TIDMCHG
RNS Number : 3098Y
Chemring Group PLC
23 January 2014
FOR IMMEDIATE RELEASE 23 January 2014
CHEMRING GROUP PLC
FINAL RESULTS FOR THE YEAR ENDED 31 OCTOBER 2013
FINANCIAL PERFORMANCE
Year ended Year ended Change
31 Oct 2013 31 Oct 2012
Revenue GBP624.9m GBP740.3m - 15.6%
Underlying operating profit GBP72.1m GBP88.3m - 18.3%
Underlying operating margin 11.5% 11.9%
Underlying profit before tax GBP52.4m GBP70.1m - 25.2%
Net debt GBP248.7m GBP244.8m + 1.6%
Underlying earnings per share 21.6p 28.5p - 24.2%
Dividend per
share - final 3.8p 4.2p -9.5%
- full year total 7.2p 9.5p -24.2%
Total operating (loss)/profit GBP(36.9)m GBP37.0m
Total operating margin (5.9)% 5.0%
Total (loss)/profit before tax GBP(56.6)m GBP18.8m
Total (loss)/earnings per share (24.6)p 6.8p
Data above relates to continuing operations only.
Underlying measures referred to in this announcement are stated
before costs relating to acquisitions and disposals, business
restructuring and incident costs, profit on disposal of businesses,
items deemed to be of an exceptional nature, impairment of goodwill
and acquired intangibles, impairment of assets held for sale,
amortisation of acquired intangibles and gains/losses on the
movement in the fair value of derivative financial instruments. A
reconciliation of underlying and total operating profit is set out
in note 4.
HIGHLIGHTS
-- Performance Recovery Programme driving operational improvement
-- Strategic Planning Process has determined segmental strategic priorities
-- Sale of Chemring Energetic Devices' US build-to-print
business agreed for $10.0 million
-- Sale process of other non-core businesses underway
-- Husky Mounted Detection System transitioning to a long-term
capability for the US military
-- Chemring is now a more resilient business, with a clear strategic direction
Peter Hickson, Chemring Group Chairman, commented:
"At the end of a year of significant change, Chemring is now a
more resilient business, with a clear strategic direction. Much has
been achieved by the new management team during the year, with the
positive impact of the Performance Recovery Programme beginning to
bear fruit. In addition, the Strategic Planning Process has
provided a clear view of the market, competitive dynamics and
prospects for each of the businesses, as well as identifying the
core markets in which the Group will focus investment.
Chemring will continue to drive improvements in operational
performance, and pursue the growth opportunities that exist,
particularly within non-NATO markets where defence spending is
expected to increase. It will also reshape and strengthen its
portfolio of businesses through the disposal of non-core activities
and technology investment in those businesses that can achieve
sustainable growth and margin improvement. Meanwhile, the Board's
expectations for the current financial year remain unchanged."
For further information:
Mark Papworth Chief Executive, Chemring Group PLC 01489 881880
Steve Bowers Finance Director, Chemring Group PLC 01489 881880
Group Director of Communications and Investor
Relations,
Rupert Pittman Chemring Group PLC 01489 881880
Andrew Jaques
John Olsen
James White MHP Communications 0203 128 8100
Cautionary statement
This announcement contains forward-looking statements that are
based on current expectations or beliefs, as well as assumptions
about future events. These forward-looking statements can be
identified by the fact that they do not relate only to historical
or current facts. Forward-looking statements often use words such
as anticipate, target, expect, estimate, intend, plan, goal,
believe, will, may, should, would, could, is confident, or other
words of similar meaning. Undue reliance should not be placed on
any such statements because they speak only as at the date of this
document and, by their very nature, they are subject to known and
unknown risks and uncertainties and can be affected by other
factors that could cause actual results, and Chemring's plans and
objectives, to differ materially from those expressed or implied in
the forward-looking statements.
There are a number of factors which could cause actual results
to differ materially from those expressed or implied in
forward-looking statements. Among the factors that could cause
actual results to differ materially from those described in the
forward-looking statements are; increased competition, the loss of
or damage to one or more key customer relationships, changes to
customer ordering patterns, delays in obtaining customer approvals
for engineering or price level changes, the failure of one or more
key suppliers, the outcome of business or industry restructuring,
the outcome of any litigation, changes in economic conditions,
currency fluctuations, changes in interest and tax rates, changes
in raw material or energy market prices, changes in laws,
regulations or regulatory policies, developments in legal or public
policy doctrines, technological developments, the failure to retain
key management, or the key timing and success of future acquisition
opportunities or major investment projects.
Chemring undertakes no obligation to revise or update any
forward-looking statement contained within this announcement,
regardless of whether those statements are affected as a result of
new information, future events or otherwise, save as required by
law and regulations.
Notes to editors
-- Chemring is a manufacturing business with facilities in seven
countries, selling high-technology electronics and energetic
products to over sixty countries worldwide.
-- Chemring has a diverse portfolio of products protecting
military people and platforms against constantly changing
threats.
-- Operating in niche markets with short product development
timescales, Chemring has the agility to react rapidly to urgent
customer needs.
-- Strong research and development investment in new products
and improvements in technology enable Chemring to expand its
addressable markets.
www.chemring.co.uk
Presentation
The presentation slides and a live audio webcast of the
presentation to analysts will be available at the Chemring Group
results centre www.chemring.co.uk/resultscentre at 09.30 (UK time)
on Thursday 23 January 2014. A recording of the audio webcast will
be available later that day.
Photography
Original high-resolution photography is available to the media
by contacting Ben Griffiths, MHP Communications:
ben.griffiths@mhpc.com / Tel: 0203 128 8100.
Overview
At the end of a year of significant change, Chemring is now a
more resilient business, with a clear strategic direction. Much has
been achieved by the new management team during the year, with the
positive impact of the Performance Recovery Programme beginning to
bear fruit. In addition, the Strategic Planning Process has
provided a clear view of the market, competitive dynamics and
prospects for each of the businesses, as well as identifying the
core markets in which the Group will focus investment.
Defence markets have remained challenging, and operational
issues in certain businesses further impacted the Group's financial
performance. In addition, the US Government shutdown in the last
month of the financial year meant that government inspectors were
not present in a number of the Group's facilities, thus delaying
product acceptance and shipment in October 2013.
Performance Recovery Programme
In January 2013, the new management team established a
Performance Recovery Programme focused on delivering improvements
in operational performance and providing increased resilience to
challenging markets. This led to a reorganisation of the Group to
ensure swift and effective response to attractive market
opportunities. The cost of this reorganisation and restructuring
will be approximately GBP15.0 million, which has predominantly
arisen in the year ended 31 October 2013, and will deliver annual
savings of approximately GBP10.0 million from 2014.
The Performance Recovery Programme had five initial areas of
focus:
-- Simplify the organisational structure.
-- Integrate compatible business units and deliver untapped synergies.
-- Implement a systematic programme of operational performance improvement.
-- Re-focus business development activity.
-- Improve cash and cost management.
Chemring's previous organisational structure included
significant divisional overhead, and this has been eliminated. Head
office and divisional functions have been integrated into a single,
tighter central management structure, resulting in a 46% reduction
in head office and divisional headcount. The operating businesses
have also been reorganised to provide a more effective reporting
structure consisting of four strategic product segments:
Countermeasures, Sensors & Electronics, Pyrotechnics &
Munitions, and Energetic Sub-Systems.
Operational efficiency is improving, but it will take time to
resolve all of the Group's operational issues. Clearer reporting
lines and more rapid communication with the Group's senior
management are delivering improved focus, accountability and
responsiveness. Crucially, customers are also benefiting from this
streamlined organisation through a more co-ordinated approach to
the Group's markets, product portfolio, quality and technology
development.
Strategic Planning Process
The Group has undertaken a comprehensive Strategic Planning
Process to determine its business strategy. This has provided a
clear view for each of Chemring's business units of their current
market environment, competitive dynamics and future prospects. It
has confirmed strong market-leading positions and the strength of
the Group's technology in a number of areas, whilst highlighting
new defence and adjacent non-defence opportunities. It has also
identified a number of further operational initiatives which will
enable the Group to manage the impact of current market
challenges.
As a result of this process, a number of business units have
been identified as not being part of Chemring's longer- term
strategy. As a consequence, several divestment processes are now
underway, the outcome of which should lead to a reduction in the
Group's debt.
The first of these divestments was in December 2013, with a
conditional agreement for the sale of Chemring Energetic Devices'
build-to-print business located in Clear Lake, South Dakota to
AMTEC Corporation for $10.0 million (GBP6.1 million), payable in
cash. Completion of the sale, which is conditional upon regulatory
approvals and subject to a working capital adjustment, is expected
within the next few weeks.
The Group's strategy is to re-position itself for growth through
the innovation and exploitation of intellectual property. This will
focus on Chemring's core competencies, directing investment into
those lines of business which have technologies, products and
market positioning that provide the greatest opportunity to achieve
sustainable high margins and revenue growth.
The Group's segmental strategies are as follows:
1. Maintain world leadership in countermeasures market
Chemring has a clear lead in expendable decoys, as a result of
its customer relationships and manufacturing facilities in its core
markets of the US, UK and Australia, combined with advanced
technologies in flare, radio frequency and special material decoys.
In the face of reduced short-term demand, the Group is integrating
Alloy Surfaces and Kilgore to form Chemring Countermeasures USA, in
order to reduce costs and raise efficiency levels.
The three strategic priorities for the Countermeasures segment
are:
-- Complete the integration of Chemring Countermeasures USA. The
integration of Alloy Surfaces and Kilgore has already reduced the
overhead base and enabled sharing of operational best practice to
position Chemring Countermeasures USA for profitable growth as new
platforms enter service.
-- Maintain a technological lead in core markets. Customers in
these markets are the most advanced in the world, and the Group
will promote targeted customer-funded development projects to
maintain national capabilities to support future military
operations.
-- Optimise the Group's manufacturing base and routes to market.
