 (2005: £1.444). The options outstanding at the year end have a weighted average remaining contractual life of 7.48 years (2005: 7.75 years), exercise prices range from £0.619 to £1.898. In 2006, the effective dates for options granted were 12 May and 14 November. The estimated fair values of the options granted on those dates were £0.45 and £0.47. In 2005, options were granted on 11 May, 19 October and 9 December. The estimated fair values of the options granted on those dates were £0.32, £0.35 and £0.40 respectively.

These fair values were calculated using the Black-Scholes option pricing model. The inputs into the model were as follows:

2006 2005

Weighted average share price 1.833 1.404 Weighted average exercise price 1.855 1.432 Expected volatility 25% 26%Expected life 5 Years 5 YearsRisk free rate 4.5% 4.4%Expected dividend yield 1.9% 2.1%

Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous five years. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.



10. Share-based payments (continued)ShareSave 2006 2005

Weighted Weighted Number average Number average of share exercise of share exercise options price options price

Outstanding at the beginning of the year 16,168,325 0.939 15,772,490 0.886 Granted during the year 1,752,463 1.530 2,125,123 1.240 Forfeited during the year (396,621) 1.001 (567,650) 0.935 Exercised during the year (4,921,408) 0.819 (905,298) 0.713 Expired during the year (2,061,971) 0.997 (256,340) 0.931 Outstanding at the end of the year 10,540,788 1.092 16,168,325 0.939 Exercisable at the end of the year – – – –

Share options were exercised throughout the year and the average share price was £1.777 (2005: £1.444). The options outstanding at the year end have a weighted average remaining contractual life of 2.00 years (2005: 2.27 years), exercise prices range from £0.691 to £1.530. In 2006, ShareSave contracts commenced on 1 February with estimated fair values of £0.69 (three year life), £0.76 (five year life) and £0.81 (seven year life). In 2005, ShareSave contracts commenced on 1 February with estimated fair values of £0.405 (three year life), £0.487 (five year life) and £0.549 (seven year life).


2006 2005

Weighted average share price £1.850 £1.382Weighted average exercise price £1.240 £1.076Expected volatility 22% – 27% 23% – 31%Expected life 3 – 7 Years 3 – 7 YearsRisk free rate 4.3% 4.5%Expected dividend yield 1.8% 2.2%

Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous three to seven years, dependant on the life of the option. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.

The Group recognised total expenses of £2.8m (2005: £2.7m) related to equity-settled share-based payment transactions during the year. In addition, a further £0.3m (2005: £nil) has been credited to reserves in connection with discontinued operations.

Cash settled share-based payment schemesDuring the year, the Group issued share appreciation rights (SARs) and awards under a phantom LTIP scheme to certain senior executives that require the Group to pay the intrinsic value of the award to the employee at the date of exercise. The expense for the year for such rights is based on the fair value of the outstanding liability at the balance sheet date and totalled £0.2m for 2006.

SARs are granted at a price not less than the market value of the Group’s Ordinary Shares on, or shortly before, the date the rights are granted. As with the ESOS awards, exercise is conditional upon the Group’s EPS growth over a three year period and is possible between three and 10 years after grant.

Phantom LTIP awards are made at nil cost, vesting over a three year performance period based on the Group’s Total Shareholder Return relative to that of a comparator group and also conditional upon the Group’s EPS growth over the same period. The comparator group and conditions are the same as those which apply for LTIPs, further details of which can be found in the Director’s remuneration report on pages 32 to 38.

Details of the awards are as follows:

SARs Phantom LTIPs

Outstanding at the beginning of the year – – Granted during the year 912,698 101,606 Outstanding at the end of the year 912,698 101,606 Exercisable at the end of the year – –

Awards of SARs (with an exercise price of £1.898) and phantom LTIPs were made on 14 November 2006. The fair value of these awards as at 31 December 2006 is £0.52 and £0.89 for SARs and phantom LTIPs respectively.

62 Cobham plc

10. Share-based payments (continued)These fair values were calculated using the Black-Scholes option pricing model modified by a Monte Carlo simulation to determine the likely impact of market-related performance conditions. The inputs into the model were as follows:

SARs Phantom LTIPs

Weighted average share price £1.938 £1.938Weighted average exercise price £1.898 NilExpected volatility 25% 25%Expected life 5 Years 3 YearsRisk free rate 5.0% 5.0%Expected dividend yield 1.8% 1.8%


11. Notes to the consolidated cash flow statementCash flows from operating activities

£m Note 2006 2005

Profit after taxation for the year 148.3 98.1

Adjustments for:Tax 4 50.8 40.8Finance income 3 (47.3) (31.9)Finance expense 3 50.7 42.6Profit on disposal of undertakings 31 (14.5) (5.6)(Gain) / loss on revaluation of currency instruments 25 (10.8) 16.1Share of post-tax profits of joint ventures and associates (4.7) (3.1)Depreciation 14 36.0 44.5Amortisation of intangible assets 12 9.6 18.2Profit on sale of property, plant and equipment (2.6) (2.1)Pension contributions in excess of pension expenditure (1.9) (3.4)Share-based payments 10 3.0 2.7Operating cash flows before movements in working capital and provisions 216.6 216.9(Decrease) / increase in provisions (16.8) 12.6Increase in working capital (7.4) (19.2)Movements in working capital and provisions (24.2) (6.6)Cash generated from operations 192.4 210.3

The 2005 movements in provisions and working capital were impacted by a reclassification of £31.2m from working capital to provisions.

Reconciliation of net cash flow to movement in net debt

£m 2006 2005

Increase in cash and cash equivalents in the year 118.7 150.8Repayment of borrowings / (new borrowings) 3.3 (127.2)Borrowings of undertakings sold 9.9 –Exchange movements 37.3 (19.8)Movement in net debt in the year 169.2 3.8Net debt at beginning of year (168.3) (163.9)Initial application of IAS 21, 32 and 39 – (8.2)Net cash / (debt) at end of year 0.9 (168.3)

Net debt as at 31 December 2005 includes £8.3m of net cash in assets held for sale.



12. Intangible assets £m Note 2006 2005

Goodwill 13 381.8 424.0Other intangible assets (as below) 100.8 104.1Total intangible assets 482.6 528.1

Movements in other intangible assets are as follows: Customer Technology Development £m lists & software costs Other Total

CostAt 1 January 2005 14.4 6.0 4.1 6.5 31.0Additions – purchased – 3.9 – 0.1 4.0Additions – internally generated – – 1.7 – 1.7Recognised on acquisition of subsidiaries 58.8 14.1 – 19.9 92.8Disposed on sale of undertakings – – (5.0) (0.5) (5.5)Foreign exchange adjustments (0.4) 1.4 – 1.0 2.0Reclassifications – 0.3 – 0.5 0.8At 1 January 2006 72.8 25.7 0.8 27.5 126.8Additions – purchased – 0.2 – 1.2 1.4Additions – internally generated – 0.1 0.2 – 0.3Recognised on acquisition of subsidiaries 1.3 7.0 – 0.3 8.6Disposal of undertakings (0.9) (0.1) – (1.1) (2.1)Foreign exchange adjustments (7.4) (4.3) – (3.1) (14.8)Disposals – – – (0.1) (0.1)Reclassifications 7.5 1.7 – 0.7 9.9At 31 December 2006 73.3 30.3 1.0 25.4 130.0

Accumulated amortisation At 1 January 2005 0.4 0.3 2.3 3.0 6.0Charge for the year 2.8 10.8 0.7 3.9 18.2Eliminated on disposal of undertakings – – (2.6) (0.2) (2.8)Foreign exchange adjustments – 0.5 – 0.2 0.7Reclassifications – 0.4 – 0.2 0.6At 1 January 2006 3.2 12.0 0.4 7.1 22.7Charge for the year 9.1 (4.9) – 5.4 9.6Disposal of undertakings (0.2) – – (0.2) (0.4)Foreign exchange adjustments (0.7) (1.1) – (1.0) (2.8)Disposals – – – (0.1) (0.1)Reclassifications – – – 0.2 0.2At 31 December 2006 11.4 6.0 0.4 11.4 29.2

Carrying amountAt 31 December 2006 61.9 24.3 0.6 14.0 100.8At 31 December 2005 69.6 13.7 0.4 20.4 104.1

Reclassifications include balances transferred from goodwill following a re-assessment of the fair values of acquired intangible assets.

Values ascribed to customer lists represent the fair value of acquired customer lists, contracts and other related customer relationships, both contractual and non-contractual, held by the acquired company at time of entry into the Group.

Values ascribed to technology and software represent the fair value of acquired trade secrets and processes, patented and unpatented technology and know how held by the acquired company at time of entry into the Group. This category also includes the purchase of technology and software rights and licenses, where it is appropriate to recognise such items as assets.

Values ascribed to development costs represent the directly attributable costs of internally generated development knowledge from the point at which an individual project meets the requirements for capitalisation until it is available for utilisation in the business.

Values ascribed to other intangible assets represent purchased and acquired patents, licences and trademarks and order backlog.

All of these assets are recognised at fair value and are amortised over their estimated useful lives.

Fair values of acquired intangible assets have been assessed by reference to the future estimated cash flows arising from the application of assets, discounted at a post-tax rate of 7.5% to present value.

64 Cobham plc

13. Goodwill

£m Total

CostAt 1 January 2005 380.6Arising on acquisition of subsidiaries 85.9Resulting from movements in contingent consideration 4.2Eliminated on disposal of undertakings (55.6)Foreign exchange adjustments 9.1Reclassification (0.2)At 1 January 2006 424.0Arising on acquisition of subsidiaries 13.5Resulting from movements in contingent consideration (0.2)Eliminated on disposal of undertakings (28.7)Foreign exchange adjustments (17.4)Reclassification to intangible assets (9.4)At 31 December 2006 381.8

Accumulated impairment lossesAt 1 January 2005 and 2006, and 31 December 2006 –

Carrying amountAt 31 December 2006 381.8At 31 December 2005 424.0

Goodwill acquired in a business combination is allocated, at acquisition, to the cash generating units (CGUs) that are expected to benefit from that business combination. Before recognition of impairment losses, the carrying amount of goodwill arising on acquisitions during 2006 has been allocated as follows:

£m 2006

Avionics and Surveillance domo Limited 10.9Flight Operations and Services Aerodata Flight Inspection GmbH 2.6 13.5

The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired.

The recoverable amounts of the CGUs are determined from value in use calculations. The key assumptions for the value in use calculations are those regarding the discount rates, growth rates and expected changes to selling prices and direct costs during the period for which management have detailed plans. Management estimates discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the CGU being measured. The growth rates are based on GDP of the primary market for the CGU, adjusted to recognise an estimate of the historic and projected premium associated with the high technological content associated with the business. Changes in selling prices and direct costs are based on past practices and expectations of future changes in the market. The Group prepares cash flow forecasts derived from the most recent financial budgets approved by management for the coming year and extrapolates cash flows after that period based on growth rate as described above. Where these growth rates are not appropriate to the prospects of particular businesses, longer term financial plans have been used.

The pre-tax rate used to discount the forecast cash flows is 10.5% (2005: 10.5%).

Following detailed review, no impairment losses have been recognised in the period and no prior impairment losses reversed.

REMEC Defense and Space Inc, a wholly owned subsidiary of the Group, has £41.8m of goodwill allocated to it and no other intangible assets with indefinite useful lives. The recoverable amount associated with this goodwill has been determined on a value in use basis. Key assumptions are as follows:

The authorised plan for the Company has been extrapolated in perpetuity using a growth rate of 4.3% and discounted to a present value using the Group assumption of 10.5%. Growth rate is based on US GDP adjusted to reflect a premium for the nature of the CGU’s business Sensitivity analysis has determined that the discount rate of 10.5% is the most influential assumption on the outcome of the recoverable amount calculation. The recoverable amount exceeds the total carrying value of assets for this CGU by £194m and the discount rate would need to increase to 18.5% in order for the carrying value to be impaired.



13. Goodwill (continued)European Antennas Limited is the CGU most sensitive to an increase in discount rate. Currently the goodwill in this CGU is not impaired, based on a discount rate of 10.5% and a long term growth rate of 3.8%. If the discount rate were to rise to 11.5%, a goodwill impairment of £0.2m would be required for this CGU.

The remainder of the goodwill is allocated to various CGUs across the Group, no individual amounts other than those disclosed above are considered individually significant.

