TIDMCHG
RNS Number : 5221M
Chemring Group PLC
21 January 2016
FOR IMMEDIATE RELEASE 21 January 2016
CHEMRING GROUP PLC
RESULTS FOR THE YEAR ENDED 31 OCTOBER 2015
2015 2014
Continuing operations
Revenue GBP377.3m GBP403.1m
Underlying operating profit(1) GBP34.4m GBP46.7m
Underlying profit before tax(1) GBP19.8m GBP28.1m
Net debt GBP154.3m GBP135.6m
Underlying earnings per share(1) 8.1p 11.6p
Total operating profit GBP5.5m GBP25.4m
Total loss before tax GBP(9.1)m GBP(5.2)m
Total loss per share (2.7)p (0.7)p
1 Underlying measures referred to in this announcement are
stated before costs relating to acquisitions and disposals,
business restructuring and incident costs, profit/loss 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
-- FY15 result in line with revised, lower expectations set out in 26 October 2015 statement
-- Solid operational recovery across Countermeasures and Energetic Systems segments
-- Key contract wins on US Sensors & Electronics development
programmes for IED, chemical and biological detection
-- Record year end order book of GBP569.6 million at 31 October 2015
-- Expectations for FY16 unchanged
-- Fully underwritten Rights Issue launched today to raise gross
proceeds of GBP80.8 million to reduce
indebtedness (see separate announcement)
-- Process underway regarding non-executive Board changes
Michael Flowers, Chemring Group Chief Executive, commented:
"2015 was a disappointing year, with several key export orders
in the Sensors & Electronics segment taking longer to
materialise than anticipated. In addition, the Energetic Systems
segment was heavily impacted in the final quarter of the year by a
contract termination and delays to the start of fulfilment of a
major order for 40mm ammunition. These events have overshadowed the
progress we have made in improving the Group's operations, which
have resulted in all of our business units being profitable in
FY15. This progress reflects our strong management team and growing
collaboration within the Group.
We expect the wider market backdrop for global defence
expenditure to be one of slow recovery in 2016. The situation for
US defence spending is more stable than it has been for some time,
and ongoing geopolitical tensions in the Middle East and elsewhere
emphasise the need for robust defence and security measures. The
timing of Middle East order placement and contract activity remains
difficult to predict, in part due to the impact that recent falls
in the oil price are having on Government spending in the region.
Nevertheless, our continued customer focus means the Group is well
positioned to benefit from any sustained increase in demand in its
markets."
For further information:
Group Chief Executive, Chemring
Michael Flowers Group PLC 01794 833901
Group Finance Director, Chemring
Steve Bowers Group PLC 01794 833901
Group Director of Corporate Affairs,
Rupert Pittman Chemring Group PLC 01794 833901
Andrew Jaques
John Olsen 0203 128
James White MHP Communications 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 global business that specialises in the
manufacture of high technology products and the provision of
services to the aerospace, defence and security markets
-- Employing approximately 3,000 people worldwide, and with
production facilities in four countries, Chemring meets the needs
of customers in more than fifty countries
-- Chemring is now organised under three strategic product
segments: Countermeasures, Sensors & Electronics, and Energetic
Systems
-- Chemring has a diverse portfolio of products that deliver
high reliability solutions to protect people, platforms, missions
and information against constantly changing threats
-- Operating in niche markets and with strong investment in
research and development, Chemring has the agility to rapidly react
to urgent customer needs
www.chemring.co.uk
Presentation and photography
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 21 January 2016. A recording of the audio webcast will be
available later that day. Original high-resolution photography is
available to the media by contacting Tom Horsman, MHP
Communications: tom.horsman@mhpc.com / tel: 0203 128 8100.
Overview
2015 was a disappointing year for Chemring, with several key
export orders in the Sensors & Electronics segment taking
longer to materialise than anticipated. In addition, the Energetic
Systems segment was heavily impacted in the final quarter of the
year by a contract termination and delays to the start of
fulfilment of a major order for 40mm ammunition. These events have
overshadowed the progress we have made in improving the Group's
operations.
Recent years have seen Chemring undergo significant
restructuring and transformation, largely in response to the
downturn in the global defence sector. The Group has been
streamlined operationally, business units have been integrated, and
greater focus has been placed on safety and operational
improvement. All of these actions are delivering positive results.
Further progress was made in 2015 as we continued our efforts on
positioning the Group for future growth.
Today, by separate announcement and by a prospectus sent to
shareholders, we explain why we have launched a proposed rights
issue to raise gross proceeds of GBP80.8 million (the "Rights
Issue"), for which shareholder approval is being sought. In
summary, the Board believes that this capital raising is in the
best interests of the Group, significantly reducing its structural
indebtedness and providing a more appropriate capital structure.
The Board believes that this will allow the Group to pursue certain
growth initiatives and further cost reduction over the medium-term,
and will provide a stronger platform for the future.
Safety
Safety is our first priority and we continue to strive to
improve in this area. The majority of our business units completed
FY15 without a single lost time incident, and the lost time
incident rate for the year is near our historical best performance.
There was one lost time incident in the year involving energetic
materials, in which an employee suffered burns at Chemring
Australia's facility. As a result of wearing the correct protective
personal equipment, the employee made a full recovery and was soon
able to return to work. We cannot, and will not, be complacent in
this area, and we have reviewed all similar operations at our
facilities with the aim of ensuring that this type of incident
cannot recur.
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Our Safety Leadership Programme continues to address the
cultural aspects of safety, and a 40% increase in near miss
reporting in the year is an encouraging leading indicator,
providing evidence that our employees are embracing the principles
of the Programme. We continue to invest to improve operational
safety to remove people from exposure to hazardous materials, and
have commissioned an automated flare pellet manufacturing
capability at Chemring Countermeasures UK's facility in Salisbury,
and automated block explosive manufacturing at Chemring Energetics'
facility in Ardeer.