Current manufacturing capacity is scaled to meet surge levels of
demand. This capacity and its utilisation will be optimised to
ensure a flexible, efficient and safe manufacturing base to meet
customer requirements.
2. Build a world-leading technology base in Sensors & Electronics
Chemring has world-leading technologies in chemical, biological
and improvised explosive device ("IED") threat detection,
electronic warfare and cyber protection. The Group will invest to
extend this portfolio of Sensors & Electronics technology. The
key priorities are:
-- Ensure critical wins in the US defence market. The US market
is the world's largest and the Group will continue to invest to
secure its position and win key programmes.
-- Build a world-leading technology base across the Group's
transatlantic footprint. Chemring's technical centres in the US and
UK are well-recognised nationally but do not fully exploit the
scale and synergies of its international operations. Chemring will
build on existing customer relationships to anticipate user needs
and capitalise on its global capability, growing the Group's
technology base through targeted investment.
-- Leverage Chemring's proven skills and reputation to expand
into adjacent areas, for example cyber protection.
-- Incubate technologies for non-defence markets.
-- Complete the integration of Chemring Detection Systems and
NIITEK in the US into a single organisation, Chemring Sensors &
Electronic Systems, to leverage technology capabilities,
co-ordinate customer interactions and maximise supply chain
efficiencies.
3. Optimise operational performance of Pyrotechnics & Munitions
Military pyrotechnics and ammunition are used in both training
and active operations. The global market for these products has
been heavily impacted by the decline in NATO operations in
Afghanistan, leaving many forces' stockpiles full and a target for
short-term cuts. The Group's strategic priorities for this segment
are:
-- Establish operational excellence in pyrotechnics. Chemring's
pyrotechnic portfolio includes many products which are infrequently
produced, which causes complexity and impacts margins. The Group
will rationalise this product range and continue to improve
production efficiency.
-- Maintain its leading position in large and medium-calibre
ammunition niches. Chemring has a strong position in naval and
light armoured vehicle ammunition, and will maintain the
technologies and relationships which underpin this. The Group will
also manage workload across its sites to reduce manufacturing
bottlenecks and maximise capacity utilisation.
4. Focus on performance improvement and near-term market
opportunities in Energetic Sub-Systems
Chemring's Energetic Sub-Systems segment is complex, with a wide
variety of products produced infrequently in batch production runs.
The market is stable, with significant qualification costs and
other barriers to entry, and the segment therefore has the
potential to improve margins. However, recent operational
challenges have impacted performance. The key priorities for
Energetic Sub-Systems are:
-- Complete the integration of Hi-Shear with Chemring Energetic
Devices, in order to exploit Hi-Shear's strong market position on
key programmes such as the PAC-3 missile and the NASA Standard
Initiator, whilst eliminating manufacturing bottlenecks by
distributing work between sites. The integration will also deliver
benefits from sharing best practices, systems and marketing
resources.
-- Explore non-defence opportunities in civil aerospace, space and other markets.
Trading
Chemring's improving operational performance has been adversely
affected by the deteriorating external trading environment, largely
as a result of budgetary pressures on global defence spending,
which has manifested in delays in order placement in all our
markets.
In particular, the US has seen a significant deterioration in
defence spending due to the effects of sequestration, continuing
resolutions and budget reductions. This was heightened by the
shutdown of the US Government in early October 2013, a key month in
the Group's delivery schedule. The shutdown resulted in the
temporary closure of the Defence Contract Management Agency
("DCMA"), the government agency with responsibility for inspecting
and approving products for delivery to the US Department of
Defense. This closure impacted deliveries to customers in the last
weeks of the financial year but these delays are expected to be
resolved in the first quarter of the current financial year.
Consequently, Group revenue for 2013 was GBP624.9 million, a
decrease of 15.6%, generating an underlying operating profit of
GBP72.1 million (2012: GBP88.3 million). Underlying profit before
tax reduced by 25.2% to GBP52.4 million, resulting in underlying
earnings per share of 21.6p (2012: 28.5p).
Order intake for the Group was GBP534.5 million, 14.5% below
revenue. As a result, the closing order book was GBP675.5 million
(2012: GBP760.9 million), a reduction of 11.2%. The closing order
book is lower than the value of GBP702 million disclosed in the
Group's trading update published on 25 November 2013, due to
exchange rate fluctuations impacting the valuation of certain
orders.
Group results
An analysis of underlying and total results is set out
below:
2013 2013 2012 2012
Underlying Total Underlying Total
GBPm GBPm GBPm GBPm
Revenue 624.9 624.9 740.3 740.3
----------- ------- ----------- -------
Segmental operating profit/(loss) 82.2 (26.8) 98.8 47.5
Unallocated corporate costs (10.1) (10.1) (10.5) (10.5)
----------- ------- ----------- -------
Operating profit/(loss) 72.1 (36.9) 88.3 37.0
Share of profit after tax of
associate - - 0.1 0.1
Finance income 0.2 0.2 0.1 0.1
Finance expense (19.9) (19.9) (18.4) (18.4)
----------- ------- ----------- -------
Profit/(loss) before tax 52.4 (56.6) 70.1 18.8
Tax (10.6) 9.1 (15.1) (5.6)
----------- ------- ----------- -------
Profit/(loss) after tax 41.8 (47.5) 55.0 13.2
----------- ------- ----------- -------
Results shown above are for continuing operations and exclude
the results of the marine business, which was sold in July 2012.
Underlying measures referred to in this announcement are stated
before costs relating to acquisition and disposals, business
restructuring and incident costs, profit on disposal of businesses,
items deemed to be of an exceptional nature, impairment of goodwill
and acquired intangibles, impairment of assets held for sale,
amortisation of acquired intangibles and gains/losses on the
movement in the fair value of derivative financial instruments. A
reconciliation of underlying and total operating profit is set out
in note 4.
During the year, changes in foreign exchange rates, principally
the appreciation of sterling against the US dollar, increased
reported revenues by GBP8.0 million. At constant exchange rates,
revenue was GBP616.9 million, a reduction of 16.7%.
An analysis of segmental revenue and underlying operating profit
is set out below:
2013 2012
Underlying Underlying Underlying Underlying
operating operating operating operating
Revenue profit margin Revenue profit margin
GBPm GBPm GBPm GBPm
Countermeasures 125.0 13.2 10.6% 163.2 20.4 12.5%
Sensors & Electronics 211.3 44.7 21.2% 228.9 44.9 19.6%
Pyrotechnics &
Munitions 200.6 13.0 6.5% 249.5 21.2 8.5%
Energetic Sub-Systems 88.0 11.3 12.8% 98.7 12.3 12.5%
---------- ----------- ----------- ---------- ----------- -----------
624.9 82.2 13.2% 740.3 98.8 13.3%
---------- ----------
Unallocated corporate
costs (10.1) (10.5)
----------- ----------- ----------- -----------
72.1 11.5% 88.3 11.9%
----------- ----------- ----------- -----------
Countermeasures revenue decreased by 23.4%, due to lower demand
from the UK and US as a result of the continuing drawdown from
Afghanistan. In the US, volumes were also impacted by ongoing
production delays caused by operational quality issues, most
notably at Kilgore. However, the extent of these delays began to
reduce towards the end of the year due to the focus on operational
improvements. Included within the results is revenue arising from
the contract for the supply of aircraft countermeasures to a
customer in the Middle East that was highlighted in the 2012 annual
report.
Despite headcount reductions and other measures taken to improve
efficiency, operating margins decreased to 10.6% (2012: 12.5%),
reflecting the high fixed-cost base of the countermeasures
production facilities. Development of the advanced countermeasure
highlighted in the 2012 annual report is ongoing, with further
customer trials due to be conducted in 2014.
Sensors & Electronics revenue reduced by 7.7% to GBP211.3
million (2012: GBP228.9 million), despite strong sales of HMDS to
the US Department of Defense and growing sales in other markets.
Operating margins increased to 21.2% (2012: 19.6%), reflecting the
release of contingencies held back prior to customer acceptance of
the first delivery order for the Husky Mounted Detection System
("HMDS") under the indefinite delivery/indefinite quantity ("IDIQ")
contract. In addition, the sales mix at Chemring Technology
Solutions was weighted toward higher margin product sales.
Pyrotechnics & Munitions revenue reduced by 19.6% to
GBP200.6 million (2012: GBP249.5 million), due to lower activity
levels resulting from order deferrals by a number of customers.
Underlying operating profit decreased by 38.7% to GBP13.0 million
(2012: GBP21.2 million). Operating margins were impacted by an
adverse sales mix, notably lower demand for illumination products,
and by the high fixed cost nature of the munitions facilities.
Deliveries on the Group's contract for the supply of vehicle-based
mortar systems recommenced in the final quarter of the year,
following the resolution of export licence and customer acceptance
issues.
Energetic Sub-Systems revenue reduced to GBP88.0 million (2012:
GBP98.7 million), with deliveries constrained by production issues
at Chemring Energetic Devices in the US. Demand from the major
customers of the Group's UK operation, including the UK Ministry of
Defence, was also lower. Operating profit of GBP11.3 million (2012:
GBP12.3 million) resulted in an operating margin of 12.8% (2012:
12.5%). Margins benefited from a reduction in sales of lower margin
build-to-print products manufactured at the Clear Lake facility,
for which a conditional sale agreement was signed in December
2013.
Unallocated corporate costs were GBP10.1 million (2012: GBP10.5
million), reflecting an element of the savings from the
simplification of the Group's management structure and the closure
of administrative offices in the UK and US.
As a result of these factors, the Group's underlying operating
profit was GBP72.1 million (2012: GBP88.3 million), a decrease of
18.3%. The underlying operating margin was 11.5% (2012: 11.9%).
The total operating loss was GBP36.9 million (2012: GBP37.0
million profit). This loss is principally due to the higher level
of non-underlying costs of GBP109.0 million (2012: GBP51.3
million), which are discussed below.