14. Property, plant and equipment

Plant and Payments Land and buildings machinery Fixtures on account (including fittings and assets Long Short aircraft & tools and under £m Freehold leases leases vehicles) equipment construction Total

CostAt 1 January 2005 87.2 16.3 9.8 354.8 58.9 4.2 531.2Additions 1.8 0.8 0.2 32.2 4.7 (1.1) 38.6Acquisition of subsidiaries – 1.9 – 12.7 0.2 0.5 15.3Disposal of undertakings (12.6) – (6.2) (50.7) (7.1) (1.4) (78.0)Disposals (2.8) – – (5.4) (2.0) – (10.2)Reclassified as held for sale (3.6) – – (2.4) (0.4) (0.2) (6.6)Foreign exchange adjustments 2.5 0.2 1.1 8.5 1.9 0.2 14.4Reclassifications 0.8 – (0.4) (1.3) 0.5 (0.7) (1.1)At 1 January 2006 73.3 19.2 4.5 348.4 56.7 1.5 503.6Additions 3.0 3.0 0.3 40.2 4.1 2.3 52.9Acquisition of subsidiaries – – – 1.0 0.1 – 1.1Disposal of undertakings (2.4) – (0.1) (15.0) (2.7) (0.4) (20.6)Disposals (11.9) – – (10.0) (5.8) – (27.7)Foreign exchange adjustments (2.9) (0.5) (0.5) (12.2) (2.9) (0.2) (19.2)Reclassifications (3.1) (0.2) – (2.2) 1.3 (1.0) (5.2)At 31 December 2006 56.0 21.5 4.2 350.2 50.8 2.2 484.9

Accumulated depreciation At 1 January 2005 16.6 3.7 1.7 227.5 43.9 – 293.4Depreciation charge for the year 2.4 0.3 0.4 36.2 5.2 – 44.5Eliminated on disposal of undertakings (3.3) – (0.4) (28.1) (5.1) – (36.9)Eliminated on disposals – – – (4.1) (1.8) – (5.9)Reclassified as held for sale (0.1) – – (0.5) (0.1) – (0.7)Foreign exchange adjustments 0.7 0.1 0.2 5.1 1.4 – 7.5Reclassifications – – (0.1) (1.1) 0.1 – (1.1)At 1 January 2006 16.3 4.1 1.8 235.0 43.6 – 300.8Depreciation charge for the year 1.8 0.6 0.4 28.5 4.7 – 36.0Eliminated on disposal of undertakings (0.7) – – (9.1) (2.5) – (12.3)Eliminated on disposals (0.3) – – (9.2) (5.6) – (15.1)Foreign exchange adjustments (0.7) (0.2) (0.2) (6.6) (2.2) – (9.9)Reclassifications (1.5) 0.4 (0.1) (2.3) 1.3 – (2.2)At 31 December 2006 14.9 4.9 1.9 236.3 39.3 – 297.3

Carrying amount At 31 December 2006 41.1 16.6 2.3 113.9 11.5 2.2 187.6At 31 December 2005 57.0 15.1 2.7 113.4 13.1 1.5 202.8

Reclassifications include transfers to investment properties for properties retained on business disposals in 2006 which are leased to tenants.

The carrying amount of the Group’s plant and machinery includes an amount of £0.8m (2005: £0.3m) in respect of assets held under finance leases. These assets are held as security against the finance lease liabilities.

66 Cobham plc

15. Investment properties

£m Total

CostAt 1 January 2005 and 2006 4.1Reclassifications 3.5At 31 December 2006 7.6

Accumulated depreciationAt 1 January 2005 –Depreciation charge for the year 0.1At 1 January 2006 0.1Reclassifications 0.9Depreciation charge for the year 0.2At 31 December 2006 1.2

Carrying amountAt 31 December 2006 6.4At 31 December 2005 4.0

All of the Group’s investment properties are held under freehold interests and are valued under the cost model.

Property rental income earned by the Group from its investment properties amounted to £1.0m (2005: £0.5m), which is net of all direct costs associated with the leasing of the property, save for depreciation. The buildings are leased to commercial users on operating leases with terms of between three and 25 years, commencing in 1998 and 2006.

The fair value of the investment properties has been assessed to be £12.1m (2005: £7.0m). This is based on estimated market prices provided by the agents who manage the properties on the Group’s behalf. These valuations were obtained during 2006. The agents are experienced in marketing such properties in each location. No formal valuations have been completed.

16. Investments in joint ventures

£m 2006 2005

Group’s share of net assets of joint ventures (as below) 15.7 14.7

The Group has the following interests in joint ventures within the Flight Operations and Services division:a) 45% of the voting share capital in Aviation Défense Service SA, a company incorporated in France.b) 50% of the voting share capital in FB Heliservices Limited, a company incorporated in England.c) 50% of the voting share capital in FBS Limited, a company incorporated in England.d) 50% of the voting share capital in FB Leasing Limited, a company incorporated in England.

Notwithstanding the fact that the holding is 45%, governance structures for Aviation Défense Service SA are such that the Group has joint control with its partner and therefore the investment is treated as a joint venture.

The share of the balance sheets and income statements of the joint ventures which has been included in the consolidated financial statements is as follows:

£m 2006 2005

Current assets 20.3 18.1Non-current assets 42.7 46.3 63.0 64.4Current liabilities (12.8) (5.7)Non-current liabilities (34.5) (44.0) (47.3) (49.7)Net assets 15.7 14.7

£m 2006 2005

Income 35.2 32.7Expenses (28.4) (28.5)



16. Investments in joint ventures (continued)Investments in associatesDuring the year to 31 December 2005, the Group acquired the remaining 60% of the shares of TracStar Inc which had previously been accounted for as an associate within the Antennas Division. Consequently this entity has been fully consolidated as at 31 December 2006 and 2005. The revenue of the associate for the period prior to the acquisition of the remaining shares during 2005 was £1.8m and the profit after tax was £0.2m.

17. Inventories

£m 2006 2005

Raw materials and consumables 51.0 62.1Work in progress 96.1 89.4Finished goods and goods for resale 19.0 22.2Payments on account (5.9) (6.5) 160.2 167.2

There is no significant difference between the replacement cost and the fair value of inventories shown.

An allowance for obsolescence is included in raw materials and consumables and amounts to £29.7m (2005: £30.6m). This allowance is reviewed by the directors on a regular basis and further amounts are provided or released as considered necessary. During the year £7.1m (2005: £8.0m) was provided and £1.2m (2005: £1.5m) of the provision was reversed.

Inventory will be realised within the normal operating cycle of the businesses, which in some cases may be more than 12 months.

18. Trade and other receivables18a. Current

£m 2006 2005

Trade receivables 148.3 172.0Amounts recoverable on contracts 4.0 5.0Other receivables 8.1 12.3Prepayments and accrued income 22.2 19.2 182.6 208.5

18b. Non-current

£m 2006 2005

Trade receivables 0.1 0.2Amounts recoverable on contracts 0.1 1.3Other receivables 9.0 7.0 9.2 8.5

An allowance has been made for estimated irrecoverable amounts from the sale of goods of £1.8m (2005: £2.0m). This allowance has been determined by reference to past default experience.

The directors consider that the carrying amount of trade and other receivables approximates to their fair value.

68 Cobham plc

19. Cash and cash equivalentsBank balances and cash comprise cash held by the Group and short-term bank deposits with an original maturity of three months or less. The carrying amount of these assets approximates to their fair value.

Cash and cash equivalents include the following for the purposes of the cash flow statement:

£m Note 2006 2005

Cash and cash equivalents per balance sheet 364.3 251.8Bank overdrafts (3.9) (13.5) 360.4 238.3Cash and cash equivalents included in assets held for sale 33 – 8.3Cash and cash equivalents per cash flow statement 360.4 246.6

Cash and cash equivalents include term deposits held in Australia of AUS$10.0m (£4.1m, 2005: £nil) and US$1.0m (£0.5m, 2005: £nil) which do not allow withdrawal, other than interest, until their expiry dates in 2020.

20. Trade and other payables20a. Current liabilities

£m 2006 2005

Payments received on account 25.1 21.5Trade payables 77.2 80.3Bills of exchange payable 2.8 –Payroll and other taxes including social security 10.9 13.4Accruals and deferred income 50.7 52.3Other liabilities 15.9 6.7 182.6 174.2

20b. Non-current liabilities

£m 2006 2005

Accruals and deferred income 3.1 2.0Other liabilities 4.7 5.8 7.8 7.8

Trade creditors and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The directors consider that the carrying amount of trade payables approximates to their fair value.



21. Provisions

£m 2006 2005

Current liabilities 38.0 42.7Non-current liabilities 22.9 20.9 60.9 63.6

Movements in provisions during the year are as follows: Contract Aircraft Contingent Warranty loss maintenance £m consideration claims provisions provisions Other Total

At 1 January 2006 9.5 3.2 21.7 10.2 19.0 63.6Reclassification – – (9.5) – 8.9 (0.6)Additional provisions in the year 10.5 2.0 1.7 2.3 3.5 20.0Created on disposals – – – – 12.0 12.0Utilisation of provisions (4.4) (0.8) (4.9) (3.1) (12.2) (25.4)Unused amounts reversed in the year – (0.4) (3.0) (1.4) (1.6) (6.4)Foreign exchange adjustments (0.8) (0.2) (0.6) (0.5) (0.2) (2.3)At 31 December 2006 14.8 3.8 5.4 7.5 29.4 60.9

Closing balances are analysed as: Current liabilities 11.5 3.4 4.2 1.5 17.4 38.0Non-current liabilities 3.3 0.4 1.2 6.0 12.0 22.9 14.8 3.8 5.4 7.5 29.4 60.9

Contingent considerationContingent consideration has been provided for where it is considered probable that the conditions applicable to the payment of contingent consideration in respect of acquisitions made by the Group in current and previous years will be met. The amount provided is therefore the amount considered likely to be payable in the event of these conditions being met. Arrangements of this nature vary, but may typically extend for up to five years and are discounted where payable after two years. The provision at 31 December 2006 is stated after a discount of £0.9m (2005: £nil) and the unwinding of the discount in the year resulted in a finance charge of £0.2m.

Warranty claimsThe warranty provision represents management’s best estimate of the Group’s liability under warranties granted on products sold, based on past experience and industry averages for defective products. It is anticipated that most of these costs will be incurred in the next two financial years.

Contract loss provisionsContract loss provisions represent management’s best estimate of the amount by which the expected benefits from certain specific contracts are lower than the unavoidable cost of meeting its obligations under those contracts. The timeframe within which such provisions will unwind varies by contract, but is generally within one year.

Aircraft maintenance provisionsAircraft maintenance provisions are established in respect of significant periodic maintenance costs, where maintenance activity is required on leased operational aircraft or engines on a cycle greater than 12 months. Costs are charged to the income statement on the basis of utilisation of the aircraft and are credited to the provision. The provision is then utilised by absorbing the actual costs incurred in carrying out the maintenance activity. Maintenance carried out on a cycle of 12 months or less is charged to the income statement as incurred.

When aircraft are leased, it is customary for the contract to contain specific conditions regarding the state of the aircraft on its return to the lessor at the end of the lease. These conditions may relate to the number of operational hours to be available before a major maintenance check, the physical configuration of the aircraft or direct costs to be incurred by the lessee in the physical return of the aircraft to the lessor. The estimated cost associated with fulfilling these requirements is charged to the income statement on an aircraft utilisation basis. The provision is utilised on actual return of the aircraft or on incurring the expenditure required to return the aircraft to the state of maintenance required by the lease before return of the aircraft to the lessor.

Other provisionsOther provisions include provisions recognised on warranties and indemnities given on the disposals of the Countermeasures operations and the Fluid and Air group. All amounts have been determined based on the directors’ current estimates of likely outcomes. Provisions relating to the Countermeasures and Fluid and Air disposals are likely to unwind over a period of more than one year but due to the uncertainty over the timing and amounts have not been discounted. All other items are likely to be resolved within two years.

70 Cobham plc

22. Deferred taxThe following are the major deferred tax liabilities and assets recognised by the Group, and the movements thereon:

Retirement Accelerated tax benefit £m depreciation obligations Other Total

At 1 January 2005 (19.5) 20.7 (17.3) (16.1)Initial application of IAS 21, 32 and 39 – – (4.7) (4.7)Credit / (charge) to income statement 5.9 (10.4) 4.9 0.4Charge to reserves for the year – 14.0 (0.5) 13.5Acquired on acquisition of subsidiaries (1.0) – (1.6) (2.6)Disposed on sale of undertakings 4.3 – 0.2 4.5Foreign exchange adjustments 1.5 – 1.3 2.8Reclassified as held for sale 0.2 – – 0.2At 1 January 2006 (8.6) 24.3 (17.7) (2.0)Credit / (charge) to income statement (0.1) (5.5) (1.2) (6.8)Credit / (charge) to reserves for the year – (9.8) 1.4 (8.4)Acquired on acquisition of subsidiaries – – (2.3) (2.3)Disposed on sale of undertakings 0.1 – 0.7 0.8Foreign exchange adjustments – (0.1) 0.1 –At 31 December 2006 (8.6) 8.9 (19.0) (18.7)

Other deferred tax assets and liabilities shown above include balances arising from temporary differences in relation to provisions, share-based payments, intangible assets, goodwill and derivative financial instruments.

