Performance and Risk Management of Cobham Plc - Essay Example

Performance And Risk Management Study Of Cobham Plc Contents Contents 2 INTRODUCTION 3 BUSINESS AND KEY MARKETS 5 CORPORATE AND FINANCIAL ACTIONS 7 Financial Trends 8 Efficiency Ratios 8 Asset turnover and Inventory Turnover 9 Profitability 9 Operating and Net Profit Margin 10 Liquidity 10 Current Ratio: 10 Financial gearing 11 Total Debt to Equity and Long Term Debt to Equity 11 Risk Management 12 Exchange Rate Risk Management 13 Political Risk Management 15 Global Risk Management 19 Conclusion and Recommendations 19 List Of References 21 INTRODUCTION More than a century old business Cobham offers differentiate technology for the military and civil systems (Cobham Plc, 2015a; Cobham Plc., 2010). The corporation attempt to meeting agile customer needs in defense, aviation, commercial, and security industry (Cobham Plc, 2015b). Cobham Plc’s four divisions including Conham Communications and Connectivity (CCC), Cobham Advanced Electronic Solutions (CAES), Cobham Mission Systems (CMS), and Cobham Avuation Services (CAvS) with presence in almost across the world in form of the sales offices while 15 principle locations for manufacturing and Operating in the North America, Europe, and Australia (Cobham Plc, 2014). Each of the four division offer range of products and service to the three different categories of end markets. Cobham’s US Defence/ security market, non-US Defence/ security Markets and commercial markets with 47%, 28% and 35% of the total market share as depicted from the image below (Cobham Plc. 2014): (Cobham Plc, 2014) The consistent growth is acquired with its strategy of continuous improvement, transformation of business through Excellence in Delivery (EiD); and maintaining focus on the core market of second and third tiers of the defense, security market, commercial aerospace, land and marine market etc; and finally and divesting non-core businesses (Cobham Plc, 2015d; Cobham Plc, 2012). Global market share is presented below: (Cobham Plc. 2014) The industry of the Cobham is highly complex in its characteristics. At one end, it is highly fragmented, facing high level of consolidation, strategic interdependency (ECORYS, 2009) and impact of loaming budgets (ATKearney, 2013). While on the other hand, the company defines opportunities and its respective position in the industry as follows: (Cobham Plc, 2012) With this effect, the past five years of Cobham have been eventful; hence, set the backdrop for the review of the Cobham. BUSINESS AND KEY MARKETS According to the annual report 2013, the company offers technologies that are technically diverse and are innovated to facilitate the diverse needs of the customers (Cobham Plc, 2012). Five years’ revenue trends is as follows: (Extracted from Annual Reports: Cobham Plc. 2010; 2011; 2012; 2013; 2014) As graph above shows that the company has increased its sales except the CDS due to the slippage in the defense and security programs in USA (Cobham Plc, 2010). However, increasing margins from transformation under EiD program, acquisitions, and redefining scope and renaming of Aerospace and Security as Communications and Connectivity; from CAS; offset impact (Cobham Plc, 2013). Also anticipated decline in the defense sector by 2.5% while appreciation in the demand from the commercial sector by 25% in future years (Deloitte, 2015); has played its role. CORPORATE AND FINANCIAL ACTIONS Cobham’s ranks on the 36th position in the top 100 companies and faced two dips as compared to 2012 due to the decline in the sales (PwC, 2013). The financial position of the company stands as follows: (Extracted from Annual Reports: Cobham Plc. 2010; 2011; 2012; 2013) Additionally, the declines in the orders from USA defense its outlays in later years (Powley, 2014), acquisitions such as Thrane & Thrane; and divestments of non-core businesses have impacted revenue (Cobham Plc, 2012). The role of transformational program EiD that has reduced the operating cost has improved operating margin. For instance, the annual report 2013 states that the labor productivity has improved by 40% since 2010 as result of EiD program (Cobham Plc, 2013). However, the consistent acquisition strategy also calls for the integration of synergies generation to increase the revenues with limited rise in expenses (Sharman, 2014) The balance sheet trend below shows increase in the total assets in 2010 resulted from orders delay and increased inventories. Cobham’s three acquisitions in the years 2010 only totaling to amount US$175m (Cobham Plc, 2010); divestment of Analytic Solutions from its portfolio fluctuated assets (Cobham Plc, 2011). (Extracted from Annual Reports: Cobham Plc. 2010; 2011; 2012; 2013; 2014) Financial Trends Efficiency Ratios Successful businesses are efficient enough in capitalizing the investment by increasing sales (Arnold, 2008). Efficiency ratios assess performance of sales with respect to assets and inventory is presented below: Asset turnover and Inventory Turnover The mounting assets turnover in 2010 and 2011 is due to two reasons. First, due to the slippage in the revenue as a result of delays in orders from USA that increased its inventory levels by £.37.6m. Second, the increase in total assets that are generated from sales i.e. trade receivable increased by £.10m (Cobham Plc, 2010). The decline in the asset turnover in latest two years is reflective of the investment that company made in the intangible assets £.13.8m (Cobham Plc. 2012) and Property, plant and equipment £10m (Cobham Plc, 2013). While, owing to the increase in business options, the increase in the inventory levels across five years has reduced the inventory turnover. Profitability The core objective of profitability on two levels reflects saving that business generates after meeting its cost of operating expenses and all other expenses (Brigham and Ehrhardt, 2013): Operating and Net Profit Margin EiD program is effectively controlling cost. The dip of 2010 and 2013 is the result of the reduction in the USA defense business that has reduced the turnover too (Cobham Plc, 2010) and the impact of Group’s pension Schemes respectively. Liquidity Current Ratio: Liquidity measured through current ratio implies capacity of the business to pay