Net finance expense was GBP19.7 million (2012: GBP18.3 million).
Included within finance expense is GBP0.5 million (2012: GBP0.8
million) in respect of retirement benefit obligations.
Underlying profit before tax was GBP52.4 million (2012: GBP70.1
million), a decrease of 25.2%. Including non-underlying items, the
total loss before tax was GBP56.6 million (2012: GBP18.8 million
profit).
Tax on underlying profit before tax was GBP10.6 million (2012:
GBP15.1 million), representing an effective tax rate of 20.2%
(2012: 21.5%). The tax rate is comparable to the UK corporation tax
rate, and benefits from the utilisation of research and development
tax credits together with the recognition of certain tax losses
within the Pyrotechnics & Munitions segment. The effective tax
rate on the total loss before tax was 16.1% (2012: 29.8%), due to
the higher proportion of non-underlying costs in the total
result.
Underlying profit after tax was GBP41.8 million (2012: GBP55.0
million), a decrease of 24.0%. Including non-underlying items, the
total loss after tax was GBP47.5 million (2012: GBP13.2 million
profit).
Analysis of non-underlying items
The use of underlying measures, in addition to the total
measures noted above, is considered by the Board to improve
comparability of business performance between periods and, in line
with past practice, certain items are classed as non-underlying as
set out below:
2013 2012
GBPm GBPm
Acquisition and disposal related costs 3.2 8.2
Business restructuring and incident costs 11.7 11.9
Profit on disposal of business - (10.3)
Impairment of goodwill 50.9 22.5
Impairment of acquired intangibles 15.7 -
Impairment of assets held for sale 8.8 -
Intangible amortisation arising from business
combinations 18.8 20.9
Gain on fair value movements on derivative
financial instruments (0.1) (1.9)
------ -------
Total non-underlying items 109.0 51.3
------ -------
Acquisition and disposal related costs of GBP3.2 million include
GBP2.1 million in respect of a one-off provision relating to an
onerous lease for a business sold in 2003. Business restructuring
and incident costs of GBP11.7 million include costs relating to the
major simplification of Chemring's management structure (GBP4.4
million) and business unit integration and restructuring (GBP5.5
million), that has been completed as part of the Performance
Recovery Programme.
The profit on disposal of business in the prior year related to
the sale of the Group's marine business in July 2012.
Following a detailed review, goodwill relating to Hi-Shear of
GBP50.9 million has been fully impaired as a result of lower
expectations of future trading performance. In addition, an
impairment of GBP15.7 million of acquired intangibles has been
recognised in relation to Chemring Energetic Devices' Clear Lake
facility due to a decline in the market for its build-to-print
products. In 2012, the goodwill impairment of GBP22.5 million
related to Chemring Ordnance (GBP6.8 million) and Chemring
Energetic Devices (GBP15.7 million). Impairment analysis is based
on value-in-use calculations, with the impairments being primarily
driven by business valuations negatively impacted by the
challenging conditions facing the defence industry.
In December 2013, conditional agreement was reached for the sale
of Chemring Energetic Devices' Clear Lake facility. Assets and
liabilities relating to Clear Lake have been classified as held for
sale at 31 October 2013, incurring a further impairment charge of
GBP8.8 million.
The amortisation of intangible assets arising from business
combinations was GBP18.8 million (2012: GBP20.9 million), with the
decrease reflecting the fact that certain intangible assets are now
fully amortised. This amortisation is treated as non-underlying to
improve comparability and understanding of the results given its
large size and its non-cash nature.
Countermeasures review
-- Revenue: GBP125.0 million
-- Underlying operating profit: GBP13.2 million
-- Underlying operating margin: 10.6%
Revenue in the Countermeasures segment was GBP125.0 million,
down 23.4% on the previous year. This was primarily due to a lower
opening order book in the US and UK, resulting from the drawdown
from Afghanistan, but also reflected US Department of Defense
delays in product acceptance, order funding and awards. Both
sequestration and continuing resolution have caused delays to
orders and sales, especially in relation to special material
decoys. Further issues were experienced as a result of the US
Government shutdown in October 2013. Sales at the Group's
Australian operation reduced as a result of lower expenditure by
the Australian Defence Force. The closing order book for
Countermeasures was GBP160.8 million, down 24.6% on the previous
year, reflecting generally lower order intake, particularly in the
US due to the effects of the drawdown from Afghanistan.
The two US countermeasures business units have been integrated
to form Chemring Countermeasures USA. This is enabling the Group to
reduce overheads, retain the best management talent, reduce costs
when volumes are low, and take advantage of synergies. It has also
enabled the Group to focus operational and quality improvement
resource on the significant challenges at Kilgore. The integration
is delivering cost savings and, more importantly, is improving
performance to customers.
The US Government shutdown in October 2013 resulted in the
closure of the DCMA, the government agency with responsibility for
inspecting and approving products for delivery to the US Department
of Defense. This closure impacted deliveries in the final weeks of
the year, the effects of which were particularly felt at Kilgore,
which also continued to be impacted by production quality issues.
Further steps are being taken to strengthen the management team at
this business, and in the past six months a new General Manager and
a new Health, Safety & Environment Manager have been appointed.
These appointments are already having a meaningful impact on the
business, and relationships with customers have improved
significantly as a consequence.
The inclusion of decoy dispensers on the Joint Strike Fighter,
with the significant costs associated with embedding these into the
airframe and the development of a dedicated suite of flares for
this platform, gives confidence that the Group's countermeasures
technology will remain a critical element of defensive aids for
military aircraft.
The outlook for the air countermeasures market is expected to
remain challenging in the short term, with the decline in NATO
procurement outpacing growth in non-NATO markets. While Chemring
has sole-source qualified positions on the two major new platforms,
Joint Strike Fighter and Typhoon, delays in aircraft deliveries and
expected in-service dates will lead to the deferment of
procurements of war reserves and training rounds for these
fleets.
Encouragingly, these delays are driving capability extensions to
existing platforms and there is heightened interest in Chemring's
countermeasure products from non-NATO customers. There is also a
growing capability gap in customers' naval countermeasures, with
resulting interest in naval decoys and launchers. However, the
timing of orders in the current tight budget environment remains
uncertain.
While demand for countermeasures has fallen dramatically in
recent years, the Group considers that it is now close to minimum
sustaining volumes. This ensures that production lines can be
maintained at a high state of readiness to quickly ramp-up output
when new threats arise. Chemring's principal customers are
maintaining some development effort to ensure their capability
against the next generation of threats but until budgets recover, a
material improvement in production volumes will be dependent upon
new aircraft programmes entering service.
Sensors & Electronics review
-- Revenue: GBP211.3 million
-- Underlying operating profit: GBP44.7 million
-- Underlying operating margin: 21.2%
Revenue in the Sensors & Electronics segment was GBP211.3
million, 7.7% lower than the previous year, and was underpinned by
the ongoing fulfilment of the $579 million multi-year HMDS ground
penetrating radar IDIQ contract. The closing order book for Sensors
& Electronics was GBP106.2 million, up 5.5% on 2012, as a
result of major orders for HMDS and chemical and biological
detection products.
Chemring has integrated two US operations to create a single
business unit - Chemring Sensors & Electronic Systems. This
integration enables the Group to leverage its technology
capabilities, co-ordinate customer interaction and maximise
efficiencies within the supply chain.
Trading at Chemring Sensors & Electronic Systems was strong,
and included completion of the initial $161.3 million delivery
order placed under the HMDS IDIQ contract. Orders totalling $141.0
million were placed under this contract during the year, with these
orders expected to be fulfilled in the period to May 2014.
Encouragingly, the Group has continued to receive interest in its
ground penetrating radar from other NATO countries, with sales to
Australia, Italy, Turkey and Spain being made during the year.
The HMDS programme has historically been funded as an Urgent
Operational Requirement ("UOR"), driven by demand for Iraq and
Afghanistan, but is currently transitioning into a long-term
capability and is expected to be funded from the US Department of
Defense's base budget through a Program of Record.
In October 2013, Chemring Sensors & Electronic Systems was
awarded a $10.6 million contract by the US Army for the procurement
of six HMDS test systems. These will be used for advanced testing
in preparation for a long-term HMDS procurement from base budget
funds. This is a significant development, potentially securing the
position of HMDS as a long-term capability for the US military.
Both the R-VISOR robot-mounted ground penetrating radar and
handheld detection solutions are also expected to transition to
Programs of Record during 2014. The operational and logistical life
cycle of these systems is expected to be over ten years. The ground
penetrating radar technology used in these solutions is being
augmented by additional capabilities, including sensors from
Chemring Technology Solutions, to enhance performance.
In the UK, Roke Manor Research and Chemring EOD have been
integrated to create Chemring Technology Solutions, with the
explosive ordnance disposal business reporting alongside Roke's
three other sectors of defence, security and technology solutions.
Chemring Technology Solutions had a favourable sales mix in the
year, weighted towards higher-margin product sales and away from
its historical focus on contract-based research and development
activity. The Group is raising the profile and level of investment
in non-defence products and technology, and a number of concepts
are showing early promise.
The long-term outlook for Sensors & Electronics is robust.
Many countries acknowledge a significant and growing gap in their
capabilities to deal with the persistent and rapidly evolving
threat of IEDs. This is resulting in sustained interest in
Chemring's detection, jamming and defeat products from both NATO
and non-NATO markets. There also continues to be significant
interest in the Group's electronic warfare, security and cyber
security solutions.
Pyrotechnics & Munitions review
-- Revenue: GBP200.6 million
-- Underlying operating profit: GBP13.0 million
-- Underlying operating margin: 6.5%
Pyrotechnics & Munitions revenue was GBP200.6 million, a
19.6% reduction from 2012. This reduction was partially a
consequence of mortar system delivery delays. The closing order
book for Pyrotechnics & Munitions was GBP315.5 million, a
reduction of 9.9%. Order intake included a $42.1 million contract
for the procurement and supply of non-standard ammunition for the
US Government.