The charge to income statement for 2006 excludes a credit of £0.2m in relation to Wallop Defence Systems Limited which was classified as held for sale at 31 December 2005 as detailed in note 33.

Certain deferred tax assets and liabilities have been offset in accordance with the Group’s accounting policy. Deferred tax balances (after offset) for balance sheet purposes are analysed as follows:

£m 2006 2005

Deferred tax liabilities (25.6) (8.8)Deferred tax assets 6.9 6.8 (18.7) (2.0)

Deferred tax liabilities fall due as follows:Within one year (3.1) –After one year (22.5) (8.8) (25.6) (8.8)

Deferred tax assets are recoverable as follows:Within one year 2.1 2.9After one year 4.8 3.9 6.9 6.8



22. Deferred tax (continued)The movement on the deferred tax liabilities and deferred tax assets, without taking into consideration the offsetting of balances, are as follows:

Deferred tax liabilities Retirement Accelerated tax benefit £m depreciation obligations Other Total

At 1 January 2005 (20.0) – (24.6) (44.6)Initial application of IAS 21, 32 and 39 – – (5.3) (5.3)Credit / (charge) to income statement 4.1 – (1.3) 2.8Charge to reserves for the year – – (0.5) (0.5)Acquired on acquisition of subsidiaries (1.0) – (1.6) (2.6)Disposed on sale of undertakings 4.3 – 0.2 4.5Foreign exchange adjustments 1.5 – 1.3 2.8Reclassified as held for sale 0.2 – – 0.2At 1 January 2006 (10.9) – (31.8) (42.7)Credit / (charge) to income statement 0.9 – (2.1) (1.2)Credit to reserves for the year – – 1.4 1.4Acquired on acquisition of subsidiaries – – (2.3) (2.3)Disposed on sale of undertakings 0.1 – 0.7 0.8Foreign exchange adjustments 0.1 – 0.3 0.4At 31 December 2006 (9.8) – (33.8) (43.6)

The credit / (charge) to reserves relates to deferred tax provided in respect of the change in the fair value of cash flow hedging derivatives and share-based payments.

Deferred tax assets Retirement Accelerated tax benefit £m depreciation obligations Other Total

At 1 January 2005 0.5 20.7 7.3 28.5Initial application of IAS 21, 32 and 39 – – 0.6 0.6Credit / (charge) to income statement 1.8 (10.4) 6.2 (2.4)Credit to reserves for the year – 14.0 – 14.0At 1 January 2006 2.3 24.3 14.1 40.7Credit / (charge) to income statement (1.0) (5.5) 0.9 (5.6)Charge to reserves for the year – (9.8) – (9.8)Foreign exchange adjustments (0.1) (0.1) (0.2) (0.4)At 31 December 2006 1.2 8.9 14.8 24.9

At the balance sheet date, the Group has unused tax losses of £72.0m (2005: £78.0m) potentially available for offset against future profits in certain circumstances. No deferred tax asset has been recognised in respect of this amount because of the unpredictability of future qualifying profit streams. These losses can be carried forward indefinitely.

At the balance sheet date, the aggregate amount of temporary differences associated with undistributed earnings of subsidiaries and joint ventures for which deferred tax liabilities have not been recognised is £204.8m (2005: £196.0m). No liability has been recognised in respect of these differences because the Group is in a position to control the timing of the reversal of the temporary differences and it is probable that such differences will not reverse in the foreseeable future.

The Group’s share of the tax on temporary differences arising in connection with interests in joint ventures was £1.7m (2005: £1.8m).

72 Cobham plc

23. Borrowings

£m Note 2006 2005

Current Bank loans and overdrafts 227.8 272.1Loan notes 1.2 1.6Senior notes 1.9 2.9Other borrowings 0.1 0.1Finance leases 24 0.2 0.2 231.2 276.9Non-currentBank loans 8.8 7.6Loan notes 7.4 8.6Senior notes 115.2 134.4Other borrowings – 0.1Preference shares 26 – –Finance leases 24 0.8 0.9 132.2 151.6Total borrowings 363.4 428.5

The non-current borrowings are repayable as follows:Within 1-2 years 9.2 8.7Within 2-3 years 31.6 7.3Within 3-4 years 1.0 32.8Within 4-5 years 0.9 1.4After five years 89.5 101.4Amount due for settlement after 12 months 132.2 151.6

The carrying amounts of the Group’s borrowings are denominated in the following currencies:

£m 2006 2005

Sterling 8.9 14.6US dollars 280.5 330.6Australian dollars 28.7 11.1Euro 44.7 68.4Other currencies 0.6 3.8Total 363.4 428.5

The average effective interest rates paid were as follows:

£m 2006 2005

Bank overdrafts 4.99% 4.85%Bank loans 4.62% 3.74%Loan notes 4.49% 4.65%Senior notes 6.11% 4.75%Other borrowings 7.61% 7.56%

As at 31 December 2006 the Group had total borrowings of £363.4m (2005: £428.5m) of which £131.6m (2005: £152.1m) were at fixed rates, being £14.5m of bank loans (2005: £14.8m) and £117.1m of senior notes (2005: £137.3m). All other borrowings were at floating rates with regular repricing dates.

In respect of the fixed rate borrowings, the Group held senior notes as at 31 December 2006 of £112.0m (2005: £128.6m) which were swapped into floating rates on issuance in 2002 through to their maturity in 2009 (£27.4m) and 2012 (£84.6m), the rates being set on a six monthly basis. The Group has applied hedge accounting in respect of the swap and its fair value is detailed in note 25.

Of the floating rate debt of £231.8m at the year end (2005: £276.4m), the Group held interest rate swaps that will have the effect of swapping £132.8m (2005: £151.4m) of current US dollar-denominated bank loans at floating rate into fixed rate at 4.48% from January 2006 through to maturity in June 2010. Additionally £16.1m (2005: nil) of current Australian dollar-denominated floating rate debt has been swapped into fixed rate at 6.3% from May 2006 to maturity in January 2020. The Group has applied hedge accounting in respect of these swaps and their fair value is detailed in notes 25 and 27c.



23. Borrowings (continued)The Group manages the fair value interest rate risk inherent in fixed rate borrowings and the cash flow interest rate risk arising from floating rate borrowings by active review and the purchase of swap contracts when commercially justified.

The Group has the following undrawn borrowing facilities in various currencies available in respect of which all conditions precedent had been met. These facilities are at floating interest rates:

£m 2006 2005

Expiring within one year 58.3 65.6Expiring between one and five years 82.7 59.0 141.0 124.6

The estimated fair values of the Group’s borrowings is as follows:

£m 2006 2005

Bank overdrafts 3.9 13.5Bank loans 232.7 266.2Loan notes 8.6 10.2Senior notes (held at fair value) 117.1 137.3Other borrowings 1.1 1.3 363.4 428.5

All bank overdrafts are repayable on demand.

The Group’s principal borrowings are as follows:

In July 2005, a five year £300m revolving multi-currency credit facility was entered into for general corporate purposes, with extensions of up to two years at the options of the lenders. During the year the facility was extended by one year. Interest is payable at the applicable LIBOR rate of the drawn currencies, plus margin. As at 31 December 2006, £217.3m (2005: £241.6m) had been drawn on this facility.

A seven year bank loan for AUS$25.9m (£10.4m, 2005: £11.0m) expiring in June 2007 is secured by an all assets and undertakings charge over the Group’s Australian operations. These operations had gross assets of AUS$260.6m (£105.0m, 2005: £77.6m) which includes cash and cash equivalents of AUS$67.9m (£27.3m, 2005: £9.8m).

In addition two tranches of senior notes were issued in 2002, being US$55m maturing in 2009 with a 5.14% coupon and US$170m maturing in 2012 with a 5.58% coupon. The respective agreements contain no provisions for charges over Group assets and include both financial and non financial covenants.

24. Obligations under finance leases

Minimum lease Present value of payments minimum lease payments

£m 2006 2005 2006 2005

Amounts payable under finance leases:Within one year 0.2 0.2 0.2 0.2In the second to fifth years inclusive 0.6 0.4 0.4 0.4After five years 0.6 0.5 0.4 0.5 1.4 1.1 1.0 1.1Less: future finance charges (0.4) – n/a –Present value of lease obligations 1.0 1.1 1.0 1.1Less: Amount due for settlement within 12 months (shown under current liabilities) (0.2) (0.2)Amount due for settlement after 12 months 0.8 0.9

74 Cobham plc

25. Derivatives and other financial instrumentsThe Group’s multi-national operations and debt financing expose it to a variety of financial risks which include the effects of changes in debt market prices, foreign currency exchange rates, credit risks, equity securities prices, liquidity and interest rates. The Group has in place a risk management programme that seeks to limit the adverse effects on the financial performance of the Group by using foreign currency financial instruments, debt, and other instruments, including interest rate swaps.

Financial instruments The Group finances its operations primarily through a mixture of retained profits and borrowings. The Group does not use complex derivative financial instruments. Where it does use financial instruments these are mainly put in place to manage the currency risks arising from normal operations and to raise finance for the Group’s operations. The Group’s financial instruments, other than derivatives, comprise borrowings, cash and various items such as trade receivables and trade payables that arise directly from its operations. The Group uses forward foreign currency contracts to manage transactional currency risk arising from its operations and interest rate swaps to manage interest rate risk. Foreign currency borrowings are used to mitigate the impact of foreign currency exchange rates on the Group’s overseas net assets.

It is, and has been throughout the period under review, the Group’s policy that no trading in financial instruments shall be undertaken.

Foreign currency risk is the most significant exposure for the Group for which financial instruments are employed as mitigation. The Group is exposed to a lesser extent to other risks such as interest rate risk and liquidity risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below. The policies have remained unchanged throughout the year.

Foreign currency risk The Group, which is based in the UK and reports in sterling, has significant investment in overseas operations in the USA, with further investments in other European countries, Australia, Canada, South Africa and Asia. As a result, the Group’s balance sheet can be affected by movements in these countries’ exchange rates. The Group’s policy is to reduce, or eliminate where practicable, both structural and transactional foreign exchange risk. Where significant, currency-denominated net assets are partially hedged by currency borrowings and as at the year end £278.5m (2005: £330.6m) of US dollar borrowings and £42.4m (2005: £52.9m) of euro borrowings were designated as the hedging instruments in net investment hedges.

The Group also has transactional currency exposures. Such exposures arise from operating unit sales and purchases denominated in currencies other than the unit’s functional currency. The Group’s policy is to minimise trading in the operating units’ non functional currencies. However, where this is impractical, the Group will seek to reduce its exposure through the use of forward contracts. Currency exposures are reviewed regularly and all significant foreign exchange transactions are approved by the parent company.

The sterling/US dollar exchange rate is the most important as far as the Group is concerned, particularly given the level of US dollars which the subsidiaries expect to receive from their normal business activities. In addition to the longer term borrowing structure, a number of financial instruments are used to manage the foreign exchange position, such as forward contracts. As at 31 December 2006, US$185m (2005: US$224m) of dollar forward contracts were in place with maturity dates out to 2014 (2005: 2014). These contracts are at an average exchange rate of US$1.73: £1 (2005: US$1.72: £1). It is the Group’s current belief that the net dollar receipts from its subsidiaries will exceed the level of the outstanding commitment.

Interest rate risk The Group has various long and short term borrowings, principally in US dollars, euro, Australian dollars and sterling at both fixed and floating rates of interest. The Group continually monitors its exposure to movements in interest rates in order to bring greater stability and certainty with respect to borrowing costs. Group policy is to assess borrowings with regard to fixed or variable rates of interest depending on prevailing market conditions. Under this interest rate management policy the Group has acquired interest rate swaps. Further detail in respect of these instruments and their accounting treatment is detailed in note 23.

Surplus funds are placed on short term deposit. These deposits have floating rates of interest, and thus there is some modest exposure to interest rates.

Liquidity riskThe Group has a positive cash flow and where practicable the funds generated by operating companies are managed on a regional basis. For short term working capital purposes in the UK, most operating companies utilise local bank facilities within an overall Group arrangement. In the USA a central treasury function is maintained which all US subsidiaries use. These practices allow a balance to be maintained between continuity of funding, security and flexibility.