Strategy and organisation
It is important not to understate the progress we have made in
implementing our strategy, as our home customers in the US, UK and
Australia have shifted away from an operational footing. In the
Countermeasures segment, the successful launch of new special
material decoys by Alloy Surfaces, the award of a qualification
contract to Chemring Australia as the second source supplier for
F-35 flares, and the qualification of a new naval decoy by Chemring
Countermeasures UK all confirm our position as the world leader in
the countermeasures market. The proposed acquisition of key assets
and technology from Wallop Defence Systems in the UK, announced on
25 November 2015, is expected to further enhance our
Countermeasures technology base. In Sensors & Electronics, the
migration of the Husky Mounted Detection System ("HMDS") to a
long-term Program of Record, and research and development
("R&D") contract wins on US chemical and biological detection
programmes, are critical steps to securing the strategic future of
this business. Finally, operational improvements delivered by
Chemring Energetic Devices, and international successes at Chemring
Ordnance and Chemring Defence in pyrotechnic products, demonstrate
the benefits of our strategy for the Energetic Systems segment.
In addition, we are encouraged by improved collaboration within
and across all three segments. Notable successes include
transatlantic collaboration in relation to advanced flare
technologies and products for the space market, and the joint
development of products to counter improvised explosive devices
("IEDs") and products for the electronic warfare ("EW") market. As
we re-shape the Group to match customer needs and expected demand
levels, we continue to encourage collaboration, taking the steps
necessary to enable and embed this across the Group.
During 2016 we expect to revise our US management structure to
improve efficiency and effectiveness. The changes in structure are
in the process of being agreed with the US Defense Security
Service, who manage the Special Security Agreement under which
certain of our US businesses operate.
Operational performance
The year has been one of challenges in achieving progress on
major supply contracts at our US businesses. Further progress on
the HMDS contract with a Middle East customer that commenced in
FY14 has been delayed, and the significant order for 40mm
ammunition for an end user in the Middle East failed to deliver
revenue in FY15 due to delays in achieving regulatory and funding
hurdles. The year was also affected by the termination for
convenience by the US Government of a significant contract to
deliver non-standard ammunition. Encouragingly, the US Government
has subsequently awarded the first of a series of smaller contracts
for the same requirement to Chemring, although this was too late to
mitigate any of the impact of the termination in FY15.
However, the fact that every business unit was profitable in
FY15 is testament to the hard work by all of our people as we
restructure our operations to match expected demand levels. These
efforts have improved delivery performance and reduced our cost
base. For example, the integration of Chemring Energetic Devices'
operations in Torrance, California into the Downers Grove, Illinois
facility is already improving adherence to our customers' delivery
schedules, and the separation of Roke's contract R&D activity
from Chemring Technology Solutions' product business is
contributing to increased order intake and staff utilisation.
Rights Issue
On 26 October 2015, we announced our intention to undertake a
rights issue. The background to this is well documented, and is
covered in a separate announcement released today, but it has
become clear to the Board that whilst we have made progress in
transforming the operations of the Group, further improvement is
being hampered by our high level of structural indebtedness and
limited headroom on associated financial covenants. We have
identified further opportunities to consolidate sites, automate
manufacturing and improve our products, and our decision to
fundamentally address the high level of debt and provide a
competitive capital structure are critical steps in taking
advantage of these opportunities.
The Rights Issue is expected to raise GBP80.8 million in gross
proceeds. Of the expected approximate GBP75.2 million of net
proceeds from the Rights Issue, the Group expects to use a minimum
of GBP48.5 million in prepayment of loan notes, with the balance to
be used for make-whole premiums pursuant to the terms of the loan
notes, waiver fees and general corporate purposes. In respect of
the latter, the Board will have regard to the scheduled repayment
of loan notes due in November 2016.
Board of directors
2015 was not an easy year for Chemring but, nevertheless, the
Board remains committed to continuing to drive improvements in
Chemring's performance. However, following announcement of the
rights issue, we believe it is now time to reshape the membership
of the Board. As a consequence, Peter Hickson has decided to stand
down as Chairman, and from the Board, as soon as a suitable
replacement has been identified and appointed. A process, run by
the Nomination Committee using the services of an outside executive
search consultancy, is under way and we expect a number of
candidates to be considered for the position.
On the non-executive side, we are also seeking new directors. We
have retained the services of a different executive search firm in
order to identify suitable candidates. The process has been under
way for some months but, due to the impending rights issue, we have
not yet reached a position of being able to make any appointments.
However, the process is continuing with a view to identifying
well-qualified candidates.
From the current Board, Ian Much, the Senior Independent
Director, will retire at the Annual General Meeting, as reported in
last year's annual report. He will be succeeded as Senior
Independent Director by Nigel Young, the Chairman of the Audit
Committee. We would like to thank Ian for his very significant
contribution to the Chemring Board over his many years of service
and wish him well for the future. In addition, Andy Hamment has
indicated that, for personal reasons, he also intends to stand down
from the Board as soon as a replacement can be appointed.
Finally, in what has been a difficult year for the Company, the
Board would like to express its thanks to all our employees who
continue to contribute so much to the activities of our operations
across the world.
Current trading and outlook
The Board's expectations for FY16 remain unchanged.
Trading since the start of FY16 has been below management's
expectations, although order intake remains robust. Revenue has
been impacted in part due to re-phasing of deliveries. Some
customer acceptance delays at the end of FY15 have continued but
are expected to be resolved shortly, and specific production and
contract finalisation issues will result in the phasing of some
revenue to later in FY16. The first quarter of the Group's
financial year typically has a low level of revenues and that is
again expected in FY16.
The order book as at 31 October 2015 increased 17.0% to GBP569.6
million, of which GBP330.9 million is currently expected to be
recognised as revenue in FY16, representing almost 75.0% of the
expected FY16 revenue of GBP450.0 million. This level of order
cover for FY16 is encouraging. Included within the order book at 31
October 2015 is GBP103.0 million in respect of the major 40mm order
secured by Chemring Ordnance in FY15. The order book as at 31
December 2015 was GBP600.5 million.