A significant focus in Pyrotechnics & Munitions has been on
enhancing operational performance and optimising routes to market,
whilst developing a coherent and comprehensive product catalogue.
These activities have started to deliver results. At Chemring
Ordnance, the Anti-Personnel Obstacle Breaching System ("APOBS")
production line has been enhanced, resulting in improved gross
margins. The overall staffing and facilities layout at Chemring
Ordnance has also been revised to raise efficiency and
throughput.
The naval ammunition market remains stable, with revenue at
similar levels to 2012. However, order intake has been
disappointing due to delays in receipt of significant orders from
non-NATO customers, although the Group is confident of receiving
these orders during 2014. Nonetheless, the Group received several
orders from Middle Eastern customers and grew the level of naval
munitions business with the NATO Support Agency.
In seeking to develop its market presence, Chemring has signed a
number of strategic agreements focused on technology sharing,
co-production and joint marketing.
The outlook for Pyrotechnics & Munitions is mixed. NATO
demand is reducing but this is being offset by Chemring's leading
positions in naval ammunition and certain large calibre tank and
armoured vehicle munitions. The Group will leverage its position in
non-NATO markets, particularly where customers are building up
national capabilities with new armoured vehicle fleets.
Energetic Sub-Systems review
-- Revenue: GBP88.0 million
-- Underlying operating profit: GBP11.3 million
-- Underlying operating margin: 12.8%
Energetic Sub-Systems revenue was GBP88.0 million, a 10.8%
reduction from 2012. This was mainly as a result of the reduction
in defence spending in the US and UK. The closing order book for
Energetic Sub-Systems was GBP93.0 million, a reduction of 3.9%.
The Group is integrating Hi-Shear with Chemring Energetic
Devices to exploit common technology and production synergies. This
integration is resulting in common systems and processes, which
will facilitate better management of the operations. In addition,
the integration is improving the loading of production facilities
to alleviate manufacturing bottlenecks, and has resulted in a more
co-ordinated sales force. The combined business will be better able
to leverage volume and integrate technology development plans,
while also having a streamlined management structure. The combined
portfolio of defence and non-military customers provides an
opportunity for future growth.
In the UK, Chemring Energetics secured a GBP9.9 million contract
to supply the UK Ministry of Defence with plastic explosive for a
four year period commencing in April 2014. This contract
strengthens Chemring's position as a leader in the supply of
demolition products to the military.
The Energetic Sub-Systems segment is expected to be relatively
flat in the near term. Growth will be generated by diversification
into non-defence markets, with the development of bespoke products
for fire suppression, security and space applications. Defence
requirements will continue to reduce within NATO and emphasis will
therefore be placed on securing positions in emerging markets,
particularly the Middle and Far East.
Principal risks and uncertainties
The principal risks and uncertainties which could have a
material impact on the Group's performance and could cause actual
results to differ materially from expected and historical results
have not changed significantly from those set out in the Group's
2012 annual report and the 2013 interim report. A detailed
description of the Group's principal risks and uncertainties and
the ways they are mitigated can be found at Annex 1. These can be
summarised as:
-- Health and safety risks.
-- Risks associated with possible defence budget cuts.
-- Risks associated with the timing and value of orders.
-- Political risks.
-- Operational risks.
-- Risks associated with the introduction of new products.
-- Risks of product liability and other customer claims.
-- Risks associated with the adequacy of management resource.
-- Compliance and corruption risks.
-- Risks associated with compliance with environmental laws and regulations.
-- Financial risks.
Management have detailed mitigation plans and assurance
processes to manage and monitor these risks.
Research and development
Research and development expenditure was GBP46.0 million (2012:
GBP59.0 million). The reduction primarily reflects a lower level of
customer-funded development projects. Continued investment in
research and development is a key aspect of the Group's Performance
Recovery Programme, and internally-funded research and development
is expected to increase in 2014 as investment is made in product
development, particularly within Sensors & Electronics. An
analysis of research and development expenditure is set out
below:
2013 2012
GBPm GBPm
Customer-funded research and development 27.1 34.4
Internally-funded research and development
* expensed to the income statement 11.5 12.3
* capitalised 7.4 12.3
------ ------
Total research and development expenditure 46.0 59.0
------ ------
Amortisation of development and patent costs in the year was
GBP5.9 million (2012: GBP4.6 million), reflecting a number of
previously capitalised projects coming on-stream.
Pensions
The deficit on the Group's defined benefit pension schemes, as
defined in IAS 19 Employee Benefits (Revised), was GBP25.1 million
(2012: GBP27.0 million). This principally relates to the Chemring
Group Staff Pension Scheme (the "Scheme"), a UK defined benefit
scheme whose assets are held in a separately administered fund. The
Scheme was closed to future accrual in April 2012. A full actuarial
valuation for the Scheme as at 6 April 2012 has been prepared and
updated to 31 October 2013, using the projected unit credit
method.
The actuarial valuation of the Scheme at October 2013 showed a
deficit of GBP24.2 million, compared to a deficit of GBP25.9
million in the prior year. Following discussions with the Scheme's
trustees, a new funding structure has been agreed. This replaces
the previous GBP20.0 million lump sum funding commitment, which
would have fallen due for payment in June 2014, with contributions
of GBP8.2 million in the year ending 31 October 2014 and GBP5.0
million annually thereafter. The Group has given a bank guarantee
and letters of credit totalling GBP27.2 million (2012: GBP27.2
million) to the Scheme in respect of future contributions payable.
Of these commitments, GBP20.0 million will progressively reduce as
contributions are paid to the Scheme under the new funding
structure.
Chemring will implement amendments to IAS 19 Employee Benefits
(Revised) in its financial statements for the year ending 31
October 2014, and while there will be no resulting cash effect, the
net interest cost associated with retirement benefit obligations is
expected to increase by approximately GBP0.9 million per annum.
Chemring's UK employees are now offered membership of a defined
contribution pension scheme. The majority of the Group's overseas
pension arrangements are also defined contribution, save in those
European countries where certain defined benefit pension
arrangements are required.
Cash flow
Underlying continuing operating cash flow was GBP68.6 million
(2012: GBP114.9 million). A summary of underlying Group cash flow
from continuing operations is set out below:
2013 2012
GBPm GBPm
Underlying continuing operating profit 72.1 88.3
Depreciation and loss on disposal of fixed
assets 22.3 19.1
Amortisation of development costs, patents
and licences 5.9 4.6
------- -------
Underlying continuing operating profit before
interest, depreciation
and amortisation 100.3 112.0
(Increase)/decrease in working capital (31.3) 19.9
Other movements (0.4) (17.0)
------- -------
Underlying operating cash flow 68.6 114.9
Fixed asset expenditure (19.7) (41.1)
Tax (0.5) (6.1)
Interest (20.4) (23.8)
------- -------
Underlying free cash flow 28.0 43.9
------- -------
Expenditure on property, plant and equipment and capitalised
development projects was GBP19.7 million (2012: GBP41.1 million).
This includes GBP1.5 million (2012: GBP6.9 million) associated with
the construction of new facilities at the Group's countermeasure
sites in the UK and Australia. Other expenditure comprised numerous
projects, including health and safety related projects to upgrade
electricity supplies and automate production.
Tax payments were GBP0.5 million (2012: GBP6.1 million),
reflecting the lower profits of the Group, receipt of refunds in
respect of prior periods and timing of payments.
Interest payments reduced due to a lower level of gross debt
during the year.
Working capital
An analysis of working capital is set out below:
2013 2012
GBPm GBPm
Inventories 113.7 113.8
Trade receivables 76.2 90.9
Contract receivables 104.8 87.6
Trade payables (62.8) (100.2)
Advance payments (17.4) (11.7)
Accruals and deferred income (48.9) (45.6)
Other items (40.0) (41.5)
------- --------
Total working capital 125.6 93.3
------- --------
During September and October 2013, deliveries to customers in
the Middle East were delayed due to constraints in available
shipping capacity. Working capital at 31 October 2013 was higher as
a consequence of these delays; however, this impact has largely
unwound during the first quarter of the current financial year.
Working capital has also risen due to a reduction in trade
payables, reflecting a more sustainable approach towards creditor
management. Contract accounting continues to be applied where
appropriate and contract accounted revenues represented 38% (2012:
37%) of total revenue.
The Group's working capital is a key focus area for management,
and initiatives have been implemented to raise working capital
efficiency, notably through the reduction of inventories and
contract receivables. Working capital is expected to reduce during
2014, although the profile of certain major contracts is now
expected to lead to this reduction being weighted towards the
second half of the current financial year.
Net debt, facilities and going concern
Net debt at 31 October 2013 was GBP248.7 million (2012: GBP244.8
million). The Group had GBP126.8 million (2012: GBP143.9 million)
of undrawn borrowing facilities at the year end.
The Group's debt facilities include a GBP230.0 million revolving
credit facility with a syndicate of five banks. The facility, which
is unsecured, provides both trade finance and funds for general
working capital purposes. The term of this facility is to April
2015, with an option to extend for twelve months. In practice, it
is intended that the facility will be refinanced during 2014.
In addition to the revolving credit facility, the Group has
fixed interest loan notes in the US, repayable in November 2016
($80.0 million), November 2017 (GBP12.5 million and $125.0 million)
and November 2019 ($200.0 million). The Group continues to have
positive relationships with all its debt providers.
The Group is subject to two key financial covenants, which are
tested quarterly, relating to the leverage ratio between underlying
earnings before interest, tax, depreciation and amortisation
("underlying EBITDA") and debt, and the interest cover ratio
between underlying EBITDA and finance costs. The revolving credit
facility and the loan notes have differing covenant compliance
calculations, with the primary difference being that the revolving
credit facility uses consolidated net debt in calculating the
leverage ratio, whereas the loan notes use total gross debt. In
June 2013, Chemring successfully concluded a revision of financial
covenants with its debt providers. In respect of the revolving
credit facility, the maximum permitted ratio of net debt to
underlying EBITDA was increased to 3.50x at the April and July 2013
testing dates, and then reduced to 3.25x at the October 2013 and
January 2014 testing dates, before reverting to 3.00x thereafter.
