FOR IMMEDIATE RELEASE
3 FEBRUARY 2004
CHEMRING GROUP PLC
PRELIMINARY RESULTS
FOR THE YEAR ENDED 31 OCTOBER 2003
Results
Turnover of continuing operations �112.3m (2002: �85.0m), up 32%
Operating profit of continuing operations �14.3m (2002: �7.0m)
Profit before tax �12.1m (2002: �5.4m)
Basic earnings per ordinary share 31.04p (2002: 14.16p)
Basic earnings per ordinary share - continuing operations 30.06p (2002: 12.75p)
Net debt �38.7m (2002: �47.3m), a reduction of 18%
Dividend per ordinary share 7.40p (2002: 6.70p), up 10%
Trading Highlights
Operating profit of continuing operations more than doubled to �14.3m
US Department of Defense sales up 33% to �31m
Strong net cash flow
Alloy Surfaces included in United Airlines team on Department of Homeland
Security initiative on commercial aircraft protection
Commenting on the results, Ken Scobie, Chemring Group Chairman, said: "This has
been a very successful year for the Group, principally due to significant
growth in the sales and profitability of our three countermeasures businesses -
Chemring Countermeasures, Alloy Surfaces and Kilgore. This excellent
performance was achieved despite the fact that Kilgore's new production plant
only resumed full production in the second half.
The substantial increase in earnings of over 100% returns us to the growth
pattern achieved prior to the incident at Kilgore in April 2001.
Two non-core businesses, Chemical Coatings and Kembrey Wiring Systems, were
sold in July 2003 and November 2003 respectively for a total consideration of �
3.4 million after costs.
The reduction in the Group's net debt to �39 million represents satisfactory
progress. We are still awaiting a substantial sum from the resolution of the
Kilgore insurance claim, which is being pursued against Royal and Sun Alliance
(RSA), to further reduce our net debt.
Last year I expressed my confidence in the growing demand for our
countermeasures products. Our performance this year and current events in Iraq
and Afghanistan have demonstrated clearly to the military the essential part we
play in defeating ground-based missiles. This is having the anticipated impact
on our order book and enquiries for the future, particularly in the US.
Our military pyrotechnics business, our marine business and our Australian
operation are expected to make further progress this year. This, together with
the continuing expansion of our countermeasures business, should lead to
another year of excellent growth for the Group."
Note:
All comparisons are for the year ended 31 October 2002.
For further information:
Ken Scobie Chairman 0207 930 0777
David Evans Chief Executive 0207 930 0777
Paul Rayner Finance Director 0207 930 0777
Jonathan Rooper CardewChancery 0207 930 0777
Operating Results
Turnover of the continuing operations was �112.3 million (2002: �85.0 million),
an increase of 32%. Turnover of the discontinued operations was �8.2 million
(2002: �11.3 million). Total Group turnover was �120.5 million (2002: �96.3
million), an increase of 25%.
Overheads are unchanged on last year at �15.8 million. Overheads of the
discontinued operations accounted for approximately �1.5 million of the total
in both years.
Net operating profits of the continuing operations were �14.3 million (2002: �
7.0 million). Net operating margins of the continuing operations were 13%
(2002: 8%). The discontinued operations produced an operating loss of �
0.2 million in the year (2002: operating profit of �0.7 million).
Dividends
The Board recommends a final dividend of 4.85p per ordinary share, a 14%
increase on the final dividend for last year and a 10% increase on the total
dividend. It is recognised that the dividend is now over four times covered by
retained profits and upon resolution of the insurance claim the Group's
dividend policy will be reviewed.
Turnover by Business Area
2003 2002
�m �m
Countermeasures 66.4 45.7
Military pyrotechnics 19.5 17.9
Marine safety and security 26.4 21.4
Continuing operations 112.3 85.0
Discontinued operations 8.2 11.3
Total 120.5 96.3
Countermeasures
Countermeasures turnover increased by 45% to �66.4 million
The excellent growth in the countermeasures business reflects our position as
the worldwide market leader in providing expendable decoys to protect valuable
military platforms.