As regards liquidity, the Group’s policy throughout the year has been to maintain a mix of short, medium and long term borrowings with their lenders. Short term flexibility is achieved by overdraft facilities and the use of the Group’s revolving credit facility. In addition, it is the Group’s policy to maintain undrawn committed borrowing facilities in order to provide flexibility in the management of the Group’s liquidity; details are provided in note 23.



25. Derivatives and other financial instruments (continued)Commodity price riskThe Group has no material exposure to commodity price fluctuations.

Credit riskThe Group has no significant concentrations of credit risk. The Group’s principal financial assets are bank balances and cash, trade and other receivables and investments.

The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high credit ratings assigned by international credit-rating agencies. The Group further limits risk in this area by setting a maximum level for deposits or overdrafts with any one counterparty.

Concentrations of credit risk with respect to trade receivables are limited due to the Group’s customer base being large and unrelated. Due to this, the directors believe there is no further credit risk provision required in excess of normal provision for doubtful receivables.

In the UK the Group has a master netting arrangement in respect of bank balances. In the normal course of business these bank accounts are settled on a net basis within each currency and as such are presented in the financial statements as net. In the event of an automatic enforcement event the bank balances are automatically set off against each other to achieve a net position.

The Group has not pledged any assets in respect of any of its primary borrowing facilities, except as disclosed in notes 23 and 24.

Movement in fair values Interest rate swaps Currency Cash flow Fair value translation £m Note hedge hedge derivatives Total

Initial application of IAS 32 and 39 – 0.9 17.6 18.5Fair value gain / (loss) in year to 31 December 2005 – Through income statement – (3.4) (16.1) (19.5) – Through reserves 1.7 – – 1.7Fair value at 31 December 2005 1.7 (2.5) 1.5 0.7

Fair value gain / (loss) in year to 31 December 2006 – Through income statement (0.9) (0.6) 10.8 9.3 – Through reserves 27 1.3 – – 1.3Fair value at 31 December 2006 2.1 (3.1) 12.3 11.3

Interest rate swaps are accounted for using hedge accounting. Movements in fair values are matched against the corresponding liabilities or reflected in reserves as appropriate.

Currency translation derivatives are not accounted for using hedge accounting and movements in fair values are reflected in the income statement.

The fair values of the Group’s currency and interest rate derivatives are established using valuation techniques, primarily discounting cash flows, based on assumptions that are supported by observable market prices or rates.

Balance sheet analysis Interest rate swaps Currency Cash flow Fair value translation £m hedge hedge derivatives Total

Derivative financial instruments – non-current assets 1.3 – 3.2 4.5Derivative financial instruments – current assets 0.4 – 1.3 1.7Derivative financial instruments – current liabilities – (0.5) (3.0) (3.5)Derivative financial instruments – non-current liabilities – (2.0) – (2.0)Fair value at 31 December 2005 1.7 (2.5) 1.5 0.7

Derivative financial instruments – non-current assets 1.6 – 7.0 8.6Derivative financial instruments – current assets 0.6 – 6.4 7.0Derivative financial instruments – current liabilities – (0.7) (1.1) (1.8)Derivative financial instruments – non-current liabilities (0.1) (2.4) – (2.5)Fair value at 31 December 2006 2.1 (3.1) 12.3 11.3

76 Cobham plc

26. Share capitalAuthorised:

£m 2006 2005

1,479,200,000 (2005: 1,479,200,000) Ordinary Shares of par value 2.5p each 37.0 37.020,000 6% second cumulative preference shares of £1 each – –

Ordinary Shares issued and fully paid: Number of shares £m

At 1 January 2005 1,116,069,050 27.9Exercise of share options 6,790,440 0.2At 1 January 2006 1,122,859,490 28.1Exercise of share options 7,749,649 0.2At 31 December 2006 1,130,609,139 28.3

The Company has one class of Ordinary Shares which carry no right to fixed income.

19,700 6% second cumulative preference shares have been issued. These are non-redeemable and are classified as borrowings with a value of £19,700.

The shareholders of the 6% second cumulative preference shares are entitled to receive a fixed cumulative preference dividend at the rate of 6% per annum in priority to the payment of dividends on the Ordinary Shares (included within finance income as shown in note 3). In addition, on a return of assets on the liquidation or otherwise of the Company, the assets available for distribution are to be applied first in repaying to the holders of the 6% second cumulative preference shares the amounts paid up on their shares. On a show of hands, every member holding 6% second cumulative preference shares who is present in person has one vote and on a poll, every member has one vote for every £1 in nominal amount of the shares of which the member is the holder.

27. Reserves

£m Note 2006 2005

Share premium account 27a 94.2 87.5Translation reserve* 27b (8.9) 1.9Other reserves – Hedging reserve 27c 1.5 1.2 – Share options reserve 27d 14.5 10.1Total other reserves 16.0 11.3Retained earnings* 27e 585.3 456.8 686.6 557.5

* The translation reserve and retained earnings as at 31 December 2005 have been restated following a re-assessment of the cumulative translation reserve.

27a. Share premium account

£m

At 1 January 2005 81.6Issue of shares 5.9At 1 January 2006 87.5Issue of shares 6.7At 31 December 2006 94.2

27b. Translation reserve

£m

At 1 January 2005 (as restated) (1.3)Currency differences on translation of foreign operations (as restated) 3.4Transfer to profit on sale of undertakings (0.2)At 1 January 2006 (as restated) 1.9Currency differences on translation of foreign operations (11.2)Transfer to profit on sale of undertakings 0.4At 31 December 2006 (8.9)

Following a re-assessment of the cumulative translation reserve, this reserve has been restated as at 1 January 2005 from £(11.4m) to £(1.3m). The transfer from retained earnings for the year to 31 December 2005 has been restated from £24.6m to £3.4m and the balance as at 31 December 2005 has been restated from £13.0 to £1.9m.



27. Reserves (continued)27c. Hedging reserve

£m Note

At 1 January 2005 –Increase in fair value of cash flow hedging derivatives 25 1.7Tax effect of increase in fair value of cash flow hedging derivatives (0.5)At 1 January 2006 1.2Increase in fair value of cash flow hedging derivatives 25 1.3Tax effect of increase in fair value of cash flow hedging derivatives (0.4)Recycling of fair values to income statement 25 (0.9)Tax effect of recycling of fair values 0.3At 31 December 2006 1.5

27d. Share options reserve

£m

At 1 January 2005 4.8Credit to reserve for the year for share-based payments 2.8Deferred tax credit to reserve for the year 2.5At 1 January 2006 10.1Credit to reserve for the year for share-based payments 3.1Deferred tax credit to reserve for the year 1.3At 31 December 2006 14.5

The share options reserve includes the cost of share options issued during the year as assessed under IFRS 2 together with deferred tax provided under IAS 12 relating to share-based payments, where the calculated future tax benefit is in excess of the allowable charge for the year.

27e. Retained earnings £m Note

At 1 January 2005 (as restated) 420.2Initial application of IAS 21, 32 and 39 7.3Total recognised income for the year 72.5Transfer to translation reserve (as restated) (3.2)Transfer to hedging reserve (1.2)Transfer to share options reserve (2.5)Dividends authorised 5 (35.8)Profit for the year attributable to minority interest (0.5)At 1 January 2006 (as restated) 456.8Total recognised income for the year 161.8Transfer from translation reserve 10.8Transfer to hedging reserve (0.3)Transfer to share options reserve (1.3)Dividends authorised 5 (39.7)Profit for the year attributable to minority interest (0.2)Goodwill written off on acquisition of minority interests (2.6)At 31 December 2006 585.3

As detailed in note 27b, following a re-assessment of the cumulative translation reserve, retained earnings as at 1 January 2005 have been restated from £430.3m to £420.2m. The net transfer to translation reserve for the year to 31 December 2005 has been restated from £24.4m to £3.2m and the balance as at 31 December 2005 has been restated from £445.7m to £456.8m.

78 Cobham plc

28. Reconciliation of changes in total equity

£m Note 2006 2005

Total equity at start of year 587.1 534.5Initial application of IAS 21, 32 and 39 – 7.3Total recognised income for the year 161.8 72.5Dividends authorised 5 (39.7) (35.8)Profit attributable to minority interest (0.2) (0.5)Goodwill written off on acquisition of minority interests 29 (2.6) –Issue of share capital 26 0.2 0.2Premium on shares issued 27 6.7 5.9Share-based payments charge 27 3.1 2.8(Decrease) / increase in minority interest (1.4) 0.2Total equity at end of year 715.0 587.1

29. AcquisitionsThe acquisitions during the year to 31 December 2006 were as follows: Proportion of shares Date of acquired Cost of Names of businesses acquired Principal activity acquisition % acquisition

New subsidiariesAerodata Flight Inspection GmbH Inspection and calibration of aircraft safety systems 13 February 2006 100% €6.9mdomo Limited Digital wireless video technology 14 June 2006 100% £17.8m

Remaining minority interests in subsidiaries to obtain 100% holdingFlight Precision Limited Inspection and calibration of aircraft safety systems 13 February 2006 49% €4.5mWaveCall Communications Inc. Satellite communications 9 June 2006 25% US$2m

Components of the cost of acquisition of new subsidiaries:

£m Total

Cash 13.6Contingent consideration 8.7Directly attributable acquisition costs 0.3 22.6

As at 31 December 2006, fair values of assets and liabilities acquired are provisional and subject to potential subsequent adjustment.

A summary of the book values and fair value adjustments of the acquisitions is as follows:

£m Book value prior to acquisition Fair value

Non-current assets – Intangibles – 8.6 – Property, plant and equipment 1.8 1.1Current assets – Inventories 0.4 0.4 – Trade receivables 1.2 1.2 – Bank and cash balances 1.7 1.7Current liabilities – Trade payables (1.0) (1.0) – Corporation tax (0.6) (0.6)Non-current liabilities – Deferred tax liability – (2.3)Net assets acquired 3.5 9.1Goodwill 13.5Total consideration 22.6

Directly attributable acquisition costs include direct legal costs and stamp duty.

All intangible assets were recognised at their respective fair values. The residual excess of the total cost over the fair value of the net assets acquired is recognised as goodwill in the financial statements. Goodwill represents the premium paid in anticipation of future economic benefits from assets that are not capable of being separately identified and separately recognised.



29. Acquisitions (continued)Adjustments from book value to fair value include adjustments arising from the application of Group accounting policies, the recognition of intangible assets under IFRS 3 (Business Combinations) and fair value adjustments to property, plant and equipment.

On the acquisition of the remaining interests in Flight Precision Limited and WaveCall Communications Inc., goodwill amounting to £2.6m was written off under the economic entity method directly to retained earnings (see note 27e).

A summary of the net cash outflows arising from the acquisitions in 2006 is as follows:

£m

Cash consideration paid including expenses of acquisition 13.9Cash and cash equivalents acquired (1.7) 12.2

The profit after tax of these acquisitions since the date of acquisition totalled £0.9m. If these acquisitions had taken effect on 1 January 2006, it is estimated that Group total revenues would have been £1,018m and profit after tax £149.0m. This information is not necessarily indicative of the results had the operations been acquired at the start of the year, nor of future results of the combined operations.

30. Discontinued operations On 8 March 2006 Wallop Defence Systems Ltd was sold, completing the disposal of the Group’s Countermeasures operations, which was initiated on 28 June 2005. At 31 December 2005 this operation was classified as held for sale and presented separately in the balance sheet. The results of this business are reported within discontinued operations in 2006, as in 2005.

For the year to 31 December 2005, discontinued operations also included the Group’s other countermeasures business, FR Countermeasures Inc, the Fluid and Air group and the Cobham Fluid Systems products division, which were all disposed of during 2005.

The results of the discontinued operations for the year, or to the date of disposal, were as follows:

2006 2005

Other Total Discontinued Fluid and discontinued discontinued £m operations Air group operations operations

Revenue 3.6 93.5 26.6 120.1Cost of sales (2.5) (80.5) (19.1) (99.6)Distribution costs (0.2) (3.3) (2.6) (5.9)Administrative expenses (0.1) (5.2) (2.4) (7.6)Other income – – 0.7 0.7Operating profit 0.8 4.5 3.2 7.7Finance income and expense 0.1 0.1 0.2 0.3Profit before tax 0.9 4.6 3.4 8.0Tax (0.1) (1.2) (0.7) (1.9)Profit for the year after tax 0.8 3.4 2.7 6.1Profit on disposal before tax 13.0 4.9Tax on profit on disposal – (3.6)Total profit after taxation from discontinued operations 13.8 7.4

Cash flows from discontinued operationsNet cash (used) / received in operating activities (1.5) (8.4) 4.4 (4.0)Net cash (used) / received in investing activities (1.0) (3.0) 5.9 2.9Net cash received / (used) in financing activities 0.1 (1.1) (1.4) (2.5)Foreign exchange – (1.6) (2.1) (3.7) (2.4) (14.1) 6.8 (7.3)

Earnings per Ordinary Share of discontinued operations (including profit on disposal) – basic 1.22p 0.66p – fully diluted 1.21p 0.66p

The carrying amounts of the assets and liabilities of disposals at the date of disposal are disclosed in note 31.