The basis of calculation of this ratio was also amended so as to
translate non-sterling denominated debt using average, rather than
closing, rates of exchange. In respect of the loan notes, the
permitted ratio of debt to underlying EBITDA was increased to 3.50x
for the four quarters mentioned above before reverting to 3.00x
thereafter, with this covenant continuing to be based upon total
gross debt. This covenant also uses average exchange rates.
The Group complied with these covenants throughout the year, and
this compliance is expected by the directors to continue for the
foreseeable future. The results of the covenant tests at the year
end are detailed below:
2013 2012
Covenant ratios - revolving credit facility
Maximum allowed ratio of consolidated net debt
to underlying EBITDA 3.25x 3.00x
Actual ratio of consolidated net debt to underlying
EBITDA 2.65x 2.14x
Minimum allowed ratio of underlying EBITDA to finance
costs 4.00x 4.00x
Actual ratio of underlying EBITDA to finance costs 4.98x 6.71x
Covenant ratios - loan note agreements
Maximum allowed ratio of consolidated total debt
to underlying EBITDA 3.50x 3.00x
Actual ratio of consolidated total debt to underlying
EBITDA 2.78x 2.79x
Minimum allowed ratio of underlying EBITDA to finance
costs 3.50x 3.50x
Actual ratio of underlying EBITDA to finance costs 5.61x 6.86x
The composition of gross and net debt is set out below:
2013 2012
GBPm GBPm
Loan notes (259.1) (261.2)
Revolving credit facility - (71.1)
Other loans and finance leases (3.8) (8.5)
-------- --------
Gross debt (262.9) (340.8)
Cash 14.2 96.0
-------- --------
Net debt (248.7) (244.8)
-------- --------
The Group's level of debt, and therefore leverage, reflects the
historic development of the Group through acquisition, together
with the effect of growth in working capital and the substantial
investment in production capacity. The Group continues to work
towards a sustained reduction in debt through consistent conversion
of operating profit to operating cash flow.
As part of their regular assessment of the business working
capital and financing position, the directors have prepared a
detailed trading budget and cash flow forecast for a period which
covers at least twelve months after the date of approval of the
financial statements. In assessing the forecast, the directors have
considered:
-- Trading risks presented by the current economic conditions in
the defence market, particularly in relation to government budgets
and spending.
-- The impact of macroeconomic factors, particularly interest rates and foreign exchange rates.
-- The status of the Group's financial arrangements and associated covenant requirements.
-- Progress made in developing and implementing outcomes from
the Strategic Planning Process, including the implications of
disposing of businesses which do not form part of the Group's
longer-term strategy.
-- Mitigating actions available should business activities fall
behind current expectations, including the deferral of
discretionary overheads and restricting cash outflows, together
with the potential to dispose of non-core operations.
The long-term nature of the Group's business, taken together
with the Group's order book, provide a satisfactory level of
confidence to the Board in respect of trading.
The directors have acknowledged the latest guidance on going
concern. They have made appropriate enquiries and believe that the
Company is well-placed to manage its risks.
Whilst the current volatility in financial markets has created
general uncertainty, the Group continues to have working capital
headroom. The Group has been in compliance with its revolving
credit facility and loan note covenants throughout 2013 and is
forecast to be in compliance for the coming twelve months.
Additional sensitivity analysis has been prepared with a focus on
the April 2014 covenant test date, when the permitted leverage
ratios revert to 3.00x, to consider the impact of a reduction in
forecast EBITDA. This sensitised scenario includes identified
mitigating actions that can be taken if needed and, based on the
application of these, shows headroom on all covenant test dates.
The directors having considered the forecasts, the risks and
associated mitigating actions, have a reasonable expectation that
adequate financial resources will continue to be available for the
foreseeable future. Thus, they continue to adopt the going concern
basis in preparing the financial statements.
Dividends
The Board is recommending a final dividend for the year of 3.8p
(2012: 4.2p). With the interim dividend of 3.4p (2012: 5.3p), paid
in August 2013, this results in a total dividend in respect of 2013
of 7.2p (2012: 9.5p). This total dividend is in line with the
Group's stated policy of maintaining a dividend that is covered
three times by underlying earnings.
Shareholder returns
Underlying basic earnings per share were 21.6p (2012: 28.5p), a
decrease of 24.2%. There was a basic loss per share of 24.6p (2012:
6.8p earnings per share).
The total dividend per share of 7.2p (2012: 9.5p) is covered 3.0
times (2012: 3.0 times) by underlying earnings per share.
Shareholders' funds at the year end were GBP383.8 million (2012:
GBP433.5 million).
Board of directors
A number of changes were made to the Board of directors during
the year. Mark Papworth joined as Chief Executive on 5 November
2012, followed by Steve Bowers as Finance Director on 7 January
2013.
Nigel Young, who was Interim Chief Financial Officer between
August 2012 and January 2013, became a non-executive director and
Chairman of the Audit Committee on 1 May 2013. Andy Hamment, who
was previously Group Marketing Director of Ultra Electronics plc,
joined the Board as a non-executive director on 1 July 2013. Two
non-executive directors retired from the Board during the year:
Peter Norriss, who had been a director since May 2004, stepped down
at the Annual General Meeting in March 2013, and Roger Freeman, who
had been a director since May 2006, retired from the Board on 31
December 2013. The Board is most grateful to both for their
valuable contributions over many years.
These changes mean that Chemring has created a substantially new
Board in the last two years. This fresh perspective will be
important in meeting the challenges and opportunities facing the
Group.
Outlook
Real progress has been made in transforming Chemring and the
Performance Recovery Programme is eliminating a number of the
issues that have dragged down recent performance. The benefits of
the programme will come through in 2014 and the Group is better
placed as a result.
While sequestration of the US defence budget has been avoided,
the difficult market conditions that Chemring experienced in 2013
are expected to continue throughout 2014 and represent the most
significant challenge that the Group currently faces. Growth in
emerging markets is expected to be offset by defence spending
constraints in the US, UK and Europe, and a recovery in the Group's
traditional NATO markets is not expected in the medium-term. The
current strength of sterling against the US dollar, if sustained,
will also impact earnings given the significance of the Group's US
operations.
Chemring will continue to drive improvements in operational
performance, and pursue the growth opportunities that exist,
particularly within non-NATO markets where defence spending is
expected to increase. It will also reshape and strengthen its
portfolio of businesses through the disposal of non-core activities
and technology investment in those businesses that can achieve
sustainable growth and margin improvement. Meanwhile, the Board's
expectations for the current financial year remain unchanged.
RESPONSIBILITY STATEMENT OF THE DIRECTORS ON THE ANNUAL REPORT
AND ACCOUNTS
The responsibility statement below has been prepared in
connection with the Company's full annual report and accounts for
the year ended 31 October 2013. Certain parts thereof are not
included within this announcement.
We confirm to the best of our knowledge:
1. The financial statements, prepared in accordance with International
Financial Reporting Standards as adopted by the European
Union, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company and
the undertakings included in the consolidation taken as a
whole; and
2. The Chairman's statement, the strategic report and the performance
review include a fair review of the development and performance
of the business and the position of the Company and the undertakings
included in the consolidation taken as a whole, together
with a description of the principal risks and uncertainties
they face.
This responsibility statement was approved by the Board of
directors on 23 January 2014 and has been signed on its behalf by
Mark Papworth and Steve Bowers.
SUMMARY FINANCIAL INFORMATION
Note 2013 2012
GBPm GBPm
Revenue from continuing operations 2
Countermeasures 125.0 163.2
Sensors & Electronics 211.3 228.9
Pyrotechnics & Munitions 200.6 249.5
Energetic Sub-Systems 88.0 98.7
-------- -------
624.9 740.3
Revenue from discontinued operations
Pyrotechnics & Munitions - 15.1
-------- -------
Total revenue 624.9 755.4
-------- -------
Underlying operating profit 3
- continuing operations 72.1 88.3
- discontinued operations - 3.1
-------- -------
Total underlying operating profit 72.1 91.4
-------- -------
Underlying profit before tax from continuing
operations 52.4 70.1
Underlying basic earnings per ordinary share
from continuing operations 5 21.6p 28.5p
Operating (loss)/profit from continuing operations (36.9) 37.0
(Loss)/profit before tax from continuing operations (56.6) 18.8
Basic (loss)/earnings per ordinary share from
continuing and discontinued operations (24.6)p 7.9p
Dividends declared per ordinary share 9 7.2p 9.5p
Net debt 7 248.7 244.8
Shareholders' funds 383.8 433.5
Underlying measures referred to in this announcement are stated
before costs relating to acquisition and disposals, business
restructuring and incident costs, profit on disposal of businesses,
items deemed to be of an exceptional nature, impairment of goodwill
and acquired intangibles, impairment of assets held for sale,
amortisation of acquired intangibles and gains/losses on the
movement in the fair value of derivative financial instruments. A
reconciliation of underlying and total operating profit is set out
in note 4.
