Countermeasures revenue decreased by 23.1%, due to reductions in
demand from the UK and US as a result of the withdrawal from
Afghanistan. Production volumes in the US were also affected by the
incident at the Kilgore facility in February 2014, which led to
production being suspended while investigations were conducted and
regulatory clearance obtained. Following a gradual re-start of
production that commenced in March 2014, the facility became fully
operational in October 2014. Countermeasures operating margin of
10.1% (2013: 10.6%) reflects the impact of the issues at Kilgore,
partially offset by the benefit of headcount reductions and cost
saving measures, together with resolution of certain technical
problems previously encountered in 2012 on the development of an
advanced countermeasure.
Sensors & Electronics revenue reduced by 26.9%, as
fulfilment of the major production contract with the US DoD for the
supply of the Husky Mounted Detection System ("HMDS") ground
penetrating radar was completed. Significant research and
development contracts with the US DoD are underway for the next
generation of ground penetrating radar and chemical detection
systems. The operating margin of 20.7% (2013: 21.2%) reflects the
benefit of the release of contract risk reserves on completed US
programmes, offset by the impact of lower margin funded research
and development activity and a reduced level of higher margin
international product sales.
The increase in Energetic Systems revenue reflects improved
production throughput at our US operations. Underlying operating
profit increased by 76.5% to GBP15.0 million (2013: GBP8.5
million), with operating margins benefiting from the operational
improvement. This improvement was particularly marked at Chemring
Energetic Devices, and at Chemring Ordnance, which returned to
profit after a loss-making position in the prior year.
Unallocated corporate costs were GBP9.9 million (2013: GBP10.1
million), with the small reduction reflecting further savings from
the simplification of the Group's management structure.
Underlying operating profit from continuing operations was
GBP46.7 million (2013: GBP56.3 million), a decrease of 17.1%. The
underlying operating margin was 11.6% (2013: 11.9%).
Discontinued operations comprise the European munitions
businesses, Mecar, based in Belgium, and Simmel, located in Italy,
and Chemring Defence Germany. All these businesses were sold in May
2014. At the European munitions businesses there were positive
order intake signs during the period to the date of disposal, but
this was offset by weakness in the naval munitions sector.
The discontinued operations had revenue in the period to
disposal of GBP71.8 million (year to 31 October 2013: GBP152.6
million) and achieved an operating profit in that period of GBP2.3
million (year to 31 October 2013: GBP15.8 million). Their order
book at 30 April 2014 was GBP189.3 million (31 October 2013:
GBP180.6 million).
The total operating loss was GBP28.2 million (2013: GBP36.9
million). This includes non-underlying costs of GBP77.2 million
(2013: GBP109.0 million), which are analysed later in this
review.
Net finance expense was GBP18.7 million (2013: GBP20.5 million),
of which GBP0.1 million (2013: GBP0.7 million) related to
discontinued operations. In addition, GBP12.0 million of
non-underlying accelerated interest costs were incurred on the
repayment of loan note debt.
Underlying profit before tax from continuing operations was
GBP28.1 million (2013: GBP36.5 million), a decrease of 23.0%. Tax
on underlying profit before tax from continuing operations was
GBP5.7 million (2013: GBP6.5 million), representing an effective
tax rate of 20.3% (2013: 17.8%). The tax rate is comparable to the
UK corporation tax rate and benefits from the utilisation of
research and development tax credits.
Including non-underlying items, the total loss before tax from
continuing operations was GBP5.2 million (2013: GBP66.5 million).
The effective tax rate on the total loss before tax from continuing
operations was 73.1% (2013: 16.4%), due to the higher proportion of
non-underlying costs that are not deductible for tax purposes.
Including discontinued operations, underlying profit after tax
was GBP23.9 million (2013: GBP41.0 million), a decrease of 41.7%,
and the total loss after tax was GBP54.9 million (2013: GBP48.3
million).