A depreciation charge of £nil (2005: £3.8m) has been charged in the results of discontinued operations.

80 Cobham plc

31. Disposal of subsidiaries and business operationsAs referred to in note 30, on 8 March 2006, the Group disposed of Wallop Defence Systems Limited for £33.8m, resulting in a profit on disposal, reported within discontinued operations, of £13.0m. Contingent consideration of £0.6m, which was provided in 2005, has been paid out to a purchaser, giving total consideration for discontinued operations of £33.2m.

During the year the Group also disposed of the following businesses:

Names of businesses disposed Date of disposal Proceeds of sale

Precision Antennas Limited 13 April 2006 £15.4mAtlas Composites Limited 19 May 2006 £0.6mSlingsby Aviation Limited 29 June 2006 £1.7mDräger Aerospace GmbH 26 July 2006 €45.7mChelton Applied Composites AB 10 November 2006 SEK55m Chelton Aviation Corporation (closure) 31 December 2006 –

These entities do not form a separate line of business for the Group and hence have been included within continuing operations. The profit on disposal before tax of £1.5m has been excluded from the trading profit, as detailed in note 7.

The profit on disposal can be analysed as follows: Discontinued Continuing Total £m operations operations disposals

Gross consideration 33.2 53.0 86.2Loan repayments (2.1) (4.4) (6.5)Net assets at date of disposal (5.6) (46.0) (51.6)Expenses of sale (1.7) (2.2) (3.9)Provisions created on disposal (11.1) (0.9) (12.0)Pension liability curtailment and settlement gains 0.3 2.4 2.7Transfer from translation reserve – (0.4) (0.4)Profit on disposal 13.0 1.5 14.5Tax credit on profit on disposal – 0.7 0.7Profit on disposal after tax 13.0 2.2 15.2

The net assets of the operations disposed of in 2006 were as follows: Discontinued Continuing Total £m operations operations disposals

At date of disposal Attributable goodwill – 28.7 28.7Other intangible assets 1.0 0.7 1.7Property, plant and equipment 6.0 8.2 14.2Inventories 2.2 16.9 19.1Trade and other receivables 3.6 19.8 23.4Cash and cash equivalents and overdrafts – (0.9) (0.9)Borrowings – (9.9) (9.9)Deferred tax liability (0.2) (0.8) (1.0)Current tax liability (0.3) (1.1) (1.4)Trade and other payables including provisions (6.7) (15.6) (22.3)Net assets at date of disposal 5.6 46.0 51.6

At 31 December 2005 Attributable goodwill – 28.7 28.7Other intangible assets – 0.7 0.7Property, plant and equipment – 10.5 10.5Inventories – 14.6 14.6Trade and other receivables – 18.1 18.1Cash and cash equivalents and overdrafts – 1.4 1.4Assets held for sale 18.1 – 18.1Borrowings – (11.2) (11.2)Trade and other payables – (19.3) (19.3)Deferred tax liability – (0.5) (0.5)Current tax liability – (0.7) (0.7)Liabilities held for sale (14.2) – (14.2)Net assets at 31 December 2005 3.9 42.3 46.2



31. Disposal of subsidiaries and business operations (continued)The net cash impact of the disposals is as follows:

Discontinued Continuing Total £m operations operations disposals

Cash consideration 33.2 53.0 86.2Expenses of sale (2.7) (0.9) (3.6)Net overdrafts disposed – 0.9 0.9 30.5 53.0 83.5

In addition, £11.5m of special contributions have been made to pension schemes in respect of these disposals.

Contingent consideration totalling £2.9m was also received in relation to the disposal of FR Countermeasures Inc, which was completed in 2005.

32. Charge in relation to trade investmentThe Group has taken a charge of £0.7m in respect of Bournemouth Aviation Services Company Limited (19% holding) following the decision to undertake voluntary liquidation of this company.

33. Non-current assets held for sale As disclosed in note 31, at 31 December 2005, Wallop Defence Systems Limited was classified as held for sale and presented separately in the balance sheet. No assets were classified as held for sale as at 31 December 2006.

The major classes of assets and liabilities classified as held for sale as at 31 December 2005 were as follows:

£m

Property, plant and equipment 5.9Inventories 1.7Trade and other receivables 2.2Cash at bank 8.3Total assets classified as held for sale 18.1Trade and other payables (13.6)Tax and other liabilities (0.6)Total liabilities associated with assets classified as held for sale (14.2)Net assets of disposal group 3.9

34. Operating lease arrangementsAt the balance sheet date the Group had outstanding commitments for minimum lease payments due under non-cancellable operating leases as follows:

£m 2006 2005

Within one year 12.8 7.4Between one and five years 36.0 33.9After five years 77.1 77.4 125.9 118.7

Operating lease payments represent rentals payable by the Group for certain of its office and operational properties, and operational aircraft used in its service businesses.

82 Cobham plc

35. Contingent liabilitiesAs at 31 December 2006, the parent company and the Group had contingent liabilities in respect of bank and contractual performance guarantees and other matters arising in the ordinary course of business entered into for, or on behalf of, certain Group undertakings. Where it is expected that a material liability will arise in respect of these matters, appropriate provision is made within the Group consolidated financial statements or within those of the relevant subsidiary.

As the conditions of the above guarantees are currently being met, no obligating event is forseeable and therefore no contingent liability exists at the year end.

36. Commitments

£m 2006 2005

Commitments for the acquisition of property, plant and equipment 33.2 3.1

Capital commitments at 31 December 2006 mainly relate to aircraft for the Australian Sentinel contract.

37. Related party transactionsTransactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note. Details of transactions between the Group and other related parties are disclosed below.

Trading transactions and balances

£m 2006 2005

Transactions between Group entities and joint ventures during the year: Sales of goods 1.3 1.4Purchases of goods – (0.2)Management fees – (0.1)Dividends received 4.3 1.2

At the year end balances with joint ventures were as follows:Amounts owed by related parties to Group entities 0.1 0.1Amounts owed to related parties by Group entities – (0.1)

Sales of goods to related parties were made at the Group’s usual list prices for sales to non-related parties. Goods are bought on the basis of the price lists in force with non-related parties.

The amounts outstanding are unsecured and will be settled in cash. No guarantees have been given or received from related parties. No expense has been recognised in the period for bad or doubtful debts in respect of the amounts owed by related parties.

In 2006, prior to its acquisition by the Group, domo Limited sold £372,000 of goods to a subsidiary of Cobham plc, DTC Communications Inc.



37. Related party transactions (continued)Compensation of key management personnelThe remuneration of directors and other members of key management during the year was as follows:

£m 2006 2005

Remuneration 7.1 5.2Post-employment benefits 0.5 0.8Termination benefits – 0.1Share-based payments 1.4 1.2 9.0 7.3

The remuneration of directors and key executives is determined by the remuneration committee having regard to the performance of individuals and market trends.

The directors of Cobham plc had no material transactions with the Company during the year, other than as a result of service agreements. Details of the directors remuneration are disclosed in the Directors’ remuneration report on pages 32 to 38.

During the period the Board and Mr Hannam agreed that his service contract should be extended for a year beyond his contractual retirement date of 28 March 2006 and that a payment of £96,630 would be made to a self-invested pension plan (SIPP) in lieu of pension contributions.

Since the year end, the Board and Mr Hannam have agreed a further extension to his service contract to 31 December 2007. In addition, it was agreed that payments of £49,243 and £40,787 would be made to his SIPP and to the Cobham Executive Pension Plan respectively. The latter payment is an additional employer contribution representing an enhancement to the late retirement factor to comply with the age discrimination regulations.

During 2003, Mr P. Matthews, a member of the Group’s key management personnel, sold his shares in Sea Tel Inc to Chelton Avionics Inc, a subsidiary of Cobham plc. During 2006, Mr Matthews received consideration for the shares of US$1,932,621 (2005: US$403,033) under the terms of the sale; this is included in the remuneration shown in the table above. Further consideration on earn out terms in the sale agreement will continue to be earned until 2008 based on Sea Tel Inc performance and his continued employment.

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38. SubsidiariesAll subsidiary undertakings have been included in the consolidation. The undertakings held at 31 December 2006 which, in the opinion of the directors, principally affected the results for the year or the net assets of the Group were:

Place of incorporation Proportion of Name of undertaking (or registration) and operation ownership interest %

Air Refuelling and Auxiliary Mission EquipmentFlight Refuelling Limited* England 100Sargent Fletcher Inc USA 100

AntennasCobham Advanced Technologies (Southern Africa) (Proprietary) Limited South Africa 100Chelton Limited (formerly Chelton (Electrostatics) Limited) England 100Chelton Inc USA 100Cobham Advanced Composites Limited (formerly Chelton Radomes Limited) England 100Chelton Radomes Witney Limited England 100Cobham Composites Limited England 100Comant Industries Inc USA 100Credowan Limited England 100European Antennas Limited England 100Mastsystem International Oy Finland 100Omnipless Manufacturing (Proprietary) Limited* South Africa 100Racal Antennas Limited England 100Sea Tel Inc USA 100TracStar Systems Inc USA 100Vector Fields Limited England 100WaveCall Communications Inc USA 100

Avionics and SurveillanceACR Electronics Inc USA 100ACR Electronics AG (formerly Nauticast) Austria 100Air Précision SA France 100Artex Aircraft Supplies Inc USA 100Chelton Antennas SA France 100Chelton Avionics Inc USA 100Chelton Flight Systems Inc USA 100Chelton Telecom & Microwave SA France 100domo Limited England 100DTC Communications Inc USA 100Hyper-Technologies SA France 100Label SA France 100Micromill Electronics Limited England 100NEC Aero SA France 100Northern Airborne Technology Limited Canada 99.0Orion Electronics Limited Canada 100Salies SA France 100Seimac Limited Canada 100Spectronic Denmark A/S Denmark 100TEAM SA France 98.7



38. Subsidiaries (continued)

Place of incorporation Proportion of Name of undertaking (or registration) and operation ownership interest %

Defence Electronic SystemsAtlantic Microwave Corporation USA 100Cobham Defence Communications Limited (formerly Chelton Defence Communications Limited) England 100Continental Microwave & Tool Co Inc USA 100Kevlin Corporation USA 100Nurad Technologies Inc USA 100REMEC Defense & Space Inc USA 100Sivers Lab AB Sweden 100WA Systems Limited England 100

Life SupportCarleton Technologies Inc USA 100Carleton Life Support Systems Inc USA 100Conax Florida Corporation USA 100H Koch & Sons Co USA 100

Flight Operations and ServicesAFI Flight Inspection GmbH Germany 100Flight Precision Limited England 100FR Aviation Group Limited* England 100FR Aviation Limited England 100FR Aviation Services Limited England 100National Air Support Pty Limited Australia 100National Jet Systems Pty Limited Australia 100Surveillance Australia Pty Limited Australia 100

Other ActivitiesCulham Lightning Limited England 100ERA Technology Limited England 100

In the case of the companies marked *, the stated percentage nominal value of issued shares is held by, or by a nominee for, Cobham plc. Otherwise shares are held by, or by a nominee for, a subsidiary of Cobham plc.

39. Approval of financial statementsThe financial statements were approved by the Board of directors and authorised for issue on 28 March 2007.