We are the pre-eminent provider of aircraft IR expendable decoys to the US
Department of Defense. There is particularly strong US demand for our products
to protect military aircraft from missile attack, in particular IR Man-Portable
Air Defence Systems. These systems have been prevalent in the Iraq campaign,
where there continue to be numerous attacks on both helicopters and fixed wing
transport aircraft.
Recently there have been several initiatives on commercial aircraft
protection. The most significant of these has originated from the Department
of Homeland Security (DHS) in the US. Alloy Surfaces is included in the United
Airlines team, which is one of the three consortia selected by the DHS to
develop a system to protect commercial aircraft.
The Group has invested a total of over �17.5 million in manufacturing
facilities over the last three years at Kilgore and Alloy Surfaces in support
of the US defence industrial base. Further investment will be made in
production capacity at Alloy Surfaces in 2004 to meet the increasing demand for
its products.
During the year Kilgore was awarded initial decoy production contracts for both
of the new US fighter aircraft and development contracts for decoys for
emerging multi-role platforms. Alloy Surfaces and Kilgore have also been
selected to provide an improved decoy for the B52 bomber.
Decoy sales to the US military increased by 33% to �31 million during the
year. These sales accounted for 47% of total countermeasures turnover.
Our UK based business, Chemring Countermeasures, had an excellent year with
increased exports contributing to a 32% increase in turnover. The UK business
has a strong technical capability which is continually bringing new products to
the market including the proprietary modular expendable blocks for
enhanced helicopter protection and chaff and flare decoys for former Soviet
Union platforms such as MiG29 fighters and Mi-24 helicopters.
Military Pyrotechnics
Military Pyrotechnics turnover in the year increased by 9% to �19.5 million
Our military pyrotechnics business is at the forefront of providing specialist
military pyrotechnic products used in illumination, screening, signalling and
training. Overseas sales were 67% of total military pyrotechnics turnover.
Despite the financial pressures on governments' defence expenditure, there is
continuing strong international demand for our products against a background of
political tensions which have increased awareness of the need for training.
Kilgore is increasing its activity in illumination and screening products for
targets and rescue applications. Kilgore is the main supplier to the US Navy
of Mk58 pyrotechnic marine location markers. In addition to being used for
anti-submarine warfare, the Mk58 marker is used for search and rescue
operations, man-overboard markings, and for target practice at sea. Kilgore
won an additional order from General Dynamics for smoke and screening products,
and follow-on orders are expected. Kilgore is also a conduit into the US
military market for the Group's UK based military vehicle decoy and screening
products and technology, and is involved in supporting General Dynamics Land
Systems on future military vehicle protection in the high profile US Army
Future Combat Systems programme.
In June 2003, PW Defence secured a partnering agreement with the UK MoD
covering the procurement and through-life management of the majority of the
MoD's military pyrotechnic requirements. The agreement is a vehicle for taking
forward a number of initiatives, including improvements in the supply chain,
smart procurement and manufacturing, and full-life support.
Marine Safety
Marine Safety and Security turnover in the year increased by 24% to �26.4
million
The Group is a leading supplier of legislated marine electronic and safety
equipment worldwide for commercial and leisure markets. The marine safety and
security business is made up of three product groups and an emerging systems
business. The product groups are electronics, marine safety lights and
pyrotechnics. The growth in the business is primarily driven by electronics
products, where the range of products has increased to meet increased shipping
related legislation and growth in recreational markets both on land and at
sea. Sales of electronics products have doubled over the last three years, and
grew by 50% in 2003; these now represent 43% of total marine sales. Despite
the good growth overall, however, the profitability of electronics products was
disappointing. We have now instigated cost saving initiatives and are focusing
on increasing sales volumes to improve the profitability. Lights and
pyrotechnics markets are stable, although there was increased demand from
military customers in the year.
Demand for our 406MHz EPIRBs and personal locating beacons (PLBs) is increasing
due to a combination of the phasing out of 121.5MHz beacons, and increasing use
of 406MHz PLBs for marine, land, government, utilities and aviation use. In
the US the Federal Communications Commission permitted the use of PLBs
nationwide from 1 July 2003, enabling hikers and other outdoor adventurers to
use this life-saving product. With a unique integral GPS capability built into
our PLB, we will be the prime supplier of products into this market area.