CONSOLIDATED INCOME STATEMENT
for the year ended 31 October 2013
2013 2012
Non- Non-
Underlying underlying Underlying underlying
performance* items Total performance* items Total
GBPm GBPm GBPm GBPm GBPm GBPm
Continuing operations
Revenue 624.9 - 624.9 740.3 - 740.3
------------- ----------- -------- ------------- ----------- -------
Operating profit/(loss) 72.1 (109.0) (36.9) 88.3 (51.3) 37.0
Share of profit after
tax of associate - - - 0.1 - 0.1
Finance income 0.2 - 0.2 0.1 - 0.1
Finance expense (19.9) - (19.9) (18.4) - (18.4)
------------- ----------- -------- ------------- ----------- -------
Profit/(loss) before
tax 52.4 (109.0) (56.6) 70.1 (51.3) 18.8
Tax (10.6) 19.7 9.1 (15.1) 9.5 (5.6)
------------- ----------- -------- ------------- ----------- -------
Profit/(loss) after
tax 41.8 (89.3) (47.5) 55.0 (41.8) 13.2
Discontinued operations
Profit after tax from
discontinued operations - - - 2.1 - 2.1
------------- ----------- -------- ------------- ----------- -------
Profit/(loss) after
tax 41.8 (89.3) (47.5) 57.1 (41.8) 15.3
------------- ----------- -------- ------------- ----------- -------
Earnings/(loss) per
ordinary share
Continuing operations
Basic 21.6p (46.2)p (24.6)p 28.5p (21.7)p 6.8p
Diluted 21.2p (45.8)p (24.6)p 28.1p (21.4)p 6.7p
------------- ----------- -------- ------------- ----------- -------
Continuing operations
and discontinued operations
Basic 21.6p (46.2)p (24.6)p 29.6p (21.7)p 7.9p
Diluted 21.2p (45.8)p (24.6)p 29.2p (21.4)p 7.8p
------------- ----------- -------- ------------- ----------- -------
* Further information about non-underlying items can be found in
note 4.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the year ended 31 October 2013
2013 2012
GBPm GBPm
(Loss)/profit after tax attributable to equity
holders of the parent (47.5) 15.3
Items that will not be reclassified subsequently
to profit or loss
Actuarial gains/(losses) on defined benefit
pension schemes 0.7 (2.7)
Movement on deferred tax relating to pension
schemes (0.9) 0.7
------- ---------
(0.2) (2.0)
------- ---------
Items that may be reclassified subsequently
to profit or loss
Exchange differences on translation of foreign
operations 13.6 (20.1)
Deferred tax on exchange differences on translation
of foreign operations (1.8) 0.7
------- ---------
11.8 (19.4)
------- ---------
Total comprehensive expense attributable to
equity holders of the parent (35.9) (6.1)
------- ---------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended 31 October 2013
Share Special
Share premium capital Revaluation Translation Retained Own
capital account reserve reserve reserve earnings shares Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 November
2012 2.0 230.7 12.9 1.3 (39.6) 235.8 (9.6) 433.5
---------------------- -------- -------- -------- ------------ ------------ --------- ------- -------
(Loss) after tax - - - - - (47.5) - (47.5)
Other comprehensive
income/(expense) - - - - 13.6 (2.0) - 11.6
Total comprehensive
income/(expense) - - - - 13.6 (49.5) - (35.9)
Ordinary shares
issued - - - - - - - -
Dividends paid - - - - - (14.7) - (14.7)
Share-based payments
(net of settlement) - - - - - 0.9 - 0.9
At 31 October
2013 2.0 230.7 12.9 1.3 (26.0) 172.5 (9.6) 383.8
-------- -------- -------- ------------ ------------ --------- ------- -------
Share Special
Share premium capital Revaluation Translation Retained Own
capital account reserve reserve reserve earnings shares Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 November
2011 2.0 230.6 12.9 1.4 (19.5) 254.6 (6.6) 475.4
---------------------- --------- ---------- --------- ------------- ------------ --------- -------- --------
Profit after tax - - - - - 15.3 - 15.3
Other comprehensive
expense - - - - (20.1) (1.3) - (21.4)
Total comprehensive
(expense)/income - - - - (20.1) 14.0 - (6.1)
Ordinary shares
issued - 0.1 - - - - - 0.1
Dividends paid - - - - - (31.1) - (31.1)
Share-based payments
(net of settlement) - - - - - (1.8) - (1.8)
Transactions in
own shares - - - - - - (3.0) (3.0)
Transfers between
reserves - - - (0.1) - 0.1 - -
--------- ---------- --------- ------------- ------------ --------- -------- --------
At 31 October
2012 2.0 230.7 12.9 1.3 (39.6) 235.8 (9.6) 433.5
--------- ---------- --------- ------------- ------------ --------- -------- --------
CONSOLIDATED BALANCE SHEET
as at 31 October 2013
2013 2012
GBPm GBPm GBPm GBPm
Non-current assets
Goodwill 168.3 214.8
Development costs 32.7 31.0
Other intangible assets 135.5 167.4
Property, plant and equipment 222.3 240.0
Interest in associate 1.5 1.4
Deferred tax 21.7 16.9
-------- -------- ---------- ----------
582.0 671.5
-------- -------- ---------- ----------
Current assets
Inventories 113.7 113.8
Trade and other receivables 203.9 193.0
Cash and cash equivalents 14.2 96.0
Derivative financial instruments 1.5 1.0
Assets held for sale 6.7 -
-------- -------- ---------- ----------
340.0 403.8
-------- -------- ---------- ----------
Total assets 922.0 1,075.3
-------- -------- ---------- ----------
Current liabilities
Borrowings (0.4) (74.0)
Obligations under finance leases (1.6) (1.7)
Trade and other payables (176.7) (201.5)
Provisions (2.7) (2.8)
Current tax (15.4) (5.2)
Derivative financial instruments (0.4) (0.1)
Liabilities held for sale (1.1) -
-------- -------- ---------- ----------
(198.3) (285.3)
-------- -------- ---------- ----------
Non-current liabilities
Borrowings (259.4) (262.1)
Obligations under finance leases (1.4) (2.9)
Trade and other payables (2.3) (4.3)
Provisions (10.3) (4.9)
Deferred tax (38.8) (52.7)
Preference shares (0.1) (0.1)
Retirement benefit obligations (25.1) (27.0)
Derivative financial instruments (2.5) (2.5)
-------- -------- ---------- ----------
(339.9) (356.5)
-------- -------- ---------- ----------
Total liabilities (538.2) (641.8)
-------- -------- ---------- ----------
Net assets 383.8 433.5
-------- -------- ---------- ----------
Equity
Share capital 2.0 2.0
Share premium account 230.7 230.7
Special capital reserve 12.9 12.9
Revaluation reserve 1.3 1.3
Translation reserve (26.0) (39.6)
Retained earnings 172.5 235.8
-------- -------- ---------- ----------
393.4 443.1
Own shares (9.6) (9.6)
-------- -------- ---------- ----------
Equity attributable to equity
holders of the parent 383.8 433.5
-------- -------- ---------- ----------
Total equity 383.8 433.5
-------- -------- ---------- ----------
CONSOLIDATED CASH FLOW STATEMENT
for the year ended 31 October 2013
2013 2012
GBPm GBPm
Cash flows from operating activities
-------------------------------------------------------- -------- -----------
Cash generated from continuing underlying operations 68.6 114.9
Cash generated from discontinued underlying operations - 3.3
-------------------------------------------------------- -------- -----------
Cash generated from underlying operations 68.6 118.2
Acquisition and disposal related costs (3.8) (5.5)
Business restructuring and incident costs (8.9) (10.1)
-------- -----------
55.9 102.6
Tax paid (0.5) (6.1)
-------- -----------
Net cash inflow from operating activities 55.4 96.5
-------- -----------
Cash flows from investing activities
Dividends received from associate - 0.1
Purchases of intangible assets (7.4) (11.0)
Purchases of property, plant and equipment (12.3) (30.1)
Receipt of finance income 0.2 -
Receipts from sales of businesses (net of cash
transferred) - 21.8
Net cash outflow from investing activities (19.5) (19.2)
-------- -----------
Cash flows from financing activities
Dividends paid (14.7) (31.1)
Finance expense paid (20.6) (23.8)
New borrowings - 12.5
Capitalised facility fees paid (1.7) -
Repayments of borrowings (79.1) (23.0)
Repayments of finance leases (1.7) (1.8)
Purchase of own shares - (4.8)
-------- -----------
Net cash outflow from financing activities (117.8) (72.0)
-------- -----------
(Decrease)/increase in cash and cash equivalents (81.9) 5.3
Cash and cash equivalents at beginning of the
year 96.0 91.9
Effect of foreign exchange rate changes 0.1 (1.2)
-------- -----------
Cash and cash equivalents at end of the year 14.2 96.0
-------- -----------
Notes
1. ACCOUNTS AND AUDITOR'S REPORT
The financial information set out above does not constitute the
Company's statutory accounts for the year ended 31 October 2013 or
31 October 2012 but is derived from those accounts. Statutory
accounts for 2012 have been delivered to the Registrar of
Companies, and those for 2013 will be delivered following the
company's Annual General Meeting. The auditors have reported on
these accounts; their reports were unqualified, did not draw
attention to any matters by way of emphasis without qualifying
their report, and did not contain any statements required under
either s498(2) or s498(3) of the Companies Act 2006.
This announcement has been prepared on the basis of the
accounting policies set out in the Company's financial statements
for the year ended 31 October 2013.
Whilst the financial information included in this announcement
has been computed in accordance with International Financial
Reporting Standards ("IFRSs"), this announcement does not itself
contain sufficient information to comply with IFRSs. The Company
expects to publish full financial statements that comply with IFRSs
on 18 February 2014 (see note 11 below).