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,
consistent with past practice, certain items are classed as
non-underlying, as set out below:
2014 2013
GBPm GBPm
Acquisition and disposal related costs 8.6 3.2
Business restructuring and incident costs 7.2 11.7
Impairment of goodwill 45.9 50.9
Impairment of acquired intangibles 10.7 15.7
Impairment of assets held for sale 13.6 8.8
Profit on disposal of businesses (26.5) -
Loss on disposal of associate 0.9 -
Intangible amortisation arising from business
combinations 16.1 18.8
Loss/(gain) on fair value movements of derivative
financial instruments 0.7 (0.1)
Non-underlying items excluded from underlying
operating profit 77.2 109.0
Accelerated interest costs 12.0 -
--------------------------------------------------- ------- ------
Non-underlying items excluded from underlying
profit before tax 89.2 109.0
--------------------------------------------------- ------- ------
Acquisition and disposal related costs of GBP8.6 million related
to the disposal of the European munitions businesses and Chemring
Defence Germany. Business restructuring and incident costs of
GBP7.2 million include GBP4.1 million of redundancy costs, together
with GBP1.1 million relating to the Kilgore incident and GBP0.8
million associated with the relocation of the corporate head office
to Roke's site in Romsey.
The sale of the discontinued operations gave rise to an
impairment of goodwill of GBP45.9 million and impairment of
acquired intangible assets of GBP10.7 million, wholly in relation
to Simmel. There was an impairment of other net assets of GBP13.6
million, of which GBP7.3 million related to Simmel and GBP6.3
million related to Chemring Defence Germany. Of the profit on
disposal of GBP26.5 million, GBP26.0 million relates to the
divestment of the European operations and GBP0.5 million to the
disposal of the Clear Lake facility. In October 2014, the Group
sold its 49% stake in its associate, CIRRA, for a cash
consideration of GBP0.5 million, resulting in a loss on disposal of
GBP0.9 million.
An impairment analysis, based on value-in-use calculations
reflecting current conditions in the defence industry, has been
conducted and no further impairments are considered to exist at 31
October 2014.
The amortisation of intangible assets arising from business
combinations was GBP16.1 million (2013: GBP18.8 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.
The cash outflow from non-underlying items was GBP25.9 million
(2013: GBP12.7 million).
Countermeasures
-- Revenue: GBP96.1 million (2013: GBP125.0 million)
-- Underlying operating profit: GBP9.7 million (2013: GBP13.2 million)
-- Underlying operating margin: 10.1% (2013: 10.6%)
Revenue in the Countermeasures segment reduced by 23.1%. This
was primarily a consequence of continued deferrals in US order
placement and the impact of the incident at Kilgore in February
2014.
The closing order book for Countermeasures was GBP193.3 million,
up 20.2% on the previous year, reflecting the receipt of a number
of orders in the final quarter of the year. While elements of this
order intake are for multi-year delivery reaching into the
medium-term, this nonetheless provides support for our view that
customer demand has reached minimum sustaining volumes.
The most significant factor in the performance of the
Countermeasures segment was the tragic incident that occurred at
Chemring Countermeasures USA's Kilgore facility in February 2014,
in which an employee was fatally injured. All production was
suspended while an investigation took place. Following regulatory
clearance, a structured and controlled re-start of production
commenced in March 2014. However, re-commissioning of the portion
of the facility where the incident occurred and the receipt of
appropriate regulatory approvals was not completed until October
2014.
Operational issues at Kilgore have led to poor performance in
recent years, which the Group has been actively addressing. A new
General Manager of the Kilgore site and a new President of Chemring
Countermeasures USA were appointed during the year, and these
appointments are driving improvement in process controls and site
management. Improving operational performance at Kilgore is
expected to enable all overdue orders, which constitute the
majority of Kilgore's order backlog, to be fulfilled during
2015.
Chemring (LSE:CHG)
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Chemring (LSE:CHG)
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