off its current obligations through its currents assets (Graham, Smart, and Megginson, 2009). The ratio of the Cobham has worsened since past two years. Increase in current liabilities by 12% and trade payables by 6% in 2013 reflects increase in trading during the year. Also the reduction in cash was the result of debt financing that was non cash in nature (Cobham Plc, 2013). Financial gearing Gearing reflects the amount of debt as compared to equity for financing total assets (Covas and Den Haan, 2012). Leverage position of the company has been as follows: Total Debt to Equity and Long Term Debt to Equity Over a period of time company has reduced the portion of debt in its overall capital structure as result of maturing debt as depicted below: (Cobham Plc, 2010) Company acquired new debt facility in 2010 from £m.325.1 to £m.432.1 managing impact of maturing debt (Cobham Plc, 2010). Cobham’s only uses debt for the larger transactions only. Risk Management Risk, being the potential of losing economic value of the resources, is among the major considerations in the business management (Mark, and Krishna, 2014). Multinational corporations are subject to risk from wide sources and successful Businesses plan and develop the comprehensive risk management systems in effectively dealing with it (Borghesi and Gaudenzi, 2012). Similarly, Cobham has a comprehensive risk management plan which is graphed below: (Cobham Plc. 2013) Two of the most critical risks that are posed to the business are discussed in this section of the report: Exchange Rate Risk Management Echange rate affects the performance of MNC by changing cash inflows and outflows from the division of the company or the payment of import bills respectively (Madura. (2012). Exchange rate affects the profitability as a result of gains and losses in resulting from the translation of net assets owned by the subsidiaries (Moffet et al., 2012). Global presence with operational presence in more than 14 countries and sales offices across more than 50 countries of the world bring huge level of exchange rate risk to Cobham. The exchange rate of pound sterling/US$ is important as most of the companies’ orders are USA dominated (Cobham Plc, 2012). Also, Cobham’s debt is primarily held in the USA dollars; hence, increases USA$ exchange rate. Cobham had net revenue decline in 2011 due to adverse impact from the exchange rate of US dollar (Cobham Plc, 2011). Large numbers of factors affect the exchange rate and companies must account those factors in order to effectively and efficiently deal with the exchange rate risk (Madura, 2012). The summary of these factors is presented in image below: Cobham’s has a system of constant translation of exchange rate for matching financial and non-functional currency revenues, costs, assets, and liabilities (Cobham Plc, 2013). The translation exposure on the earnings operating mainly in the USA are to some extent offset by interest cost that is also denominated in dollars (Cobham Plc, 2012). Hence, business is still clearly informed about the net impact of the exchange rate on the business. Contracts with the partners in the foreign countries account currency risk as an integral part of the bid. Also company focuses on local sourcing and range of the prices variation is also determined for effectively managing the predictable currency risk using forward contract (Gandolfo, 2007). The forward exchange contract is an agreement where buyers and sellers agrees in exchanging product/ services against fixed price on some future defined date. This in turn not only benefits buyers, suppliers, contractors, and also speculators. However, it also accompanies the risk where forward contract results in anyone or both the parties do not come up with in maturing the binding. Hence, it is does not guarantee cent percent security but still it widely used (Mohapatra, 2012). Cobham’s also has commodity forward contracts for sustaining currency risk (Cobham Plc, 2013). In addition to the above measures, Cobham also employees hedging option in order to effectively deal with the performance. Hedging is one of the widely used techniques to overcome the challenges of the exchange rate risk. It is a strategic measure and technique for preserving cash flows based on the company’s view of the future currency movement (Papaioannou, 2006). Over the past five years, Cobham has hedged around 92 percent to 95 percent of transaction exposure in foreign exchange. It is policy of the company to hedge minimum of 80% of the transactional exposure (estimated) for the recent years while proportions of the long term contract spreading across time of more than one year (Cobham Plc, 2013). For instance, for the year 2013 hedging percentage and the effective rate for the past five years is presented below: (Cobham Plc, 2013) Political Risk Management The relationship between the economy and the politics has grown incrementally since recent past (E.L. 2014). Therefore, businesses in general and specifically businesses that are multinational are under greater pressure to assess and prepare for the political risks that are posed to business (Doole and Lowe, 2012). The broad spectrum of political risks is further divided into three categories in order understand and deal with their respective impacts on business: (Eiteman, Stonehill, and Moffett, 2006) The firm based risks involve the business risk that arises from industry, risks of foreign exchange risk and most importantly the government regulations that has an impact on the business operations and performance (Eiteman, Stonehill, and Moffett, 2006). Being in the technology industry that is connected to the aerospace industry, Cobham is extensively exposed to this risk. Broadly to deal with such risk, Cobham has increased its capabilities in expanding the knowledge base for servicing situational awareness related to life saving; survival and safety, and other support systems for life (Cobham Plc, 2015e). For example, the delays in the US defence and security programs produced a considerable impact on the economy. Also, firm has developed its Responsible Supply Chain Management Policy (RSCM) for ensuring long term sustainability (Cobham Plc, 2013). On the other hand, governments are more inclined towards the regulation