2. ANALYSIS OF REVENUE
2013 2012
Continuing Discontinued Total Continuing Discontinued Total
GBPm GBPm GBPm GBPm GBPm GBPm
Countermeasures 125.0 - 125.0 163.2 - 163.2
Sensors & Electronics 211.3 - 211.3 228.9 - 228.9
Pyrotechnics & Munitions 200.6 - 200.6 249.5 15.1 264.6
Energetic Sub-Systems 88.0 - 88.0 98.7 - 98.7
----------- ------------- ------ ----------- ------------- ------------
624.9 - 624.9 740.3 15.1 755.4
----------- ------------- ------ ----------- ------------- ------------
3. ANALYSIS OF UNDERLYING OPERATING PROFIT
2013 2012
Continuing Discontinued Total Continuing Discontinued Total
GBPm GBPm GBPm GBPm GBPm GBPm
Countermeasures 13.2 - 13.2 20.4 - 20.4
Sensors & Electronics 44.7 - 44.7 44.9 - 44.9
Pyrotechnics & Munitions 13.0 - 13.0 21.2 3.1 24.3
Energetic Sub-Systems 11.3 - 11.3 12.3 - 12.3
----------- ------------- ------- ----------- ------------- ------------
82.2 - 82.2 98.8 3.1 101.9
Unallocated corporate
costs (10.1) - (10.1) (10.5) - (10.5)
----------- ------------- ------- ----------- ------------- ------------
72.1 - 72.1 88.3 3.1 91.4
----------- ------------- ------- ----------- ------------- ------------
4. RECONCILIATION OF TOTAL OPERATING (LOSS)/PROFIT TO UNDERLYING
OPERATING PROFIT
Underlying measures are used by the Board to monitor the
underlying performance of the Group. Underlying measures are stated
before costs relating to acquisition and disposals, business
restructuring and incident costs, profit on disposal of businesses,
items deemed to be of an exceptional nature, impairment of goodwill
and acquired intangibles, the impairment of assets held for sale,
amortisation of acquired intangibles and gains/losses on the
movement in the fair value of derivative financial instruments.
Set out below is a reconciliation of total operating
(loss)/profit to underlying operating profit from continuing
operations:
2013 2012
GBPm GBPm
Total operating (loss)/profit from continuing
operations (36.9) 37.0
Add back:
Acquisition and disposal related costs 3.2 8.2
Business restructuring and incident costs 11.7 11.9
Profit on disposal of business - (10.3)
Impairment of goodwill 50.9 22.5
Impairment of acquired intangibles 15.7 -
Impairment of assets held for sale 8.8 -
Intangible amortisation arising from business
combinations 18.8 20.9
Gain on the movement in the fair value of
derivative financial instruments (0.1) (1.9)
------- --------
Underlying operating profit from continuing
operations 72.1 88.3
------- --------
Further details on the non-underlying items are provided earlier
in this announcement.
Total profit before tax and underlying profit before tax also
differ by the amounts shown above.
5. EARNINGS PER SHARE
Earnings per share are based on the average number of shares in
issue, excluding own shares held, of 193,292,820 (2012:
193,309,230) and the loss on continuing ordinary activities after
tax of GBP47.5 million (2012: GBP13.2 million profit). Diluted
earnings per share has been calculated using a diluted average
number of shares in issue, excluding own shares held, of
193,292,820 (2012: 195,792,140) and the loss on continuing ordinary
activities after tax of GBP47.5 million (2012: GBP13.2 million
profit). For the year ended 31 October 2013, no dilution has been
recognised for the purposes of basic earnings per share due to
there being a loss per share. Dilution has however been recognised
in the calculation of underlying earnings per share for the year
ended 31 October 2013, using a diluted average number of shares in
issue, excluding own shares held, of 196,854,505 (2012:
195,792,140).
The earnings and number of shares used in the calculations are
as follows:
2013 2012
Ordinary Earnings Ordinary Earnings
shares per shares per
Loss Number share Earnings Number share
GBPm 000s Pence GBPm 000s Pence
Basic (47.5) 193,293 (24.6) 13.2 193,309 6.8
Additional shares issuable
other than at fair value
in respect of options
outstanding - - - - 2,483 (0.1)
------------ --------- ---------- ------------ --------- ---------
Diluted (47.5) 193,293 (24.6) 13.2 195,792 6.7
------------ --------- ---------- ------------ --------- ---------
The number of shares in issue differs from the number held by
third parties due to the fact that the Company holds some of its
shares in treasury.
Reconciliation from basic earnings per share to underlying
earnings per share
Underlying basic earnings are defined as earnings before
acquisition and disposal related costs, business restructuring and
incident costs, profit on disposal of business, items deemed to be
of an exceptional nature, impairment of goodwill and acquired
intangibles, impairment of assets held for sale, intangible
amortisation arising from business combinations and gains/losses on
the movement in the fair value of derivative financial instruments.
The directors consider this measure of earnings allows a more
meaningful comparison of earnings trends.
2013 2012
Ordinary Earnings Ordinary Earnings
shares per shares per
Loss Number share Earnings Number share
GBPm 000s Pence GBPm 000s Pence
Basic (47.5) 193,293 (24.6) 13.2 193,309 6.8
Non-underlying items* 89.3 - 46.2 41.8 - 21.7
--------- --------- --------- --------- ------------- ---------
Underlying 41.8 193,293 21.6 55.0 193,309 28.5
--------- --------- --------- --------- ------------- ---------
* Before non-underlying items (see note 4) and tax thereon of
GBP19.7 million (2012: GBP9.5 million).
6. CASH GENERATED FROM UNDERLYING OPERATIONS
2013 2012
GBPm GBPm
Operating (loss)/profit from continuing operations (36.9) 37.0
Operating profit from discontinued operations - 3.1
-------- -------------
(36.9) 40.1
Impairment of goodwill 50.9 22.5
Impairment of acquired intangibles 15.7 -
Impairment of assets held for sale 8.8 -
Amortisation of development costs 5.5 4.3
Intangible amortisation arising from business
combinations 18.8 20.9
Amortisation of patents and licences 0.4 0.3
Loss on disposal of non-current assets 2.2 3.4
Depreciation of property, plant and equipment 20.1 15.9
Gain on fair value movements on derivative financial
instruments (0.1) (1.9)
Share-based payment expense/(credit) 0.9 (0.1)
Employer contributions towards pension scheme
deficit reduction plan (1.0) -
Difference between pension contributions paid
and amount recognised in income statement (0.3) 0.6
-------- -------------
Operating cash flows before movements in working
capital 85.0 106.0
Decrease in inventories 0.1 28.0
Increase in trade and other receivables (15.9) (8.2)
Decrease in trade and other payables (21.0) (20.2)
Increase in provisions 5.5 2.8
-------- -------------
53.7 108.4
Add back non-underlying items:
Acquisition and disposal related costs 3.2 8.2
Business restructuring and incident costs 11.7 11.9
Profit on disposal of business - (10.3)
-------- -------------
Cash generated from underlying operations 68.6 118.2
-------- -------------
7. RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
2013 2012
GBPm GBPm
(Decrease)/increase in cash and cash equivalents
during the year (81.9) 5.3
Decrease in debt and lease financing due to cash
flows 82.5 12.3
-------- -------------
Decrease in net debt resulting from cash flows 0.6 17.6
Effect of foreign exchange rate changes (2.5) 1.9
Amortisation of debt finance costs (2.0) (1.6)
-------- -------------
Movement in net debt (3.9) 17.9
Net debt at beginning of the year (244.8) (262.7)
-------- -------------
Net debt at end of the year (248.7) (244.8)
-------- -------------
8. ANALYSIS OF NET DEBT
As at Cash Non-cash Exchange As at
1 Nov 2012 flows changes rate effects 31 Oct
2013
GBPm GBPm GBPm GBPm GBPm
Cash at bank and in hand 96.0 (81.9) - 0.1 14.2
Debt due within one year (74.0) 79.1 (3.6) (1.9) (0.4)
Debt due after one year (262.1) 1.7 1.6 (0.6) (259.4)
Finance leases (4.6) 1.7 - (0.1) (3.0)
Preference shares (0.1) - - - (0.1)
------------ ------------- ------------- ------------- -----------
(244.8) 0.6 (2.0) (2.5) (248.7)
------------ ------------- ------------- ------------- -----------
9. DIVIDEND
The final dividend of 3.8p per ordinary share will be paid on 9
May 2014 to all shareholders registered at the close of business on
22 April 2014. The ex-dividend date will be 16 April 2014. The
total dividend for the year will be 7.2p (2012: 9.5p). The final
dividend is subject to approval by the shareholders at the Annual
General Meeting, and accordingly, has not been included as a
liability in the financial statements for the year ended 31 October
2013.
10. RELATED PARTY TRANSACTIONS
Transactions between the Company and its subsidiaries, which are
related parties, have been eliminated on consolidation and are not
disclosed. The directors of the Company had no material
transactions with the Company during the year, other than in
connection with their service agreements.
11. 2013 ANNUAL REPORT AND ACCOUNTS
The annual report and accounts for the year ended 31 October
2013 will be posted to shareholders on 18 February 2014. They will
also be available from that date at the registered office, Chemring
House, 1500 Parkway, Whiteley, Fareham, Hampshire PO15 7AF, and
will be posted on the Company's website, www.chemring.co.uk, the
following morning.
Annex 1.
PRINCIPAL RISKS AND UNCERTAINTIES
The Board has constituted a Risk Management Committee which
meets quarterly to review the key risks associated with the
achievement of the annual budget and the three year plan for each
business, the most significant health and safety risks identified
at each site, and the risk control procedures implemented. The
Committee reports biannually to the Audit Committee and the Board,
and through this process, the Board has identified the following
principal risks currently facing the Group. The mitigating actions
taken by the Group management to address these risks are also set
out below. The Group also mitigates its risk exposure through an
insurance programme that covers property and liability risks, where
it is appropriate and cost effective to do so.
-- Health and safety risks - The Group's operations which
utilise energetic materials are subject to inherent health and
safety risks. From time to time, incidents may occur which could
result in the temporary shutdown of facilities or other disruption
to manufacturing processes, causing production delays and resulting
in financial loss and potential liability for workplace injuries
and fatalities.
The Board believes that responsibility for the delivery of world
class safety standards is an integral part of operational
management accountability, and is committed to ensuring the Group's
leadership operates with health and safety as the top priority and
that the strength of the Group' safety culture and the quality of
its protective systems deliver operations where all employees and
visitors feel and are absolutely safe. A new safety leadership
programme has been developed this year, which will be attended by
the management teams of every business during 2014.