The multi-year revenues associated with the 40mm contract are
expected to commence in the first half of FY16, once the cash
advance payment is received from our customer, and this contract is
expected to provide a significant contribution to FY16. As
previously announced, the 40mm contract is expected to result in
the Group's financial performance for FY16 being weighted towards
the Energetic Systems segment, with a lower contribution from
Sensors & Electronics while its US operations focus on R&D
activity under long-term Programs of Record.
The expected profile of orders, revenue and margins means that
the Group continues to expect FY16 to reflect a significant
second-half weighting.
The Board expects the wider market backdrop for global defence
spending to be one of slow recovery in 2016. The situation for US
defence spending is more stable than it has been for some time, and
ongoing geopolitical tensions in the Middle East and elsewhere
emphasise the need for robust defence and security measures. The
timing of Middle East order placement and contract activity remains
difficult to predict, in part due to the impact that recent falls
in the oil price are having on Government spending in the region.
Nevertheless, our continued customer focus means the Group is well
positioned to benefit from any sustained increase in demand in its
markets.
Trading summary
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Revenue from continuing operations was GBP377.3 million (2014:
GBP403.1 million) and, including discontinued operations, was
GBP377.3 million (2014: GBP474.9 million). This revenue generated
an underlying operating profit of GBP34.4 million (2014: GBP49.0
million), of which GBP34.4 million (2014: GBP46.7 million) related
to continuing operations. Including non-underlying items, there was
a total operating profit of GBP5.5 million (2014: GBP28.2 million
loss).
Including discontinued operations, underlying profit before tax
reduced by 34.7% to GBP19.8 million, resulting in underlying
earnings per share of 8.1p (2014: 12.4p).
The closing order book for continuing operations increased by
GBP82.8 million during the year and at 31 October 2015 was GBP569.6
million (2014: GBP486.8 million).
The Group's net debt at 31 October 2015 was GBP154.3 million
(2014: GBP135.6 million).
Group results
An analysis of underlying and total results is set out
below:
2015 2015 2014 2014
Underlying Total Underlying Total
GBPm GBPm GBPm GBPm
-------------------------- ----------- ------ ----------- ------
Revenue
- continuing operations 377.3 377.3 403.1 403.1
- discontinued operations - - 71.8 71.8
-------------------------- ----------- ------ ----------- ------
377.3 377.3 474.9 474.9
-------------------------- ----------- ------ ----------- ------
Operating profit/(loss)
- continuing operations 34.4 5.5 46.7 25.4
- discontinued operations - 4.9 2.3 (53.6)
-------------------------- ----------- ------ ----------- ------
34.4 10.4 49.0 (28.2)
Net finance expense (14.6) (14.6) (18.7) (30.7)
-------------------------- ----------- ------ ----------- ------
Profit/(loss) before tax 19.8 (4.2) 30.3 (58.9)
Tax (4.1) 3.8 (6.4) 4.0
-------------------------- ----------- ------ ----------- ------
Profit/(loss) after tax 15.7 (0.4) 23.9 (54.9)
-------------------------- ----------- ------ ----------- ------
The use of underlying measures, in addition to total measures,
is considered by the Board to improve comparability of business
performance between periods. Underlying measures referred to are
stated before costs relating to acquisitions and disposals,
business restructuring and incident costs, profit/loss 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 depreciation of sterling against the US dollar, increased
reported revenue from continuing operations by GBP7.9 million. At
constant exchange rates, revenue from continuing operations was
GBP369.4 million, a reduction of 8.4%.
Chemring's operating segments are Countermeasures, Sensors &
Electronics and Energetic Systems. An analysis of segmental revenue
and underlying operating profit is set out below:
2015 2015 2014 2014
Underlying Underlying Underlying Underlying
2015 operating operating 2014 operating operating
Revenue profit margin Revenue profit margin
GBPm GBPm % GBPm GBPm %
------------------------ -------- ----------- ----------- -------- ----------- -----------
Countermeasures 125.8 17.5 13.9 96.1 9.7 10.1
Sensors & Electronics 99.1 9.3 9.4 154.4 31.9 20.7
Energetic Systems 152.4 15.1 9.9 152.6 15.0 9.8
------------------------ -------- ----------- ----------- -------- ----------- -----------
377.3 41.9 11.1 403.1 56.6 14.0
Unallocated corporate
costs - (7.5) - - (9.9) -
------------------------ -------- ----------- ----------- -------- ----------- -----------
Continuing operations 377.3 34.4 9.1 403.1 46.7 11.6
Discontinued operations - - - 71.8 2.3 3.2
------------------------ -------- ----------- ----------- -------- ----------- -----------
Including discontinued
operations 377.3 34.4 9.1 474.9 49.0 10.3
------------------------ -------- ----------- ----------- -------- ----------- -----------
Countermeasures revenue increased by 30.9%, due to improved
demand at our UK and Australian operations. Production volumes in
the US were more robust than in 2014, however customer demand
remains subdued. Countermeasures operating margin of 13.9% (2014:
10.1%) reflects higher volumes in the UK and Australia, the benefit
of further headcount reductions and cost saving measures, together
with the release of provisions on the successful completion of
customer acceptance tests relating to an advanced countermeasure on
which technical problems had previously been encountered.
Sensors & Electronics revenue reduced by 35.8%, reflecting
the completion of major production contracts with the US Department
of Defense ("DoD") during the comparative period. Significant
R&D contracts with the US DoD are on-going in relation to the
next generation of ground penetrating radar, and chemical and
biological detection systems. Sensors & Electronics' operating
margin of 9.4% (2014: 20.7%) reflects the reduced production
volumes and the weighting of US revenues to lower margin, customer
funded R&D activity. These factors have been partially offset
by the benefits of cost saving measures, including the closure of
one of our two production sites at Charlottesville, Virginia and a
restructuring of Sensors & Electronics' UK operations.