86 Cobham plc

UK GAAP UK GAAP IFRS IFRS IFRS £m 2002 2003 2004 2005 2006

Revenue 734.6 832.6 832.3 970.3 1,012.1Underlying profit before taxation 115.8 135.3 142.3 167.0 182.9Profit on continuing operations before taxation 99.9 119.8 134.4 126.0 185.2Tax on continuing operations (28.1) (36.0) (38.1) (35.3) (50.7)Profit on continuing operations after taxation 71.8 83.8 96.3 90.7 134.5Profit / (loss) after taxation from discontinued operations – (65.3) 4.3 7.4 13.8Profit after taxation for the year 71.8 18.5 100.6 98.1 148.3

Net assets employedIntangible assets 250.3 345.9 405.6 528.1 482.6Property, plant and equipment (including investment properties) 194.2 228.1 241.9 206.8 194.0Investments 14.5 16.5 14.2 14.7 15.7Other non-current assets – – 7.3 19.8 24.7Current assets 405.1 487.0 584.0 649.4 717.3 864.1 1,077.5 1,253.0 1,418.8 1,434.3Current liabilities (277.1) (340.2) (445.9) (559.6) (498.7)Long term liabilities (242.2) (231.2) (203.5) (191.1) (191.0)Net assets excluding pension liabilities 344.8 506.1 603.6 668.1 744.6Pension liabilities (46.6) (49.2) (69.1) (81.0) (29.6)Net assets including pension liabilities 298.2 456.9 534.5 587.1 715.0

Financed byOrdinary Share capital 25.4 27.8 27.9 28.1 28.3Reserves 272.0 428.0 505.3 557.5 686.6Shareholders’ funds 297.4 455.8 533.2 585.6 714.9Minority interest 0.8 1.1 1.3 1.5 0.1Net assets 298.2 456.9 534.5 587.1 715.0

penceDividend per Ordinary Share 2.56 2.82 2.90 3.19 3.51Earnings per Ordinary Share – underlying 8.64 9.35 9.12 10.58 11.66Earnings per Ordinary Share – basic (IFRS -continuing) 7.07 1.72 8.61 8.05 11.90Earnings per Ordinary Share – fully diluted (IFRS -continuing) 7.02 1.71 8.55 8.01 11.79Net assets per Ordinary Share 29.4 41.2 48.0 52.4 63.2

£m Market capitalisation 1,035 1,295 1,381 1,900 2,191

Notes:IFRS underlying profit before taxation excludes exceptional gains and losses on disposal of undertakings, amortisation of intangible assets recognised on acquisition and unrealised changes in fair value of currency derivative instruments.

UK GAAP underlying profit before taxation excludes amortisation of goodwill, integration costs and exceptional items.

Income statement figures reported under UK GAAP include discontinued operations. Under IFRS the profit/loss for discontinued operations is disclosed separately below profit on continuing operations after taxation.

Group financial record

Annual Report & Accounts 2006

We have audited the parent company financial statements of Cobham plc for the year ended 31 December 2006 which comprise the balance sheet, the statement of total recognised gains and losses, the reconciliation of movements in shareholders’ funds, the related notes and the accounting policies. These parent company financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors’ remuneration report that is described as having been audited.

We have reported separately on the Group financial statements of Cobham plc for the year ended 31 December 2006.

Respective responsibilities of directors and auditorsThe directors’ responsibilities for preparing the Annual Report, the Directors’ remuneration report and the parent company financial statements in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are set out in the Statement of directors’ responsibilities.

Our responsibility is to audit the parent company financial statements and the part of the Directors’ remuneration report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). This report, including the opinion, has been prepared for and only for the Company’s members as a body in accordance with Section 235 of the Companies Act 1985 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

We report to you our opinion as to whether the parent company financial statements give a true and fair view and whether the parent company financial statements and the part of the Directors’ remuneration report to be audited have been properly prepared in accordance with the Companies Act 1985. We also report to you whether in our opinion the information given in the Directors’ report is consistent with the parent company financial statements.

In addition we report to you if, in our opinion, the parent company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors’ remuneration and other transactions is not disclosed.

We read other information contained in the Annual Report and consider whether it is consistent with the audited parent company financial statements. The other information comprises only the Chairman’s statement, the Chief Executive’s review, the Business review, the Financial review, the statement on Corporate Responsibility, the statement on strategy, the Directors’ report, the Corporate governance statement and the unaudited part of the Directors’ remuneration report. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the parent company financial statements. Our responsibilities do not extend to any other information.

Basis of audit opinionWe conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the parent company financial statements and the part of the Directors’ remuneration report to be audited. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the parent company financial statements, and of whether the accounting policies are appropriate to the Company’s circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the parent company financial statements and the part of the Directors’ remuneration report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the parent company financial statements and the part of the Directors’ remuneration report to be audited.

OpinionIn our opinion:

the parent company financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the Company’s affairs as at 31 December 2006; the parent company financial statements and the part of the Directors’ remuneration report to be audited have been properly prepared in accordance with the Companies Act 1985; and the information given in the Directors’ Report is consistent with the parent company financial statements.

PricewaterhouseCoopers LLPChartered Accountants and Registered AuditorsSouthampton28 March 2007

Notes:(a) The maintenance and integrity of the Cobham plc website is

the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.

(b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Independent auditors’ report to the members of Cobham plc

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Accounting conventionThese financial statements have been prepared under the historical cost convention, as modified by the revaluation of certain tangible fixed assets and derivative contracts which are held at fair value, in accordance with the Companies Act 1985 and applicable accounting standards (UK GAAP). Compliance with SSAP 19 (Accounting for Investment Properties) requires departure from the requirements of the Companies Act 1985 relating to depreciation and an explanation of the departure is given in the tangible fixed assets accounting policy note below.

Interest incomeInterest income is recognised in the profit and loss account on an accruals basis.

Dividend incomeDividend income is recognised in the profit and loss account when it is declared.

PensionsThe Company operates and contributes to a multi-employer defined benefit pension scheme. Contributions and pension costs are apportioned across the scheme as a whole and assessed in accordance with the advice of qualified actuaries. The scheme is closed to new members and has a high proportion of deferred and pensioner members from businesses that no longer participate in the scheme. The Company is therefore not able to identify its share of underlying assets and liabilities of the scheme on a reasonable and consistent basis and in accordance with the multi-employer exemption contained in FRS17, the scheme has been accounted for as if it was a defined contribution scheme. The charge to the profit and loss account therefore reflects payments for the year.

Contributions to defined contribution schemes are charged to the profit and loss account in the period the contributions are payable.

The Company also makes contributions for certain employees to individual personal pension and stakeholder schemes. Contributions are charged to the profit and loss account in the year to which they relate.

Deferred taxationDeferred tax is recognised on a full provision basis on all timing differences which have originated, but not reversed at the balance sheet date calculated at rates of tax expected to apply, based on current tax rates and law. Timing differences represent accumulated differences between the Company’s taxable profit and its financial profit and arise primarily from payments to the Group’s defined benefit pension schemes and the difference between accelerated capital allowances and depreciation. Deferred tax liabilities have not been discounted.

Tangible fixed assetsPlant and machinery fixed assets are depreciated on a straight line basis to their estimated residual values over their estimated useful lives which range from three to five years. Investment properties are not depreciated.

In accordance with SSAP 19, investment properties are held at open market value. Any aggregate surplus or deficit on revaluation is transferred to a revaluation reserve, and no provision is made for depreciation of freehold properties. This departure from the requirements of the Companies Act 1985, which requires all properties to be depreciated, is, in the opinion of the directors, necessary for the financial statements to show a true and fair view in accordance with applicable accounting standards.

The depreciation (which would, had the provisions of the Act been followed, have reduced profit for the year) is only one of the factors reflected in the valuation and the amount attributable to this factor cannot reasonably be separately identified or quantified.

Investment in Group undertakingsInvestments are stated at cost less any provision for impairment in value, and also reflect the value of share options awarded to employees of subsidiary undertakings.

Operating leasesOperating lease payments for assets leased from third parties are charged to the profit and loss account as incurred.

ProvisionsA provision is recognised when the Company has a present legal or constructive obligation as a result of a past event and it is probable that settlement will be required of an amount that can be reliably estimated.

Share capitalPreference share capital is classified as a liability if it is redeemable on a specific date or at the option of the preference shareholders or if dividend payments are not discretionary. Dividends on preference share capital classified as liabilities are recognised in the profit and loss account as interest expense. Foreign currenciesThe local currency of the Company is sterling. Transactions in currencies other than the local currency are translated at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denoted in non-functional currencies are retranslated at the exchange rate ruling at the balance sheet date and any exchange differences arising are taken to the profit and loss account.

In order to manage the Group’s exposure to certain foreign exchange risks, the Company enters into forward contracts and options which are accounted for as derivative financial instruments.

Accounting policies


Derivative financial instruments and hedge accounting Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged.

The Company’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. The Company uses foreign exchange forward contracts and interest rate swap contracts to reduce these exposures. The Company does not use derivative financial instruments for speculative purposes.

The Company documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedge transactions. The Company also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.

Fair value hedgesChanges in fair value of derivatives that are designated and qualify as fair value hedges are recorded in the profit and loss account, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The gains or losses relating to interest rate swaps hedging fixed rate borrowings are recognised in the profit and loss account.

If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortised to the profit and loss account over the period to maturity.

Cash flow hedgeThe effective portion of changes in fair value of derivatives that are designated and qualify as cash flow hedges are recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the profit and loss account. Amounts accumulated in equity are recycled to the profit and loss account in the periods when the hedged item affects profit or loss.

When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the profit and loss account. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is immediately transferred to the profit and loss account for the period.

Share-based remunerationFor grants made under the Group’s equity-settled share-based remuneration schemes, amounts which reflect the fair value of options awarded as at the time of grant are charged to the profit and loss account. The costs of awards made under cash-settled share-based remuneration schemes are measured initially at the grant date and expensed over the vesting period. The liability is remeasured at each balance sheet date up to and including the settlement date with changes in fair value recognised through the profit and loss account.

The valuation methodology for all schemes is based on the Black-Scholes model, modified where required to allow for the impact of market related performance criteria.

The Company has taken advantage of the transitional provisions of FRS 20 in respect of equity-settled awards and has applied FRS 20 only to equity-settled awards granted after 7 November 2002.

Critical accounting estimates and judgementsEstimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

Management judgementIn the process of applying the Company’s accounting policies, management has made a number of judgements, none of which are considered to have a significant effect on the amounts recognised in the financial statements.

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Parent company balance sheet (under UK GAAP)As at 31 December 2006

£m Note 2006 2005

Fixed assetsTangible assets 1 7.4 7.2Investment in Group undertakings 2 749.7 726.4Financial assets: Derivative financial instruments 10 8.5 4.5 765.6 738.1

Current assetsFinancial assets: Derivative financial instruments 10 6.7 1.4Debtors: Amounts falling due within one year 3 387.6 429.8Cash at bank and in hand 208.5 154.3 602.8 585.5Creditors: Amounts falling due within one year Borrowings 4 (426.4) (365.5) Other creditors 4 (271.4) (279.8) Financial liabilities: Derivative financial instruments 10 (1.3) (3.3) (699.1) (648.6)Net current liabilities (96.3) (63.1)Total assets less current liabilities 669.3 675.0Creditors: Amounts falling due after more than one year Borrowings 5 (115.2) (134.4) Other creditors 5 (3.4) (3.4) Financial liabilities: Derivative financial instruments 10 (2.5) (2.0)Provisions for liabilities and charges 6 (12.9) (9.6) 535.3 525.6Capital and reservesCalled up share capital 7 28.3 28.1Share premium account 8 94.2 87.5Special reserve 8 43.6 43.6Revaluation reserve 8 2.9 2.9Other reserves 8 10.8 7.4Profit and loss account 8 355.5 356.1Equity shareholders’ funds 535.3 525.6

Approved by a duly appointed and authorised committee of the Board on 28 March 2007 and signed on its behalf by:

Gordon PageWarren TuckerDirectors

Registered number in England: 30470


Statement of total recognised gains and losses For the year ended 31 December 2006

£m Note 2006 2005

Profit / (loss) attributable to shareholders 39.1 (10.1)

Movement on cash flow hedges 8 0.4 1.7Movement on deferred tax relating to cash flow hedges 8 (0.4) (0.5)Movement on current tax relating to cash flow hedges 8 0.3 –Revaluation of investment properties 8 – 2.9Total recognised gains / (losses) relating to the year 39.4 (6.0)

Reconciliation of movements in shareholders’ fundsFor the year ended 31 December 2006

£m Note 2006 2005

Profit / (loss) attributable to shareholders 39.1 (10.1)Dividends 11 (39.7) (35.8)Loss for the year 8 (0.6) (45.9)Issue of share capital 7 0.2 0.2Premium on shares issued 8 6.7 5.9Revaluation of investment properties 8 – 2.9Initial application of adopting FRS 26 – 10.8Hedging reserve movement on adoption of FRS 26 8 0.3 1.2Credit in respect of employee share schemes 8 3.1 3.0Net increase / (decrease) to shareholders’ funds 9.7 (21.9)Shareholders’ funds at 1 January 525.6 547.5Shareholders’ funds at 31 December 535.3 525.6

Profit / (loss) attributable to shareholdersIn accordance with the concession granted under Section 230(1) of the Companies Act 1985, the profit and loss account of Cobham plc has not been separately presented in these financial statements. There is no material difference between the results disclosed and the results on an unmodified historical cost basis. Cash flow statement In accordance with the exemption under FRS 1, the Company’s cash flow statement has not been separately presented in these financial statements.