Sales of the newly developed commercial automatic identification system (AIS)
transponder commenced in the fourth quarter. The AIS is an International
Maritime Organisation legislated requirement for carriage of automatic
identification systems capable of providing information automatically in the
VHF maritime band about the ship to other ships and to coastal authorities. US
federal law requires a wide range of vessels around the US coastline to carry
this equipment by the end of 2004. The overall market will exceed �100 million
over the next two years and we are targeting to achieve an appreciable market
share. Shore monitoring will also require the introduction of AIS base
stations and modification to existing maritime coast radio stations, which
provides excellent opportunities for our emerging systems business, ICS
Electronics.
Kilgore Insurance Claim
During the year a substantial amount of further work has been carried out to
progress our claim against RSA. Our independent forensic accountant has
arrived at his preliminary conclusions on the total quantum of the claim. His
valuation is not materially different to the original total of our claim, to
which I referred last year, and has received the full support of our insurance
brokers, Willis. In addition, substantive discussions are at long last taking
place between RSA and Willis to resolve the policy coverage issues which exist
between them. It is hoped that this will soon lead to final negotiations in
order to settle this matter. In light of these positive developments, we have
reassessed our opinion on the sum recoverable under the policy. In the event
that the matter is not settled within the next three months, the Board will
concentrate on the litigation in Tennessee, which has been running in parallel
to other events.
Research and Development
Research and development expenditure totalled �4.7 million (2002: �4.6
million), an analysis of which is set out below:
2003 2002
�m �m
Customer funded research and development 1.9 1.4
Non-funded research and development 1.6 2.2
Capitalised development costs 1.2 1.0
Total research and development expenditure 4.7 4.6
The Group's prudent policy is to write-off capitalised development costs over a
three year period. Amortisation of development costs was �1.2 million (2002: �
0.7 million).
Profits on Disposal
The Chemical Coatings division of Alloy Surfaces was sold in the year for �1.5
million after costs, giving rise to a profit on disposal of �0.7 million. This
profit has been accounted for within discontinued operations.
The Group has reassessed the amounts recoverable in respect of the Kilgore
insurance claim against RSA, and has increased the amount accrued in the
Group's accounts by �1.1 million. Our total recoverable balance now stands at
�7.5 million (2002: �9.6 million) Legal costs of �0.5 million have been
incurred during the year in connection with the claim, and these have been
offset against the additional �1.1 million accrual. The balance of �0.6
million is accounted for as a net profit on disposal of assets which were
destroyed in the April 2001 incident. This is summarised in the table below:
2003 2002
�m �m
Material damage proceeds in excess of
net book value of assets 1.1 1.7
Legal expenses incurred (0.5) (0.6)
Net profit on disposal 0.6 1.1
Interest
The interest charge for the year was �3.4 million (2002: �3.5 million).
Interest was covered 4.1 times (2002: 2.2 times) by operating profit.
It is estimated that the Group incurred approximately �0.5 million (2002: �0.6
million) of interest during the year which would not have been incurred if the
Kilgore insurance claim had been settled by RSA.
Taxation
The tax charge of �3.6 million (2002: �1.6 million) represents an effective
rate of 30% (2002: 30%).
Tax losses at Kilgore were used to offset taxable profits at Alloy Surfaces and
thereby reduce tax payments in the US.
Pensions
Actuarial valuations as at 6 April 2003 for both of the Group's defined benefit
pension schemes are in progress and will be finalised by the half year.
Although the Chemring Group Staff Pension Scheme, which is by far the larger of
the two, was in surplus at the last valuation, it is anticipated that both
schemes will show deficits on the 2003 valuations. The Board has therefore
taken action to increase its pension contributions with effect from 1 January
2004. The impact of these increased contributions over the current and future
financial years is in the region of �0.5 million per annum.
Shareholder Returns
Earnings per ordinary share were 31.04p (2002: 14.16p). Earnings per ordinary
share of the continuing operations were 30.06p (2002: 12.75p).
The dividend per ordinary share of 7.40p (2002: 6.70p) is covered 4.2 times
(2002: 2.1 times).
The total shareholder return for the Group over the five years to 31 October
2003 has outperformed the FTSE Small Cap Index for the same period by 209%.
Shareholders' funds at the year end were �53.5 million (2002: �48.7 million).