Energetic Systems revenue reflects improved production
throughput, offset by lower non-standard ammunition revenue.
Underlying operating profit slightly increased to GBP15.1 million
(2014: GBP15.0 million), with operating margins benefiting from
operational improvement. This improvement was particularly marked
at Chemring Energetic Devices, where production volumes are being
transferred to the Illinois facility from the former Hi-Shear
facility in California. This transition is enabling greater
production throughput to be achieved and is generating higher
margins. Chemring Ordnance delivered improved production, although
its result was lower than had been anticipated due to the delays in
achieving revenue under the major 40mm contract that was secured
during the year.
Unallocated corporate costs were GBP7.5 million (2014: GBP9.9
million), with the reduction reflecting the full year benefit of
savings from the simplification of the Group's management structure
and lower costs of annual bonus schemes.
Underlying operating profit from continuing operations was
GBP34.4 million (2014: GBP46.7 million), a decrease of 26.3%. The
underlying operating margin was 9.1% (2014: 11.6%).
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.
The total operating profit was GBP10.4 million (2014: GBP28.2
million loss). This includes non-underlying costs of GBP24.0
million (2014: GBP77.2 million), which are analysed later in this
announcement.
Net underlying finance expense was GBP14.6 million (2014:
GBP18.7 million). The reduction principally reflects the repayment
of loan note debt during 2014, partly offset by higher levels of
interest under our revolving credit facility and by an increase in
the amortisation of prepaid facility fees.
Underlying profit before tax from continuing operations was
GBP19.8 million (2014: GBP28.1 million), a decrease of 29.5%. Tax
on underlying profit before tax from continuing operations was
GBP4.1 million (2014: GBP5.7 million), representing an effective
tax rate of 20.7% (2014: 20.3%). The tax rate on underlying profit
before tax remains comparable to the UK corporation tax rate, and
continues to benefit from the utilisation of R&D and other tax
credits. Including non-underlying items, the total loss before tax
from continuing operations was GBP9.1 million (2014: GBP5.2
million).
The effective tax rate on the total loss before tax from
continuing operations was 41.8% (2014: 73.1%) due to the geographic
mix of profit and the effect of non-underlying costs that are not
deductible for tax purposes.
Analysis of non-underlying items
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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:
2015 2014
GBPm GBPm
Acquisition and disposal related
(credit)/costs (4.4) 8.6
Business restructuring and incident
costs 6.4 7.2
Claim related costs 8.5 -
Loss on disposal of associate - 0.9
Profit on disposal of businesses - (26.5)
Impairment of goodwill - 45.9
Impairment of acquired intangibles - 10.7
Impairment of assets held for
sale - 13.6
Intangible amortisation arising
from business combinations 14.0 16.1
Loss/(gain) on fair value movements
of derivative financial instruments (0.5) 0.7
Non-underlying items excluded
from underlying operating profit 24.0 77.2
Accelerated interest costs - 12.0
-------------------------------------- ------ -------
Non-underlying items excluded
from underlying profit before
tax 24.0 89.2
-------------------------------------- ------ -------
Analysed as:
Continuing operations 28.9 33.3
Discontinued operations (4.9) 55.9
-------------------------------------- ------ -------
Non-underlying items excluded
from underlying profit before
tax 24.0 89.2
-------------------------------------- ------ -------
The acquisition and disposal related credit of GBP4.4 million
includes a GBP4.9 million credit related to disposals of businesses
in prior years. This credit results from a review of expected
liabilities under the sale agreements relating to the discontinued
operations. Business restructuring and incident costs of GBP6.4
million include GBP2.5 million of redundancy costs, of which GBP2.1
million relates to the restructuring of the Roke site in Romsey.
The remaining business restructuring and incident costs of GBP3.9
million principally comprise consultancy fees and provisions for
onerous property leases.
Claim related costs of GBP8.5 million comprise GBP4.2 million in
relation to claims brought by the US Department of Justice relating
to historical supplies of product by Kilgore, where a settlement is
being negotiated, and GBP4.3 million in settlement of claims
regarding the manufacture of certain components for the Next
Generation Light Anti-Tank Weapon ("NLAW") combat weapon by
Chemring Energetics UK. The estimated value of these claim related
costs has been reflected as a non-underlying item due to their
scale and unusual nature. The cash payment associated with
settlement of the NLAW claim occurred in November 2015, while the
Kilgore claim related costs are expected to be settled over a five
year period commencing in 2016.
An impairment analysis, based on value-in-use calculations
reflecting current conditions in the defence industry, has been
conducted and no impairments are considered to exist at 31 October
2015.
The amortisation of intangible assets arising from business
combinations was GBP14.0 million (2014: GBP16.1 million), with the
decrease principally reflecting amortisation of GBP2.6 million in
the comparative period relating to discontinued operations. The
amortisation of intangible assets arising from business
combinations is treated as non-underlying to improve comparability
and understanding of the results given its large size and non-cash
nature.
The cash outflow from non-underlying items was GBP8.4 million
(2014: GBP25.9 million).
Countermeasures
-- Revenue: GBP125.8 million (2014: GBP96.1 million)
-- Underlying operating profit: GBP17.5 million (2014: GBP9.7 million)
-- Underlying operating margin: 13.9% (2014: 10.1%)
Revenue in the Countermeasures segment increased by 30.9%, as a
result of recovery in the US businesses and strong performance in
the UK and Australia.
The closing order book for Countermeasures was GBP184.1 million,
down 4.8% on FY14. This was largely due to improved delivery
performance at Kilgore in the year compared with FY14, where
production had been halted as a result of the incident in February
of that year, resulting in a growth in order backlog. The
production issues highlighted in the interim report were
successfully resolved and Countermeasures delivered an underlying
operating profit of GBP17.5 million, compared to GBP9.7 million in
FY14.
