The group said it had held many meetings with Boeing over the past few weeks to incorporate a wide range of changes into the KC-46 schedule that provided a solid baseline for completion of the programme.
It said this had been enabled by new ways of working between the companies and an unprecedented level of co-operation which resolved long standing technical and conformance issues.
It said the schedule remained challenging and was being executed against the ongoing backdrop of an onerous commercial arrangement. A statement said: "Through the commercial negotiations associated with the changes, it became clear that the costs to complete the development schedule would fall largely to Cobham's account.
"As a result, the group has taken a charge of £150m, which fully bounds historic liabilities and appropriately funds the remaining work, after taking into account historic performance."
Cobham said it was in the final stages of its year-end close process and, although the finalisation of the preliminary results announcement and the completion of the external audit remained ongoing, the board was announcing the expected outcomes to provide early transparency.
It said management had undertaken an extensive balance sheet review and a number of adjustments have arisen which have originated from:
- Impairments of goodwill and intangible assets
- Revisions of the carrying values of other assets
- Estimates of fixed price contract profitability
- Assessment of legal and other provisions It said the board had assessed these adjustments and concluded that while the impact on reported results was high, it was appropriate to reset the group to a more prudent level. The board considered whether any of the identified items related to prior years and concluded that adjustments related to events in 2016 and no prior year adjustment was necessary.
It said group underlying trading profit was expected to be £225m.
It said: "This includes £20m of year end adjustments, which have been deducted from the draft management accounts trading profit of £245m, as announced in the 11 January 2017 post-close trading update."
The main adjustments since the draft management accounts are:
- £6m of additional amortisation on amounts capitalised in prior years relating to the implementation of Oracle ERP in two sites. This is the annual charge which will continue at a similar level for a further six years;
- £4m relating to the 2016 expenditure on IT security compliance with forthcoming US regulations. Further such expenditure is expected in 2017;
- £2m, being the sum of several year end accruals not booked in the draft management accounts;
- £8m of bad debt charges and other sundry items. It said there were further amounts that would be recognised as exceptional items and excluded from underlying trading profit.
The key components of these adjustments are: 1) Impairments of goodwill and intangible assets: The Group will recognise a total non-cash impairment of goodwill and other intangible fixed assets of £574m.
The companys aid the following impairments did not reflect a lack of confidence from the board that these businesses could create value in the future.
They were generated as a result of the lower 2016 outturn, combined with lower growth from this base, and were made up of charges against the following business units:
- £196m against the Wireless business unit within the Communications and Connectivity Sector. This unit includes part of the Aeroflex acquisition in 2014 and Axell Wireless acquired in 2013;
- £186m against the Integrated Electronic Solutions business unit, part of the Advanced Electronic Solutions Sector. This unit includes the Lansdale business acquired in 2009, part of the M/A-COM business also acquired in 2009, the Trivec business acquired in 2011 and part of the Aeroflex acquisition in 2014;
- £192m against the Semiconductor Solutions business unit, also within the Advanced Electronic Solutions Sector. This unit includes part of the Aeroflex acquisition in 2014.
2) Revisions of the carrying values of other assets:
A charge of £33m has been taken against other assets in the balance sheet. This includes:
- £20m against the inventory balance reflecting ageing stock and lower demand forecasts;
- £4m against intangible assets no longer planned to be used;
- £4m tangible asset write down against plant and machinery no longer expected to be used;
- £5m provision against aged receivables considered doubtful. 3) Estimates of fixed price contract profitability:
It said that in total a £179m charge, including KC-46, had been taken against certain contracts reflecting increased estimates of costs to complete and, in some cases, lower recovery from customers.
It said the board recognised that making estimates on complex contracts was inherently judgemental and therefore whilst it had taken a reasonable view of contract positions at present, the final outcome of the contracts could be more or less favourable than the position taken.
The charges booked can be broadly categorised as:
- £150m against KC-46 reflecting the position outlined above;
- £19m on other development contracts within the Mission Systems Sector;
- £8m on development contracts within the Advanced Electronic Solutions Sector;
- £2m within the Communications and Connectivity Sector.
4) Legal and other provisions:
It said £25m of charges had been taken to cover the estimated exposure on a number of legal, environmental, warranty and other regulatory matters across the group.
Chief executive David Lockwood said: "2016 was an incredibly turbulent and disappointing year for Cobham. Execution failure in many businesses led us to miss expectations badly and provides a poor entry point into 2017.
"The medium term provides significant opportunity with encouraging market dynamics and strong product and programme offerings.
"The route to realising this potential is strong operational performance and financial control, which will be the relentless focus through 2017.
"This has commenced and the potential to improve is clear."
At 8:09am: [LON:COB] Cobham PLC share price was -25.5p at 109.9p
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