of such industries due their deep role in the defense sector. According to KPMG report, government in the developing countries curtail budget for defense for controlling their increasing budget deficit (Gates, 2015). While government in developed countries are making heavy investment with companies in partnership to expand their defense and other related aeronautic industry. Such measures can lead to the fragmentation of the industry which in turn will affect the ability of the company in generating economies of scale on heavy capital investments (Gates, 2015). Similarly, the commercial market for Cobham include specialist in Australia and is widely interlinked with the growth in the demand of the natural resources (Cobham Plc, 2013). There is considerable debate on the regulation of the mining industry for mining sectors of Australia. Such regulation will also have direct implications on the business (Prior, et al., 2013). In order to deal with such and other related regulations from the industry, Cobham has not restricted its market to certain part of the world. Instead the company has expanded its footing in different parts of the world for reducing its dependence in the defense or commercial sector demand from one country. In addition to this, internal control systems is developed based on different committees which such as audit, risk and assurance committees etc to deal with the different risks and its potential impact on business. The advantage of the internal control is difficult to identify as it saves the business the potential losses that could have incurred in case the internal controls are not present. Also an internal control ensures systematic practices all across the organizations and not only in the financial aspects of the business Collier (2005). Country based risks are further divided into transferable and cultural and institutional risks (Eiteman, Stonehill, and Moffett, 2006). Neelankavil (2007) has determined that country based political risks arise from wide number of factors, varies country-wise and industry-wise. For example, for telecommunication company the technology related risk is more important as compared to the role of culture related variable that has higher relevance for general lifestyle. The risk management committees ensure that regulations of the home-country and its incorporation in the business unit. For instance, local human resources is hired in the company offices and units in home countries to capitalize their expertise in dealing with respective country regulations and systems. Cobham’s risk management committee gives due attention both type of the risks that are accounted in the country risk. Such regulation not only affects the performance of the business but also the compliments with it high reputational loss. This in turn has potential to produce the huge negative impact due to the highly regulated environment. The risk management committee has defined the structure that monitors such conduct down below the operational level. For the structural and institutional risks company has developed its office in different parts of the world and has given below diverse employee base from respective locations: (Cobham Plc, 2013) Company has well accounted the strength of employees not only with respect to contributing in the company with their sheer knowledge about local regulations and systems; but also in dealing with the unlikely incidents. Also Company has built a culture where employees are provided opportunities to grow their capabilities as well as financial standing without any discrimination. This saves the employees in indulging into unethical as well non-legal activities. Also, Cobhams has clearly stated Anti-Bribery and Anti-Corruption (ABAC) policy with clear and zero tolerance to it (Cobham Plc, 2013). Hence, company has duly accounted the impact of country risk in expanding its business. Global Risk Management Global connectivity and growth has alongside increased the challenges of the business in effectively dealing with it. As the company is providing technological support to the defense and commercial industry, global risk has incremental importance to it. For instance, EiD program of Cobham’ has improved on its environmental performance where CO2 emission has reduced from 87.2 MWh/£m turnover to 86.6MWh/£m turnover (Cobham Plc, 2013). In order to deal with the terrorism, USA has introduced unmanned aerial vehicles (UAVs) or drones. USA went revision in the regulation FAA Modernization and Reform Act of 2012 to add national airspace system by 2015. Such additions will increase the demand for the improved and sophisticated systems. Similarly, growth in demand is also subject to the growth in the commercials sector. Conclusion and Recommendations The above report produced a comprehensive review of the Cobham Plc. From the detailed assessed it has been concluded that business is doing considerable justice to its long standing history. For example, acquisitions of the business that is able to contribute in its core business of differentiated technology while divesting from non-core businesses. In addition to this, business has also been doing effective in the management of risks that are arising from different firm, country and global aspects. However, despite these strengths business has not been able to recover the decline from the USA defense sector that was major source of revenue for business. Furthermore, business has considerable dependency on the business from USA. Hence, following recommendations are made to the business for future: Increase market in other parts of the world while controlling extensive dependency on business from USA. It is anticipated that the steep rise in the commercial aircrafts will come sooner. This positive outlook of the industry must be capitalized by increasing focus on it (Flottau, 2014). Company must introduce the program to generate synergies across the acquisitions. Terrorism, and cyber attack are growing challenge company must ensure that its resource, be it technical or human resource, do or will not contribute in such challenges to the world. List Of References Arnold, G. (2008). Corporate financial management. Pearson Education. ATKearney. (2013). 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