Alloy Surfaces achieved first deliveries of its new MJU-66 decoy
to the US Navy and won a second year's production order for this
product. It also launched a new proprietary decoy and has been
awarded a contract for this product by the US Army, successfully
implementing its strategy of continuous product improvement to
sustain its position as a leader in pyrophoric decoy technology.
While the order book increased during FY15, demand levels are
expected to remain subdued and near-term order intake remains key.
As a result of expected production volumes, planning is underway
for the closure of one of Alloy Surfaces' two facilities. An
investment of approximately $3.0 million at Alloy Surfaces'
remaining production facility is expected to be required to support
this and is expected to deliver approximately $1.4 million in
annual cost savings from FY18.
Kilgore continued to improve its operational performance, after
the production re-start that followed the incident in 2014. It
successfully resolved production challenges during the second half
of FY15, although work remains to be done to ensure greater
consistency of countermeasure output. Kilgore's order book is
progressively being worked through and FY16 order wins are
important in ensuring an efficient level of production activity for
future years, given the high fixed cost base at the Kilgore
facility.
Chemring Countermeasures UK had a strong second half,
successfully resolving the production challenges it faced earlier
in the year. It also successfully commissioned its automated flare
pellet mixing and pressing complex with the first products being
manufactured and delivered to customers during the second half of
FY15. This facility provides a step change to flare manufacture in
terms of operator safety and flare quality while adding capacity to
the Salisbury site. Increasing benefits will be generated from this
investment over the coming years, as the range of products
manufactured in the complex is broadened.
Following the successful resolution of technical problems
associated with the development of a new and advanced
countermeasure, highlighted in the 2014 Annual Report and Accounts,
delivery of the contract was completed in FY15. With the successful
qualification, interest in the product has resulted in a follow-on
order being received, with the potential for further orders.
Interest in the CENTURION trainable launcher is growing with
detailed discussions having taken place with two separate customers
for the inclusion of the launcher on new classes of warship due to
enter service in the early 2020s.
Chemring Australia had a very strong year with sustained
successful delivery of locally manufactured flares to the
Australian Department of Defence. It also manufactured its first
flares for the F-35 which were delivered to the US customer for
performance testing.
Chemring Australia continues to make technical progress on its
electronic attack solution which complements the Group's Resolve
portable EW system, and has also received growing interest in the
system from a number of key customers.
On 25 November 2015, the Group announced it had reached
agreement with Esterline to buy patents, equipment, stock and
selected contracts relating to Esterline's UK-based subsidiary,
Wallop Defence Systems, for an initial cash consideration of GBP2.5
million. Additional payments of up to GBP9.0 million, which are
conditional on the receipt of specific orders in the future, may be
made over the next three years. The assets to be purchased relate
to air countermeasures and pyrotechnic products, which, pending
regulatory approval, will be manufactured at Chemring's existing UK
operations and further expand the Group's product offerings in
Countermeasures. Completion of the transaction, which is subject to
approval by the UK Ministry of Defence ("MoD") and the UK
Competition and Markets Authority, is expected to occur in the
second quarter of FY16.
The market for countermeasures remains subdued, with NATO
customers constrained by tight budgets. Steady order intake within
the segment confirms the ongoing requirement for Countermeasures'
products despite these constraints. In the international market,
particularly the Middle East, where political and military tensions
are high, there is increased interest in the Group's products and
technology, including advanced countermeasures. However, the timing
of this international interest translating into orders remains
unpredictable.
In the medium term, the Group's qualifications on the F-35 and
Typhoon platforms underpin its position for the future, with
requirements for a substantial level of war reserves of the unique
advanced flares for the growing fleets of these next-generation
aircraft. In addition, the approval for the F-15 and Typhoon
platforms to use Alloy Surfaces' unique pre-emptive decoy dispensed
from Saab's BOL dispenser creates a new opportunity for this
solution, with the US Air Force and Navy likely to fit these
dispensers in 2017.
Sensors & Electronics
-- Revenue: GBP99.1 million (2014: GBP154.4 million)
-- Underlying operating profit: GBP9.3 million (2014: GBP31.9 million)
-- Underlying operating margin: 9.4% (2014: 20.7%)
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Revenue in the Sensors & Electronics segment decreased by
35.8% to GBP99.1 million, as a result of extended delays in
progressing production contracts with Middle Eastern customers,
which had been anticipated to offset the decline in production
revenue from the US DoD.
Reduced revenue and an increase in R&D contracts, which have
a lower margin than production activity, led to a reduction in
underlying operating profit from GBP31.9 million in FY14 to GBP9.3
million. The order book was marginally lower at GBP75.8 million
(2014: GBP77.5 million), reflecting a steady level of business from
the US and NATO.
Following the completion of the original HMDS contract in 2014,
Chemring Sensors & Electronics' emphasis has been on securing
the long-term development contracts for the US Army's Program of
Record and developing the international market. It is currently
engaged in a sole-source contract for the engineering and
manufacturing development ("EMD") phase of the Program of Record
for the next-generation HMDS "A2" variant. The customer is
conducting a review to confirm the phasing and structure of their
requirements, and we continue to expect initial production
contracts to be awarded following completion of the EMD phase.
There is continued international interest in vehicle mounted mine
and IED detection with operators now including the US, Canada,
Australia, Italy, and Spain. Following the award of a significant
order for HMDS from a customer in the Middle East in FY14, further
order intake and contract activity in the Middle East is expected
in FY16, as we continue to promote the HMDS solution and our
3d-Radar technology.
Chemring Sensors & Electronics' hand-held dual sensor
detector, Groundshark, has enjoyed early success, with products
shipped to Poland and the Middle East. Chemring Sensors &
Electronics continues to position itself for key US programmes in
this area and has won a follow-on contract in relation to the Next
Generation Hand-held Multi-Sensor Explosive program for the
detection of buried anti-personnel and anti-vehicular explosive
devices.