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Notes to the parent company financial statements

1. Tangible fixed assets

Plant Investment and £m properties machinery Total

Cost or valuationAt 1 January 2006 7.0 0.5 7.5Additions – 0.4 0.4Disposals – (0.1) (0.1)At 31 December 2006 7.0 0.8 7.8

Accumulated depreciationAt 1 January 2006 – 0.3 0.3Charge for the year – 0.1 0.1At 31 December 2006 – 0.4 0.4

Net book amountAt 31 December 2006 7.0 0.4 7.4At 1 January 2006 7.0 0.2 7.2

A fair value of £7.0m was ascribed to the investment property in February 2006. This is based on an estimated market price provided by the agent who manages the property on the Company’s behalf. The agent is experienced in marketing such properties in the location and in the opinion of the directors forms a reasonable basis for the valuation. No formal valuation has been completed. The investment property has a historical cost of £4.1m.

The Company had capital commitments of £0.1m at 31 December 2006 (2005: £nil).

2. Investments in Group undertakings

£m Shares Options Total

At 31 December 2005 721.3 5.1 726.4Additions in the year 21.4 – 21.4Options granted to employees of subsidiary undertakings – 1.9 1.9At 31 December 2006 742.7 7.0 749.7

The directors consider that the fair value of investments is not less than their carrying value. The market capitalisation of the Group as a whole is given in the Group financial record on page 86.

A list of subsidiaries is provided in note 38 to the Group financial statements.

3. Debtors

£m Note 2006 2005

Amounts falling due within one yearAmounts owed by subsidiary undertakings 376.3 419.9Prepayments and accrued income 2.4 3.3Taxation receivable (UK Corporation Tax) 4.7 –Deferred tax 12 4.2 6.6 387.6 429.8

The directors consider that the carrying value of debtors approximates to their fair value.


4. Creditors: Amounts falling due within one year

£m 2006 2005

BorrowingsBank loans and overdrafts 424.5 362.6Senior notes 1.9 2.9 426.4 365.5

Further details concerning borrowings are given in note 5.

£m 2006 2005

Other creditorsTrade creditors 2.6 5.5Amounts owed to subsidiary undertakings 260.0 267.4Taxation payable (UK Corporation Tax) – 0.7Payroll and other taxes, including social security 0.4 1.0Accruals and deferred income 8.4 5.2 271.4 279.8

In July 2005, a five year £300m revolving multi-currency credit facility was entered into for general corporate purposes, with extensions of up to two years at the option of the lenders. During the year the facility was extended by one year. Interest is payable at the applicable LIBOR rate of the drawn currencies, plus margin. As at 31 December 2006, £217.3m (2005: £241.6m) had been drawn on this facility.

The directors consider that the carrying value of creditors approximates to their fair value.

5. Creditors: Amounts falling due after more than one year

£m 2006 2005

BorrowingsSenior notes repayable as follows:Between one and two years 1.9 2.9Between two and five years 26.7 34.2After five years 86.6 97.3 115.2 134.4

£m 2006 2005

Other creditors Amounts owed to subsidiary undertakings 3.4 3.4

Senior notes, repayable on maturity, were issued in October 2002. The facility comprises two series of notes; one for US$55m which has a bullet repayment after seven years and the other for US$170m which has a bullet repayment after ten years. The notes carry a fixed interest rate of 5.14% in respect of the seven year notes and a rate of 5.58% in respect of the ten year notes. These fixed rates have been swapped into rates that vary with LIBOR.

Senior notes, repayable by instalments, were issued in March 1996 and comprised two series of notes of US$25m each, one of which has been repaid in full. The remaining notes have an average life of ten years and carry a fixed interest rate of 6.42%. Repayments totalling US$15m have been made to date.

The directors consider that the carrying value of creditors approximates to their fair value.

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94 Cobham plc

Notes to the parent company financial statements continued

6. Provisions for liabilities and charges

£m Deferred tax Other Total

At 1 January 2006 1.6 8.0 9.6Charge to profit and loss account (0.6) 0.6 –Transferred from current tax 2.9 – 2.9Charge to reserves 0.4 – 0.4At 31 December 2006 4.3 8.6 12.9

Other provisionsOther provisions relate to indemnities given on the disposal of the Fluid and Air group. All amounts have been determined based on the directors’ current estimates of likely outcomes. Provisions relating to the Fluid and Air disposal are likely to unwind over a period of more than one year.

7. Called-up share capital

£m 2006 2005

AuthorisedEquity1,479,200,000 (2005: 1,479,200,000) Ordinary Shares of par value 2.5p each 37.0 37.0Non equity20,000 (2005: 20,000) 6% second cumulative preference shares of £1 – –

Allotted, issued and fully paidEquity1,130,609,139 (2005: 1,122,859,490) 2.5p Ordinary Shares 28.3 28.1Non equity19,700 (2005: 19,700) 6% second cumulative preference shares of £1 – –

The Company has one class of Ordinary Shares which carry no right to fixed income.

During the year, 4,872,201 (2005: 2,861,600) Ordinary Shares were issued in connection with the Cobham Savings Related Share Option Scheme and 2,877,448 (2005: 3,928,840) were issued in connection with the executive share option schemes. The nominal value of such shares were £0.2m (2005: £0.2m) and the cash consideration received net of costs was £6.9m (2005: £6.1m).

The 6% second cumulative preference shares are non-redeemable and are classified as borrowings with a value of £19,700.

The 6% second cumulative preference shareholders are entitled to receive a fixed cumulative preference dividend at the rate of 6% per annum in priority to the payment of dividends on the Ordinary Shares. In addition, on a return of assets on the liquidation or otherwise of the Company, the assets available for distribution are to be applied first in repaying to the holders of the 6% second cumulative preference shares the amounts paid up on their shares. On a show of hands every member holding 6% second cumulative preference shares who is present in person has one vote and on a poll every member has one vote for every £1 in nominal amount of the shares of which he is the holder.


8. Reserves Other reserves

Share Share Profit premium Special Revaluation Hedging option and loss £m Note account reserve reserve reserve reserve account Total

At 1 January 2005 81.6 43.6 – – 3.2 402.0 530.4

Loss for the year – – – – – (45.9) (45.9)Premium on issue of shares 5.9 – – – – – 5.9Movement in fair value of cash flow hedging derivatives 10 – – – 1.7 – – 1.7Tax effect of movement in fair value of cash flow hedging derivatives – – – (0.5) – – (0.5)Credit to reserves for the year for share-based payments – – – – 3.0 3.0Revaluation of investment properties – – 2.9 – – – 2.9At 1 January 2006 87.5 43.6 2.9 1.2 6.2 356.1 497.5

Loss for the year – – – – – (0.6) (0.6)Premium on issue of shares 6.7 – – – – – 6.7Movement in fair value of cash flow hedging derivatives 10 – – – 1.3 – – 1.3Tax effect of movement in fair value of cash flow hedging derivatives – – – (0.4) – – (0.4)Recycling of fair values to profit and loss account 10 – – – (0.9) – – (0.9)Tax effect of recycling of fair values to profit and loss account – – – 0.3 – – 0.3Credit to reserves for the year for share-based payments – – – – 3.1 – 3.1At 31 December 2006 94.2 43.6 2.9 1.5 9.3 355.5 507.0

Reserves are wholly attributable to equity interests.

The share option reserve relates to provisions made in accordance with FRS 20 for shares allocated under the Group’s share option schemes.

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96 Cobham plc

9. Share-based paymentsEquity settled share-based payment schemesThe Group operates two incentive schemes for certain senior executives, the Cobham Long Term Incentive Plan (LTIP) and the Cobham Executive Share Option Scheme (ESOS).

Under the LTIP scheme awards are made at nil cost, vesting over a three year performance period based on the Group’s Total Shareholder Return relative to that of a comparator group and also conditional upon the Group’s EPS growth over the same period.

Under the ESOS, options are granted at a price not less than the market value of the Group’s Ordinary Shares on, or shortly before the date the options are granted. Exercise is conditional upon the Group’s EPS growth over a three year period.

Further details of these schemes can be found in the Directors’ remuneration report on pages 32 to 38.

In addition, entry to the Cobham Savings Related Share Option Scheme (ShareSave) is available to all employees of participating subsidiaries. Employees may purchase the Company’s shares at 80% of the closing market price on the date of grant during a two-week period each year, up to a maximum contribution value of £3,000 in any one year. The shares so purchased are generally placed in the employee’s share savings plan and will only be released to employees who remain in the Group’s employment for a period of three years from the date of grant.

Employees of Cobham plc participate in all of the above schemes, details of the share options outstanding during the year for these employees are as follows:

LTIP 2006 2005 Number of share options Number of share options

Outstanding at the beginning of the year 2,866,550 1,343,100 Granted during the year 778,082 551,960 Forfeited during the year – –Exercised during the year – –Expired during the year (963,590) (319,150)Employees transferred from other Group companies – 1,290,640Outstanding at the end of the year 2,681,042 2,866,550 Exercisable at the end of the year – –

The options outstanding at the end of the period have a weighted average remaining contractual life of 1.30 years (2005: 1.40 years). During 2006, the effective dates for options granted were 12 May and 14 November with an estimated fair value of £0.903 and £0.909. During 2005, options were granted on 11 May with an estimated fair value of £0.551.

These fair values were calculated using the Black-Scholes option pricing model modified by a Monte Carlo simulation to determine the likely impact of market-related performance conditions. The inputs into the model were as follows:

2006 2005

Weighted average share price £1.832 £1.335Weighted average exercise price Nil NilExpected volatility 22% 22%Expected life 3 years 3 yearsRisk free rate 4.5% 4.4%Expected dividend yield 1.9% 2.3%




9. Share-based payments (continued)ESOS 2006 2005 Number of Weighted average Number of Weighted average share options exercise price share options exercise price

Outstanding at the beginning of the year 2,615,096 1.316 1,954,334 1.246 Granted during the year 1,123,712 1.858 599,102 1.351 Forfeited during the year (2,870) 1.186 – – Exercised during the year (48,290) 1.134 (305,430) 0.962 Expired during the year – – – – Employees transferred from other Group companies – – 367,090 1.337Outstanding at the end of the year 3,687,648 1.484 2,615,096 1.316 Exercisable at the end of the year 373,800 1.125 112,760 0.926

Options are awarded with a vesting period of three years and may be exercised at any time up to seven years after the vesting date.

Share options were exercised by employees of Cobham plc throughout the year and the average share price was £1.777 (2005: £1.444). The options outstanding at the year end held by employees of Cobham plc have a weighted average remaining contractual life of 8.28 years (2005: 8.79 years), exercise prices range from £0.912 to £1.898. In 2006, the effective dates for grants of options were 12 May and 14 November. The estimated fair values of the options granted on those dates were £0.45 and £0.47. In 2005, options were granted on 11 May and 19 October. The estimated fair values of the options granted on those dates are £0.32 and £0.35 respectively.


2006 2005

Weighted average share price 1.833 1.404 Weighted average exercise price 1.855 1.432 Expected volatility 25% 26%Expected life 5 years 5 yearsRisk free rate 4.5% 4.4%Expected dividend yield 1.9% 2.1%

Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous five years. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.

ShareSave 2006 2005 Number of Weighted average Number of Weighted average share options exercise price share options exercise price

Outstanding at the beginning of the year 227,674 0.999 193,490 0.919 Granted during the year 66,319 1.530 50,174 1.240 Forfeited during the year (7,540) 1.240 (3,550) 1.047 Exercised during the year (21,880) 0.717 (12,440) 0.713 Expired during the year – – – – Outstanding at the end of the year 264,573 1.148 227,674 0.999 Exercisable at the end of the year – – – –

Share options were exercised by Cobham plc employees throughout the year and the average share price was £1.777 (2005: £1.444). The options outstanding at the year end held by Cobham plc employees have a weighted average remaining contractual life of 2.73 years (2005: 2.97 years), exercise prices range from £0.691 to £1.530. In 2006, ShareSave contracts commenced on 1 February with estimated fair values of £0.69 (three year life), £0.76 (five year life) and £0.81 (seven year life). In 2005, ShareSave contracts commenced on 1 February with estimated fair values of £0.405 (three year life), £0.487 (five year life) and £0.549 (seven year life).


2006 2005

Weighted average share price £1.850 £1.382Weighted average exercise price £1.240 £1.076Expected volatility 22%-27% 23%-31%Expected life 3-7 years 3-7 yearsRisk free rate 4.3% 4.5%Expected dividend yield 1.8% 2.2%

Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous three to seven years, dependant on the life of the option. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.

The Company recognised total expenses of £1.1m (2005: £0.5m) related to equity-settled share-based payment transactions during the year.