Cash Flow and Gearing
Operating cash flow was �18.1 million (2002: �10.1 million), representing a
conversion rate from operating profit of 129% (2002: 131%). Operating cash
flow was particularly strong in the second half of the year, with the predicted
return to profitability of Kilgore being converted into cash flow. Working
capital balances have broadly remained the same as last year, despite the
substantial growth in the Group turnover.
Tangible fixed asset expenditure in the year was �5.4 million (2002: �13.1
million).
Net debt fell to �38.7 million (2002: �47.3 million). Gearing was 72% (2002:
97%).
Foreign Exchange
The Group's principal foreign exchange exposure is to the US dollar. During
the year sterling appreciated by 8% against the dollar, leading to reduced
profits from the US on translation of the results into sterling. The impact on
the Group's sales and profit before tax was approximately 3%.
Contracts have been entered into until the end of the current financial year to
reduce the Group's exposure to further depreciation of the dollar against
sterling.
Post Balance Sheet Event
On 8 November 2003, the entire issued share capital of Kembrey Wiring Systems
Limited was sold for net asset value of �1.9 million. Cash consideration of �
1.2 million was paid on completion and a further �0.2 million was paid in
January 2004. The balance of the consideration of �0.5 million is payable in
two instalments on the anniversary of completion in November 2004 and November
2005. The net assets are subject to a post completion working capital
adjustment with any surpluses or deficits to net assets being adjusted via the
deferred consideration.
As a consequence of the disposal process, the Group agreed to pay �0.5 million
to the Chemring Group Staff Pension Scheme. This cost will be accounted for in
future results.
Prospects
The Board hopes that next year they will be able to report to shareholders the
strengthening of the Group's balance sheet through the receipt of monies from
RSA.
Last year the Board expressed confidence in the growing demand for the Group's
countermeasures products. The performance this year and current events in Iraq
and Afghanistan have demonstrated clearly to the military the essential part
the Group's products play in defeating ground-based missiles. This is having
the anticipated impact on the Group's order book and enquiries for the future,
particularly in the US.
The military pyrotechnics business, the marine business and the Australian
operation are expected to make further progress this year. This, together with
the continuing expansion of the countermeasures business, should lead to
another year of excellent growth for the Group.
SUMMARY FINANCIAL INFORMATION
2003 2002
�000 �000
Turnover
Countermeasures 66,411 45,725
Military pyrotechnics 19,540 17,942
Marine safety and security 26,366 21,345
Continuing operations 112,317 85,012
Discontinued operations 8,240 11,315
120,557 96,327
Operating profit/(loss) -Continuing 14,256 7,006
-Discontinued (216) 684
14,040 7,690
Profit before taxation -Continuing 11,693 4,874
-Discontinued 381 542
12,074 5,416
Dividend per ordinary share 7.40p 6.70p
Basic earnings per ordinary share 31.04p 14.16p
Basic earnings per ordinary share - continuing 30.06p 12.75p
Diluted earnings per ordinary share 30.60p 14.11p
Net debt 38,681 47,277
Shareholders' funds 53,520 48,671
CONSOLIDATED PROFIT AND LOSS ACCOUNT
For the year ended 31 October 2003
2003 2002
Continuing Discontinued Total Continuing Discontinued Total
operations operations operations operations operations operations
�000 �000 �000 �000 �000 �000
Turnover 112,317 8,240 120,557 85,012 11,315 96,327
Analysis of operating
profit/(loss)
Kilgore - normal 2,180 - 2,180 (4,851) - (4,851)
operations
- - 5,559 - 5,559
insurance - -
claim
2,180 - 2,180 708 - 708
Rest of Group 12,076 (216) 11,860 6,298 684 6,982
Operating profit/ 14,256 (216) 14,040 7,006 684 7,690
(loss)
Operating profit/ 14,256 (216) 14,040 7,006 684 7,690
(loss)
Associated undertaking 178 - 178 89 - 89
Profit on - 565 - 565 1,123 - 1,123
disposal insurance
claim
- sale of 724 724 - -
division - -
Profit on ordinary 14,999 508 15,507 8,218 684 8,902
activities before
interest
Interest payable (3,306) (127) (3,433) (3,344) (142) (3,486)
Profit on ordinary 11,693 381 12,074 4,874 542 5,416
activities before
taxation
Tax on profit on (3,465) (113) (3,578) (1,444) (161) (1,605)
ordinary activities