In chemical and biological detection, Chemring Sensors &
Electronics maintained a position on all the strategically
important US R&D contracts it is targeting. The Next Generation
Chemical Detector programme involves three different sensor
developments and Chemring is the only bidder to have won EMD
contracts for all of these. In addition, in April 2015, Chemring
received a $14.9 million award as the sole contractor for the US
DoD's Joint Biological Tactical Detection System ("JBTDS")
development programme, which is expected to lead to production
contracts from 2018.
In the UK, the restructuring of Chemring Technology Solutions is
now complete, with Roke operating as a pure contract development
and consultancy business, and Chemring Technology Solutions
comprising the explosive ordnance disposal, IED detection and EW
products business.
Chemring Technology Solutions continues to promote its Resolve
and Locate EW products to the international market, and has won
further orders globally.
Chemring Technology Solutions has launched its Groundhunter
hand-held IED detector, which incorporates interchangeable sensor
heads for command wire and metal detection. This product has
achieved initial orders and is complementary to the GroundShark
hand-held IED detector, which uses ground-penetrating radar and
metal detection technologies.
In the non-defence market, Chemring Technology Solutions has won
a contract for the supply of its Perception cyber-protection
solution to a major UK services company, and it is seeing
considerable interest in its novel approach to information and data
protection.
Overall, the near-term outlook for Sensors & Electronics is
expected to be constrained. Major US production contracts driven by
urgent operational requirements have ended and while international
demand is strong, the timing of orders, particularly in non-NATO
countries, remains difficult to predict. Receipt of these
international orders remains key to near-term performance.
Encouragingly, the US DoD has recognised the need for a broad range
of detection systems by the inclusion of these capabilities as
Programs of Record in the base budget, and continued participation
in these Programs of Record underpins our longer-term
prospects.
Chemring is therefore well-placed to grow its position in the
Sensors & Electronics market through the development and launch
of its next-generation products, having already won key R&D
contracts for the initial phases of the Programs of Record. In
addition, our products and technologies are targeted at detecting
and mitigating new, growing threats such as IEDs and cyber-attacks.
We believe these capabilities will form a growing proportion of
future defence budgets.
Energetic Systems
-- Revenue: GBP152.4 million (2014: GBP152.6 million)
-- Underlying operating profit: GBP15.1 million (2014: GBP15.0 million)
-- Underlying operating margin: 9.9% (2014: 9.8%)
Revenue for Energetic Systems was broadly unchanged at GBP152.4
million (2014: GBP152.6 million). Underlying operating profit and
operating margins were also consistent with the prior year at
GBP15.1 million (2014: GBP15.0 million) and 9.9% (2014: 9.8%), with
operational improvement offsetting order delays for 40mm ammunition
and the termination for convenience of a US government contract for
non-standard ammunition.
The closing order book for Energetic Systems was GBP309.7
million (2014: GBP216.0 million), driven by the significant order
for 40mm ammunition awarded to Chemring Ordnance during the
year.
Chemring Energetic Devices had a strong year, addressing
capacity constraints at the California facility and delivering
another year of profit improvement. The business has successfully
started to diversify its business, with international sales of test
equipment for aircrew life-support systems, and sales of explosive
separation bolts for a new high-reliability application. The
business continues to resolve manufacturing reliability on products
for space and missile applications, such as the long-standing
Lockheed Martin Patriot PAC-3 missile programme.
Customers are supporting Chemring Energetic Devices in efforts
to qualify its Illinois operation to manufacture products, which,
once complete, is expected to enable the closure of the California
facility in 2018. Investment at the Illinois facility of
approximately $7.0 million is required to complete this site
rationalisation, which is expected to yield significantly improved
operational performance and a cost reduction of approximately $5.0
million per annum from FY19.
Chemring Ordnance had a stable year, delivering good operational
performance for its production of the Anti-Personnel Obstacle
Breaching System ("APOBS"), despite customer acceptance issues
towards the end of FY15. However, Chemring Ordnance suffered a
disappointing outcome with the termination for convenience by the
US Army of a $62.7 million contract for delivery of non-standard
ammunition. Termination for convenience clauses form part of
standard DoD contract terms and in this case were used by the DoD
to enable a change in procurement strategy. Encouragingly, the US
Government has subsequently awarded the first of a series of
smaller contracts for the same requirement to Chemring, although
this was too late to mitigate the impact in FY15.
Chemring Ordnance also secured a significant multi-year order
for 40mm ammunition to be delivered to the Middle East, and its
order book now stands at a record level, underpinning its future
prospects. Delays in necessary permits and export approvals in
respect of the 40mm contract have now been resolved, and contract
revenues are expected to commence in the first half of FY16, once
the cash advance payment is received from our customer. The 40mm
contract is expected to provide a significant contribution to
FY16.
In the UK, the reorganisation of Chemring Energetics is
delivering positive results, with greater focus on operational
effectiveness, collaboration and customer engagement. This was
demonstrated by the first deliveries of plastic explosive block for
the UK MoD from a newly-commissioned manufacturing facility,
strengthening Chemring Energetics UK's position as a leader in the
supply of demolition products. This explosive was developed jointly
by the teams at Chemring Energetics UK and Chemring Nobel in
Norway, where the composition is manufactured.
Chemring Nobel delivered strong levels of profitability, having
successfully invested to improve manufacturing yields, remove
manufacturing bottle-necks and increase production capacity.
Chemring Defence had a satisfactory year as it fulfilled orders
from Middle East customers won in 2014. Prospects with customers in
the Middle East remain encouraging, although substantial order
intake from these customers is required in 2016 to ensure
profitable manufacturing volumes. The UK MoD's requirements remain
negligible as it consumes its existing stockpiles, with no order
intake expected before 2017. This pause in UK demand has, to date,
been offset by orders from the Middle East and by the development
of relationships in the Asia Pacific region.