All employees now receive a booklet setting out the Group's
statements of intent in relation to delivery of its health and
safety strategy and the behaviours required of them as individual
employees. All employees are encouraged to report potential
hazards, and to raise any health and safety concerns through the
appropriate channels.
The Group continues to invest in state-of-the-art process safety
systems and equipment. The Group's safety and loss prevention
programmes require detailed pre-construction reviews of process
changes and new operations, and routine safety audits of operations
are undertaken on a regular basis.
All businesses are expected to proactively manage their own
risks but, in addition, the top site risks at each business and
their associated mitigation programmes are reviewed quarterly by
the Risk Management Committee. Health and safety is included on the
agenda at every Board meeting, and is discussed at the monthly
Group Executive Committee meeting.
-- Possible defence budget cuts - Defence spending depends on a
complex mix of political considerations, budgetary constraints and
the requirements of the armed forces to address specific threats
and perform certain missions. As such, defence spending may be
subject to significant fluctuations from year to year. Given the
large budget deficits and the prevailing economic conditions in
many NATO countries, the Group expects there to be continued
downward pressure on budgets, and consequently, defence expenditure
could be severely impacted.
In recognition of the issues affecting the Group's traditional
NATO markets, business development activities are being focused on
non-NATO markets, where defence expenditure is forecast to grow
strongly over the next five to ten years. The Group has made good
progress on developing its routes to market in India, Saudi Arabia,
the United Arab Emirates and Brazil. The Group has established a
more focused international sales and business development team, and
implemented new processes to ensure that the businesses are
successful in "winning every sales opportunity".
The Group also continually assesses whether its planned organic
growth strategies and product developments align with government
priorities for future funding. Most product development programmes
take between six and twelve months to complete, and this gives the
Group the ability to quickly re-deploy engineering staff to product
areas where funding is more secure.
The Group continues to closely monitor the position in all the
key markets in which it operates.
-- Timing and value of orders - The Group's profits and cash
flows are dependent, to a significant extent, on the timing of
award of defence contracts. In general, the majority of the Group's
contracts are of a relatively short duration and, with the
exception of framework contracts with key customers, do not usually
cover multi-year requirements. This means that an unmitigated delay
in the receipt of orders could affect the Group's earnings, and
achievement of its budget, in any given financial year.
The Group anticipates that delays in the placement of orders by
traditional NATO customers, as a result of budgetary constraints,
are likely to continue in the short to medium term. If the Group's
businesses are unable to continue trading profitably during periods
of lower order intake, financial performance will deteriorate and
assets may be impaired.
As referred to above, the Group is focusing on the expansion of
its business in non-NATO markets, where defence expenditure is
forecast to increase.
Maximising order intake remains a key objective for the
businesses, and they continue to address this through the
strengthening of their sales and marketing resources. The
businesses continue to pursue long-term, multi-year contracts with
their major customers wherever possible.
The Group has undertaken various restructuring projects over the
last year, which were aimed at restoring the profitability of those
Group businesses which have suffered most from order delays in
recent times. Site optimisation plans are now being developed to
ensure that the Group utilises its manufacturing facilities as
efficiently as possible, within the constraints imposed by export
control legislation and customer requirements.
-- Political risks- The Group is active in several countries
that are suffering from political, social and economic instability.
The Group's business in these countries may be adversely affected
in a way that is material to the Group's financial position and the
results of its operations. In addition, political unrest and
changes in the political structure in certain non-NATO countries to
which the Group currently sells could impact on their future
defence expenditure strategy and the Group's ability to export
products to these countries. During periods of unrest, delays in
obtaining export licences can result in delayed revenues.
The Group's businesses strive to maintain relationships at all
levels within the political structure of certain key countries, in
order to ensure that they are aware of and can react to proposed
changes, if and when they occur.
The businesses implement financing arrangements for contracts
with high risk customers, which are intended to mitigate the impact
of a deterioration in the customer's financial position, and in
certain circumstances, they may also procure political risks
insurance.
The Group is exploring opportunities for collaboration on the
establishment of local manufacturing operations in certain
countries, which will remove some of the uncertainty regarding
export of products.
The planned expansion in non-defence markets should also
increase the Group's portfolio of products which are less sensitive
from an export control perspective.
-- Operational risks - The Group's manufacturing activities may
be exposed to business continuity risks, arising from plant
failures, supplier interruptions or quality issues. These could
result in financial loss, reputational damage and loss of future
business.
All of the Group's businesses are required to prepare business
continuity plans.
The Group has introduced new requirements in relation to the
reporting of key performance indicators this year, in order to
provide better visibility on operational performance and to
facilitate the identification of potential production and quality
issues at an early stage.
The Group insures certain business interruption risks where
appropriate.
-- Introduction of new products - The Group's approach to
innovation and continued emphasis on research and development
activity ensures that the Group is continually adding new products
to the range. There is a need to ensure that this new product
development is completed in a timely manner, and to a standard
which allows volume manufacturing to be undertaken and the
production of products against high reliability and safety criteria
to meet customers' requirements. Failure to achieve this may have
both financial and reputational impacts.
The Group also needs to ensure that it continues to upgrade its
existing product range to compete with emerging technologies and to
avoid the risk of obsolescence or loss of business.
The Group has introduced a more focused product development and
technology investment approach, in order to ensure that resources
are applied appropriately across the Group in support of the three
year plan. A Technology Review Board has been established to review
all proposed research and development projects to ensure that key
initiatives are being prioritised and to eliminate possible
duplication of effort in different parts of the Group.
Working groups have been established to drive and co-ordinate
the Group's technology growth in certain key areas, such as cyber
security.
-- Product liability and other customer claims - The Group may
be subject to product liability and other claims from customers or
third parties, in connection with (i) the non-compliance of these
products or services with the customer's requirements, due to
faults in design or production; (ii) the delay or failed supply of
the products or the services indicated in the contract; or (iii)
possible malfunction or misuse of products. As many of the Group's
products are single-use devices, it is often impossible to conduct
functional testing without destroying the product, and this
increases the risk of possible product failure, either in use or
during customers' own sample-based functional tests.
Substantial claims could harm the Group's business and its
financial position. In addition, any accident, failure, incident or
liability, even if fully insured, could negatively affect the
Group's reputation among customers and the public, therefore making
it more difficult for the Group to compete effectively. Material
breaches in the performance of contractual obligations may also
lead to contract termination and the calling of performance
bonds.
The businesses maintain rigorous control of their production
processes, monitoring critical parameters on a batch or unit basis.
State-of-the-art techniques, including statistical process control
or Six Sigma, are applied, and where appropriate, processes are
automated to reduce the scope for human operator error. Detailed
assessments of incoming components and materials are conducted to
ensure compliance with specifications.
Product liability claims from third parties for damage to
property or persons are generally covered by the Group's insurance
policies, subject to applicable insurance conditions.
-- Management resource - The Group requires competent management
to lead it through the next stage of its development. In
challenging markets and difficult times, there is a need to retain
and incentivise senior managers and key employees, in order to
ensure that the operations of the Group do not suffer from loss of
management expertise and knowledge.
As the shape of the Group's business also changes, with an
increased focus on electronics, there is a need to ensure that the
businesses build an appropriate skill base to enable them to
compete successfully in new markets and product areas.
A Group Human Resources Director was appointed during 2013, to
oversee the future people strategy.
The Group has introduced a new performance management system for
2014, which will facilitate improved monitoring of individual
employees' development objectives and requirements. Alongside this,
a talent database is being developed, which will provide improved
visibility on skills and resources across the Group, and will open
up opportunities for employees to progress their careers within
different parts of the Group.
Incentivisation arrangements have been streamlined and improved
in certain areas of the business, to ensure that employees are
suitably incentivised to deliver key strategic objectives.
-- Compliance and corruption risks - The Group operates in over
sixty countries worldwide, in a highly-regulated environment, and
is subject to the applicable laws and regulations of each of these
jurisdictions. The Group must ensure that all of its businesses,
its employees and third parties providing services on its behalf
comply with all relevant legal obligations, as non-compliance could
result in administrative, civil or criminal liabilities, and could
expose the Group to fines, penalties, suspension or debarment and
reputational damage.
The nature of the Group's operations could also expose it to
government investigations relating to import-export controls,
money-laundering, false accounting, and corruption or bribery.
The Group has a central legal and compliance function which
assists and monitors all Group businesses, supported by dedicated
internal legal resource in the US. The Group's internal audit
activities also incorporate a review of legal risks.
The Group operates under a Global Code of Business Principles,
which stipulates the standard of acceptable business conduct
required from all employees and third parties acting on the Group's
behalf. The Group has also adopted a Bribery Act Compliance Manual,
incorporating all of its anti-bribery policies and procedures. A
significant proportion of the Group's management have received
training in relation to ethics and anti-corruption.
-- Environmental laws and regulations - The Group's operations
and ownership or use of real property is subject to a number of
federal, state and local environmental laws and regulations,
including those relating to discharge of hazardous materials,
remediation of contaminated sites, and restoration of damage to the
environment.
At certain sites that the Group owns or operates, or formerly
owned or operated, there is known or potential contamination for
which there is a requirement to remediate or provide resource
restoration. The Group could incur substantial costs, including
remediation costs, resource restoration costs, fines and penalties,
or be exposed to third-party property damage or personal injury
claims, as a result of liabilities associated with past practices
or violations of environmental laws or non-compliance with
environmental permits.
All of the Group's businesses are certified to the environmental
management system ISO14001, which requires the setting of
environmental goals and objectives focused on local aspects and
impacts.
The Group has managed monitoring and remediation programmes at
certain sites, for which appropriate financial provision has been
made. In certain circumstances, the Group procures environmental
liability insurance, subject to applicable insurance
conditions.
-- Financial risks- The Group is exposed to financial risks
relating to foreign exchange, interest rates and liquidity, and
where appropriate it uses financial instruments to manage these
risks. Details of the financial risks to which the Group is
potentially exposed are set out in the financial review and note 24
of the financial statements within the 2013 annual report.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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