Profit on ordinary 8,228 268 8,496 3,430 381 3,811
activities after
taxation
Equity minority 23 29
interest
Profit for the 8,519 3,840
financial year
Dividends (2,034) (1,843)
Retained profit 6,485 1,997
Basic earnings per 31.04p 14.16p
ordinary share
Basic earnings per
ordinary share -
continuing 30.06p 12.75p
Diluted earnings per 30.60p 14.11p
ordinary share
ADDITIONAL FINANCIAL PERFORMANCE STATEMENTS
For the year ended 31 October 2003
2003 2002
�000 �000
Statement of total recognised gains and losses
Profit on ordinary activities after taxation 8,496 3,811
Currency translation differences on foreign currency net
investments
(1,636) (756)
Total recognised gains and losses relating to the year 6,860 3,055
Reconciliation of movements in shareholders' funds
Profit on ordinary activities after taxation 8,496 3,811
Equity minority interest 23 29
Dividends (2,034) (1,843)
Retained profit 6,485 1,997
Other recognised losses (1,636) (756)
Ordinary shares issued - 25
Share premium arising - 1,391
Net addition to shareholders' funds 4,849 2,657
Opening shareholders' funds 48,671 46,014
Closing shareholders' funds 53,520 48,671
CONSOLIDATED BALANCE SHEET
As at 31 October 2003
2003 2002
�000 �000 �000 �000
Fixed assets
Intangible assets
Development costs 2,996 3,002
Goodwill 28,442 28,343
31,438 31,345
Tangible assets 42,879 42,746
Investments 1,063 972
75,380 75,063
Current assets
Stock 20,248 17,807
Debtors 36,346 32,636
Cash at bank and in hand 5,821 3,774
62,415 54,217
Creditors due within one year (57,675) (49,288)
Net current assets 4,740 4,929
Total assets less current liabilities 80,120 79,992
Creditors due after more than one year (21,489) (29,375)
Provisions for liabilities and charges (4,832) (1,644)
Equity minority interest (279) (302)
53,520 48,671
Capital and reserves
Called-up share capital 1,434 1,434
Reserves
Share premium account 20,726 20,726
Special capital reserve 12,939 12,939
Revaluation reserve 2,446 2,482
Revenue reserves 15,975 11,090
52,086 47,237
Shareholders' funds 53,520 48,671
Attributable to equity shareholders 53,458 48,609
Attributable to non-equity shareholders 62 62
53,520 48,671
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 31 October 2003
2003 2002
�000 �000 �000 �000
Net cash inflow from operating 18,084 10,056
activities
Returns on investments and servicing (3,420) (2,899)
of finance
Taxation (686) 671
Capital expenditure (5,497) (10,622)
Acquisitions and disposals 1,475 (145)
Equity dividends paid (1,866) (1,818)
Cash inflow/(outflow) before use of 8,090 (4,757)
liquid resources and financing
Financing - issue of shares - 54
- decrease in debt (5,645) (2,111)
(5,645) (2,057)
Increase/(decrease) in cash 2,445 (6,814)
Reconciliation of net cash flow to
movement in net debt
Increase/(decrease) in cash 2,445 (6,814)
Cash outflow from the decrease in
debt and lease financing
5,645 2,111
Change in net debt resulting from 8,090 (4,703)
cash flows
New finance leases (1,153) (3,479)
Translation difference 1,964 1,212
New finance costs applied to loans - 737
Amortisation of debt finance costs (305) (102)
Movement in net debt 8,596 (6,335)
Opening net debt (47,277) (40,942)
Closing net debt (38,681) (47,277)
RECONCILIATION OF OPERATING PROFIT/(LOSS) TO NET CASH FLOW
FROM OPERATING ACTIVITIES
For the year ended 31 October 2003
2003 2002
Continuing Discontinued Total Continuing Discontinued Total
operations operations operations operations operations operations
�000 �000 �000 �000 �000 �000
Operating 14,256 (216) 14,040 7,006 684 7,690
profit/
(loss)
Amortisation 1,210 - 1,210 702 - 702
charge
Depreciation 3,229 66 3,295 2,873 56 2,929
charge
Loss on - - - 27 - 27
disposal of
fixed assets
(Increase)/ (3,215) 375 (2,840) 338 176 514
decrease in
stock
(Increase)/ (4,078) 325 (3,753) (1,301) 463 (838)
decrease in
debtors
Increase/ 6,107 25 6,132 314 (1,282) (968)
(decrease)
in creditors
17,509 575 18,084 9,959 97 10,056
Notes
Accounts and Auditors Report
The financial information set out above does not constitute the Company's
statutory accounts for the year ended 31 October 2003 or 31 October 2002 but is
derived from those accounts. Statutory accounts for 2002 have been delivered
to the Registrar of Companies, and those for 2003 will be delivered following
the Company's Annual General Meeting. The auditors have reported on those
accounts; their reports were unqualified and did not contain statements under
s237(2) or s237(3) of the Companies Act 1985.