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98 Cobham plc

9. Share-based payments (continued)Cash settled share-based payment schemesDuring the year, the Group issued share appreciation rights (SARs) and awards under a phantom LTIP scheme to certain senior executives that require the Group to pay the intrinsic value of the award to the employee at the date of exercise. One employee of Cobham plc was granted rights to 16,867 SARs on 14 November 2006. These have an exercise price of £1.898 and a fair value at 31 December 2006 of £0.52. The expense for the year for these rights is based on the fair value of the outstanding liability at the balance sheet date and totalled £3,000 for 2006. None of the Company’s employees received awards under the phantom LTIP scheme.

SARs are granted at a price not less than the market value of the Group’s Ordinary Shares on, or shortly before the date the rights are granted. As with the ESOS awards, exercise is conditional upon the Group’s EPS growth over a three year period and is possible between three and 10 years after grant.

The fair value of the SARs was calculated using the Black-Scholes option pricing model. The inputs into the model were as follows:

Weighted average share price £1.938Weighted average exercise price £1.898Expected volatility 25%Expected life 5 YearsRisk free rate 5.0%Expected dividend yield 1.8%


10. Derivative financial instruments Interest rate swaps Currency Cash flow Fair value translation £m hedge hedge derivatives Total

Movement in fair values Initial application of new accounting standards – 0.9 15.4 16.3Fair value gain / (loss) in period through profit and loss account – (3.4) (14.0) (17.4)Fair value gain / (loss) in period through reserves 1.7 – – 1.7Fair value at 31 December 2005 1.7 (2.5) 1.4 0.6

Fair value gain / (loss) in period through profit and loss account (0.9) (0.6) 11.0 9.5Fair value gain / (loss) in period through reserves 1.3 – – 1.3Fair value at 31 December 2006 2.1 (3.1) 12.4 11.4

Balance sheet analysisDerivative financial instruments – non-current assets 1.6 – 6.9 8.5Derivative financial instruments – current assets 0.6 – 6.1 6.7Derivative financial instruments – current liabilities – (0.7) (0.6) (1.3)Derivative financial instruments – non-current liabilities (0.1) (2.4) – (2.5)Fair value at 31 December 2006 2.1 (3.1) 12.4 11.4

Derivative financial instruments – non-current assets 1.3 – 3.2 4.5Derivative financial instruments – current assets 0.4 – 1.0 1.4Derivative financial instruments – current liabilities – (0.5) (2.8) (3.3)Derivative financial instruments – non-current liabilities – (2.0) – (2.0)Fair value at 31 December 2005 1.7 (2.5) 1.4 0.6

Interest rate swaps are accounted for using hedge accounting. Movements in fair values are matched against the corresponding liabilities or reflected in reserves as appropriate.

Currency translation derivatives are not accounted for using hedge accounting and movements in fair values are reflected in the profit and loss account.

The fair values of currency and interest rate derivatives are established using valuation techniques, primarily discounting cash flows, based on assumptions that are supported by observable market prices or rates.



11. Dividends

£m 2006 2005

Dividends on Ordinary SharesFinal dividend per share for the year ended 31 December 2005 (2005: 31 December 2004) 2.40p 2.18pInterim dividend per share for the year ended 31 December 2006 (2005: 31 December 2005) 1.11p 1.01p

Total final dividend authorised 27.1 24.5Total interim dividend authorised 12.6 11.3Total dividend authorised 39.7 35.8

In addition to the above, the directors are proposing a final dividend in respect of the financial year ended 31 December 2006 of 2.64p per share which will absorb an estimated £29.8m of shareholders’ funds. This dividend is subject to approval by shareholders at the AGM and has not been included as a liability in these financial statements. If authorised, it will be paid on 6 July 2007 to shareholders who are on the register of members as at 1 June 2007.

In addition, the Company has intergroup dividends receivable of £nil (2005: £13.0m) that are proposed but not authorised and which are not included in the accounts under FRS 21.

12. Deferred taxation

£m Note 2006 2005

Deferred tax assets 3 4.2 6.6Deferred tax liabilities 6 (4.3) (1.6) (0.1) 5.0

The amount provided for represents: Accelerated capital allowances (0.6) (0.7)Other timing differences 0.5 5.7 (0.1) 5.0

Movements in deferred tax assets are as follows:

£m Total

At 1 January 2006 6.6Charge to profit and loss account (2.4)At 31 December 2006 4.2

The deferred tax assets relate primarily to deferred taxation on pension payments, and are expected to reverse over a period of up to three years.

Movements in deferred tax liabilities are disclosed in note 6.

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100 Cobham plc

13. Employees

£m 2006 2005

Wages and salaries 7.9 3.2Social security costs 0.9 0.4Other pension costs 0.7 0.8Share-based payments 1.1 0.5 10.6 4.9

Number 2006 2005

Average number of employees:Administration (including directors) 54 30

Disclosures in respect of directors’ emoluments can be found in the Directors’ remuneration report on pages 32 to 38 of the Group financial statements.

Disclosures in respect of key management emoluments can be found in note 37 to the Group financial statements.

Retirement benefit schemesThe Company operates and participates in the Cobham Pension Plan. The pension scheme is of the defined benefit type and its assets are held in a separate trustee administered fund. The fund is valued every three years by a professionally qualified independent actuary, the rates of contribution payable being determined by the actuary. The latest effective date of the actuarial assessment of the scheme was 6 April 2004. This assessment was updated to 31 December 2006 at which date the net liabilities of the scheme were assessed to be £19.6m. The directors of the companies involved in the Group scheme will continue to monitor the level of the pension deficit and take advice from independent actuaries as appropriate.

The scheme has been accounted for as if it was a defined contribution scheme and the charge to the profit and loss account therefore reflects payments for the year.

The cost of contributions to the Group scheme for 2006 amounted to £0.7m (2005: £0.8m) of normal funding and a special contribution of £11.5m (2004: £24.0m) in order to reduce the scheme deficit. Contributions to current benefit accruals represent 16.65% of pensionable salary (2005: 18.7%). No contributions were outstanding at the end of 2005 or 2006.

14. Contingent liabilitiesAs at 31 December 2006, the Company had contingent liabilities in respect of bank and contractual performance guarantees and other matters arising in the ordinary course of business entered into, for, or on behalf of, certain Group undertakings. It is not expected that any material liability will arise in respect thereof. Reference should be made to note 35 of the Group financial statements.

15. Related party transactionsDirectorsThe directors of Cobham plc had no material transactions with the Company during the year, other than as a result of service agreements. Details of the directors’ remuneration are disclosed in the Directors’ remuneration report. Exemption has been taken under FRS 8 from disclosing related party transactions for the parent company.

16. Foreign exchangeThe impact of foreign exchange to the profit and loss account for the year ended 31 December 2006 is a £1.9m gain (2005: £0.9m gain).


100 Cobham plc

13. Employees

£m 2006 2005

Wages and salaries 7.9 3.2Social security costs 0.9 0.4Other pension costs 0.7 0.8Share-based payments 1.1 0.5 10.6 4.9

Number 2006 2005

Average number of employees:Administration (including directors) 54 30

Disclosures in respect of directors’ emoluments can be found in the Directors’ remuneration report on pages 32 to 38 of the Group financial statements.

Disclosures in respect of key management emoluments can be found in note 37 to the Group financial statements.

Retirement benefit schemesThe Company operates and participates in the Cobham Pension Plan. The pension scheme is of the defined benefit type and its assets are held in a separate trustee administered fund. The fund is valued every three years by a professionally qualified independent actuary, the rates of contribution payable being determined by the actuary. The latest effective date of the actuarial assessment of the scheme was 6 April 2004. This assessment was updated to 31 December 2006 at which date the net liabilities of the scheme were assessed to be £19.6m. The directors of the companies involved in the Group scheme will continue to monitor the level of the pension deficit and take advice from independent actuaries as appropriate.

The scheme has been accounted for as if it was a defined contribution scheme and the charge to the profit and loss account therefore reflects payments for the year.

The cost of contributions to the Group scheme for 2006 amounted to £0.7m (2005: £0.8m) of normal funding and a special contribution of £11.5m (2004: £24.0m) in order to reduce the scheme deficit. Contributions to current benefit accruals represent 16.65% of pensionable salary (2005: 18.7%). No contributions were outstanding at the end of 2005 or 2006.

14. Contingent liabilitiesAs at 31 December 2006, the Company had contingent liabilities in respect of bank and contractual performance guarantees and other matters arising in the ordinary course of business entered into, for, or on behalf of, certain Group undertakings. It is not expected that any material liability will arise in respect thereof. Reference should be made to note 35 of the Group financial statements.

15. Related party transactionsDirectorsThe directors of Cobham plc had no material transactions with the Company during the year, other than as a result of service agreements. Details of the directors’ remuneration are disclosed in the Directors’ remuneration report. Exemption has been taken under FRS 8 from disclosing related party transactions for the parent company.

16. Foreign exchangeThe impact of foreign exchange to the profit and loss account for the year ended 31 December 2006 is a £1.9m gain (2005: £0.9m gain).


Analysis of shareholders(a) At 31 December 2006, 6,077 ordinary shareholders were on the register compared with 5,507 at 31 December 2005.(b) Analysis of ordinary shareholders on the register at 31 December 2006:

Percentage Percentage Number of registered Number of of Ordinary registered holders Ordinary Shares Shares holders % held %

Size of holding Up to 1,000 1,600 26.33 781,046 0.071,001 – 10,000 3,027 49.81 11,801,463 1.0410,001 – 50,000 807 13.28 17,664,458 1.5650,001 – 250,000 315 5.18 36,533,859 3.23250.001 – 1,000,000 161 2.65 84,109,499 7.441,000,001 and above 167 2.75 979,718,814 86.66 6,077 100 1,130,609,139 100Category Private persons 4,224 69.51 30,891,805 2.73Nominees 1,729 28.45 1,071,937,332 94.81Insurance companies 0 0 0 0Pension funds 2 0.03 2,060 0.00Other corporate bodies 122 2.01 27,777,942 2.46 6,077 100 1,130,609,139 100Source: Lloyds TSB Registrars.

Shareholder information

RegistrarsEnquiries concerning shareholdings or dividends should, in the first instance, be addressed to the Company’s registrars, Lloyds TSB Registrars, The Causeway, Worthing, West Sussex BN99 6DA (telephones: 0870 600 3964 or +44 (0)121 415 7047). Shareholders should promptly notify the registrars of any change of address or other particulars.

The registrars provide a range of shareholders’ services on-line. The portfolio service provides access to information on investments including balance movements, indicative share prices and information on recent dividends and also enables address and mandate details to be amended on-line. For further information and practical help on transferring shares or updating your details, please visit www.shareview.co.uk. The share dealing service enables shares to be sold by UK shareholders by telephone or over the internet. For telephone sales please call 0870 850 0852 between 8.30 a.m. and 4.30 p.m. For internet sales please visit www.shareview.co.uk/dealing.

Registered OfficeBrook Road,Wimborne, Dorset BH21 2BJTel: +44 (0)1202 882020Fax: +44 (0)1202 840523Internet: www.cobham.comRegistered in England No. 30470

Individual Savings Accounts (ISAs)The Company has introduced corporate sponsored ISAs through The Share Centre Limited, an independent stockbroker. Further information may be obtained from The Share Centre Limited on +44 (0)1296 414141 or by writing to The Share Centre Limited, PO Box 2000, Aylesbury, Bucks HP21 8ZB. Alternatively, details can be requested via email: [email protected].

Capital Gains TaxFor the information of shareholders who held Cobham plc Ordinary Shares on 31 March 1982, the market value, adjusted for capitalisation and rights issues, of the Company’s Ordinary Shares on that date for capital gains tax purposes, unadjusted for the share sub-division of July 2005, was 86.02p.

Financial CalendarAGM 6 June 2007Final dividend 6 July 2007Interim results 11 September 2007Interim dividend December 2007

Design and production: Addison Corporate Marketing Ltd Print: Royle Corporate Print (ISO 14001 and FSC accredited)

Back cover: Bottom row, middle picture photograph by: LA Dave Griffiths; © Crown Copyright/MOD, image from www.photos.mod.uk. Reproduced with the permission of the Controller of Her Majesty’s Stationery Office.

This paper is manufactured from up to 50% recycled content and the remainder from TCF (totally chlorine free) pulp. It is sourced from sustainable forests, is biodegradable and harmless to the environment. The manufacturing mill is ISO 14001 accredited.

The most important thing we build is trust

Cobham plcBrook RoadWimborneDorsetEngland BH21 2BJ

T: +44 (0)1202 882 020F: +44 (0)1202 840 523

www.cobham.com

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