In the short term, Energetic Systems will be dominated by
fulfilling the major order for 40mm ammunition. Otherwise, demand
for our Energetic Systems products is expected to remain relatively
flat until NATO customers deplete current stockpiles and start to
re-order pyrotechnics for training and operational use. Growth is
being targeted through diversification into non-defence markets,
with the development of bespoke products for fire suppression,
security and space applications. Against this market backdrop,
continued emphasis is being placed on maintaining improvements in
operational efficiency and optimising cash conversion.
Principal risks and uncertainties
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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
2014 Annual Report and Accounts and the 2015 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. In summary, the principal risks relate to:
-- health and safety risks;
-- environmental laws and regulations;
-- possible defence budget cuts;
-- timing and value of orders;
-- contract-related risks;
-- political risks;
-- management resource;
-- manufacturing risks;
-- technological risks;
-- product liability and other customer claims;
-- compliance and corruption risks;
-- cyber-related risks; and
-- financial risks.
Management have detailed mitigation plans and assurance
processes to manage and monitor these risks.
Research and development
R&D expenditure, including discontinued operations, was
GBP56.3 million (2014: GBP52.0 million). Continued investment in
R&D is a key aspect of the Group's strategy, and levels of
internally-funded R&D are expected to be maintained as
investment in product development continues, particularly within
Sensors & Electronics. An analysis of R&D expenditure is
set out below:
2015 2014
GBPm GBPm
------------------------------------ ----- -----
Customer-funded R&D 38.2 28.5
Internally-funded R&D
- expensed to the income statement 9.2 11.6
- capitalised 8.9 11.9
------------------------------------ ----- -----
Total R&D expenditure 56.3 52.0
------------------------------------ ----- -----
Amortisation of development and patent costs relating to
continuing operations was GBP6.4 million (2014:GBP5.8 million),
with the increase reflecting a number of previously capitalised
projects coming on-stream. A further increase in amortisation of
development and patent costs is anticipated for FY16 as additional
Sensors & Electronics projects complete their development
phase.
Pensions
The deficit on the Group's defined benefit pension schemes was
GBP17.7 million (2014: GBP21.8 million), measured in accordance
with IAS 19 (Revised) Employee Benefits.
The deficit 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 2015,
using the projected unit credit method. This valuation showed a
deficit of GBP17.8 million (2014: GBP22.0 million). The reduction
reflects the funding structure agreed with the trustees in June
2013, under which contributions of GBP5.0 million were paid in
FY15, partly offset by the effect of changes in actuarial
assumptions. The Group has given a bank guarantee and letters of
credit totalling GBP13.5 million (2014: GBP21.6 million) to the
Scheme in respect of future contributions, which are progressively
reducing as contributions are paid under the new funding
structure.
Cash flow
The cash inflow generated from underlying operations was GBP35.4
million (2014: GBP63.5 million). A summary of underlying free cash
flow is set out below:
2015 2014
GBPm GBPm
--------------------------------------------- ------ ------
Underlying operating profit 34.4 49.0
Depreciation and loss/(profit) on disposal
of non-current assets 16.6 16.8
Amortisation of development costs, patents
and licences 6.4 6.7
--------------------------------------------- ------ ------
57.4 72.5
Increase in working capital (18.2) (2.0)
Other movements (3.8) (7.0)
--------------------------------------------- ------ ------
Cash generated from underlying operations 35.4 63.5
Expenditure on capitalised development
costs (8.9) (12.1)
Expenditure on property, plant and equipment (8.2) (10.9)
Tax (1.3) (3.4)
Interest (11.8) (20.6)
--------------------------------------------- ------ ------
Underlying free cash flow 5.2 16.5
--------------------------------------------- ------ ------
Expenditure on property, plant and equipment was GBP8.2 million
(2014: GBP10.9 million). This comprised various projects related to
health and safety improvements, production automation and systems
upgrades, including GBP0.6 million relating to the implementation
of an enterprise resource planning system at Chemring Defence.
Expenditure on capitalised development projects was GBP8.9
million (2014: GBP12.1 million), of which GBP7.2 million (2014:
GBP9.8 million) related to the Sensors & Electronics segment,
where significant investment has been made in technology developed
in association with DoD Programs of Record and for UK product
launches. The carrying value of capitalised development costs at 31
October 2015 of GBP36.1 million included GBP12.1 million in respect
of US Sensors & Electronics projects, GBP3.6 million in
relation to the Perception cyber-protection product and GBP3.8
million in respect of the CENTURION launcher.
Tax payments were GBP1.3 million (2014: GBP3.4 million), with
the reduction reflecting the lower profitability of the Group.
Working capital
A summary of working capital in respect of continuing operations
is set out below:
2015 2014
GBPm GBPm
--------------------- --------------- --------------
Inventories 96.2 78.1
Trade receivables 66.1 59.3
Contract receivables 15.2 20.2
Trade payables (46.7) (37.1)
Advance payments (11.5) (4.5)
Other items (37.5) (46.0)
--------------------- --------------- --------------
Working capital 81.8 70.0
--------------------- --------------- --------------
Working capital was GBP81.8 million (2014: GBP70.0 million).
Inventory increased in each operating segment. The rise in
Energetic Systems was due in part to the customer acceptance issues
at Chemring Ordnance relating to APOBS units towards the end of
FY15, which led to an increase in inventory of GBP2.6 million.
These issues are expected to be resolved in the first half of FY16.
Sensors & Electronics inventory increased in relation to
newly-launched hand-held chemical detection products (GBP1.9
million) and procurement of inventory relating to the Resolve EW
system in anticipation of orders to be received in FY16 (GBP2.4
million).
Trade receivables increased due to the concentration of revenue
towards the final quarter of the year, and also included GBP6.8
million in respect of FY14 sales for which collection is linked to
receipt of the advance payment associated with the major 40mm
ammunition contract secured in FY15.