The financial information has been prepared in accordance with the accounting
policies adopted for the 2002 accounts.
Insurance Claim
Following the manufacturing incident at Kilgore Flares Company LLC on 18 April
2001, resulting in material damage and suspension of operations, the Group
lodged a claim with its insurers for property damage and business
interruption. Legal proceedings in respect of this claim were filed in a
Tennessee Court in March 2002 for an additional �11,000,000 over and above the
�3,200,000 which had been received from insurers at that time. Alongside the
legal process, negotiations with the Group's insurers have continued throughout
the year ended 31 October 2003.
At 31 October 2003, the Board has made a further estimate of the additional
proceeds which it believes that Kilgore is entitled to receive under the
insurance policy, after taking advice from its professional advisers, of which
�1,077,000 (2002: �7,300,000) has been recognised in these financial
statements. Of this, �nil (2002: �5,559,000) has been credited to cost of
sales with the balance, net of legal and professional costs of �512,000 (2002:
�618,000), being allocated as material damage proceeds. As the material damage
related to fixed assets, the surplus of �565,000 (2002: �1,123,000) has been
accounted for as a profit on disposal, in accordance with FRS15, and included
separately in the profit and loss account.
At 31 October 2003, payments totalling �5,700,000 (2002: �3,200,000) had been
received from the Group's insurers.
The balance of the claim that had not been recovered from the insurers at the
year end was �7,486,000 (2002: �9,633,000) which has been included within other
debtors. Foreign exchange movements of �724,000 have been recognised through
the statement of total recognised gains and losses in the Group's financial
statements, due to the claim being denominated in US dollars.
Earnings per Ordinary Share
The earnings and shares used in the calculations are as follows:
2003 2002
Ordinary Ordinary
shares shares
Earnings Number EPS Earnings Number EPS
�000 000s Pence �000 000s Pence
Basic 8,515 27,436 31.04 3,836 27,098 14.16
Additional shares issuable
other than at
fair value in respect of
options outstanding - 391 (0.44) - 88 (0.05)
Diluted 8,515 27,827 30.60 3,836 27,186 14.11
Earnings comprise profit for the financial year after deducting preference
dividends of �4,000 (2002: �4,000). Ordinary shares are calculated by reference
to the average number of shares in issue in the year.
Reconciliation from basic earnings per share to basic earnings per share -
continuing:
2003 2002
Ordinary Ordinary
shares shares
Earnings Number EPS Earnings Number EPS
�000 000s Pence �000 000s Pence
Basic 8,515 27,436 31.04 3,836 27,098 14.16
Profit on ordinary
activities after taxation -
discontinued operations (268) - (0.98) (381) - (1.41)
Basic - continuing 8,247 27,436 30.06 3,455 27,098 12.75
Dividend
Subject to shareholder approval, the final dividend of 4.85p per ordinary share
will be paid on 9 June 2004 to all shareholders registered at the close of
business on 14 May 2004. The ex-dividend date will be 12 May 2004.
2003 Financial Statements
The financial statements for the year ended 31 October 2003 will be posted to
shareholders on 20 February 2004 and will also be available from that date at
the registered office, 1650 Parkway, Whiteley, Fareham, Hampshire PO15 7AH.
END
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