Contract-accounted revenues represented 3.4% (2014: 22.0%) of
revenue from continuing operations, with the decline reflecting an
absence of major production activity within Sensors &
Electronics.
Working capital continues to be a key focus area and the
operational improvement at sites such as Chemring Energetic Devices
will drive greater efficiency, notably through the reduction of
inventories. In the near term, the principal drivers of working
capital will be the timing of major contracts within Energetic
Systems.
Net debt and covenants
Net debt at 31 October 2015 was GBP154.3 million (2014: GBP135.6
million). The Group's principal debt facilities comprise GBP166.5
million of private placement loan notes and a GBP70.0 million
revolving credit facility. The revolving credit facility was
established in July 2014, is with a syndicate of three banks and
has a four year term. Together with a smaller US facility, the
Group had GBP78.5 million (2014: GBP75.7 million) of undrawn
borrowing facilities at the year end.
In addition to borrowing facilities, the Group had GBP62.4
million (2014: GBP62.3 million) of facilities in respect of bonding
and trade finance requirements. At 31 October 2015, GBP28.0 million
(2014: GBP31.4 million) of these facilities were utilised.
The Group is subject to two key financial covenants, which are
tested quarterly. These covenants relate to the leverage ratio,
being the 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 calculation of these ratios involves the translation of
non-sterling denominated debt using average, rather than closing,
rates of exchange. The revolving credit facility and the loan notes
have differing covenant compliance calculations.
In respect of the revolving credit facility, leverage is
measured by reference to net debt. The maximum permitted ratio of
net debt to underlying EBITDA under the revolving credit facilities
was 3.00x at January 2015, 3.75x at April 2015, 3.50x at July 2015
and 3.00x at October 2015. The increased permitted ratios at April
and July 2015 were agreed with the revolving credit facility
syndicate in May 2015 and a ratio of 3.00x applied at those dates
prior to that revision.
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The provisions of the private placement loan notes contain two
leverage tests, each of which are tested quarterly. The first test
measures leverage by reference to total gross debt, with a maximum
permitted ratio of total gross debt to underlying EBITDA of 3.75x.
The second test measures leverage by reference to adjusted debt,
which is calculated as total gross debt less proceeds from the sale
of the European munitions businesses that were offered to note
holders in 2014 to repay outstanding notes at par, but in relation
to which such offer was not accepted. The value of such proceeds at
31 October 2015 was GBP4.6 million (2014: GBP4.5 million). The
maximum permitted ratio of adjusted debt to underlying EBITDA was
3.00x at January 2015, 3.75x at April 2015, 3.50x at July 2015 and
3.00x at October 2015. The increased permitted ratios at April and
July 2015 were agreed with loan note holders in May 2015 and a
ratio of 3.00x applied at those dates prior to that revision.
The Group complied with these covenants throughout the year and
the results of covenant tests at the year end are detailed
below:
2015 2014
------------------------------------------------ ----- -----
Covenant ratios - revolving credit facility
Maximum allowed ratio of net debt to underlying
EBITDA 3.00x 3.00x
Actual ratio of net debt to underlying
EBITDA 2.83x 1.93x
Minimum allowed ratio of underlying EBITDA
to finance costs 4.00x 4.00x
Actual ratio of underlying EBITDA to finance
costs 4.75x 4.28x
Covenant ratios - loan note agreements
Maximum allowed ratio of adjusted debt
to underlying EBITDA 3.00x 3.00x
Actual ratio of adjusted debt to underlying
EBITDA 2.84x 2.25x
Maximum allowed ratio of total debt to
underlying EBITDA 3.75x 3.75x
Actual ratio of total debt to underlying
EBITDA 2.92x 2.31x
Minimum allowed ratio of underlying EBITDA
to finance costs 3.50x 3.50x
Actual ratio of underlying EBITDA to finance
costs 4.67x 4.39x
------------------------------------------------ ----- -----
During January 2016, changes were made to covenants under the
revolving credit facility and loan notes in respect of the
permitted ratios at the 31 October 2015 and 31 January 2016 test
dates.
Certain of these changes, in respect of the 31 January 2016 test
date only, are in effect whether or not the Rights Issue proceeds.
These unconditional changes are an increase in the permitted
leverage ratio under the revolving credit facility from 3.00x to
3.50x at the 31 January 2016 test date and an increase in the
permitted adjusted debt leverage ratio under the private placement
loan notes from 3.00x to 4.00x.
The remaining amended covenant ratios, summarised in the table
below, will be in effect only if the Rights Issue proceeds and, in
the case of the amendments relating to the loan notes, if not less
than 60% of the gross proceeds of the Rights Issue are applied in
prepayment of amounts outstanding under the loan notes no later
than 29 April 2016:
31 January
31 October 2015 2016
----------------- -----------------
Original Amended Original Amended
--------------------------------------- -------- ------- -------- -------
Covenant ratios - revolving credit
facility
Maximum allowed ratio of net
debt to underlying EBITDA 3.00x 3.90x 3.00x 3.90x
Minimum allowed ratio of underlying
EBITDA to finance costs 4.00x 3.50x 4.00x 3.50x
Covenant ratios - loan note agreements
Maximum allowed ratio of adjusted
debt to underlying EBITDA 3.00x 4.00x 3.00x 4.00x
Maximum allowed ratio of total
debt to underlying EBITDA 3.75x 4.00x 3.75x 4.00x
Minimum allowed ratio of underlying
EBITDA to finance costs 3.50x 3.50x 3.50x 3.50x
--------------------------------------- -------- ------- -------- -------
The composition of gross and net debt is set out below:
2015 2014
GBPm GBPm
--------------------------------- ------- -------
Loan notes, net of facility fees (161.3) (155.6)
Revolving credit facility - -
Other loans and finance leases (0.6) (1.8)
--------------------------------- ------- -------
Gross debt (161.9) (157.4)
Cash 7.6 21.8
--------------------------------- ------- -------
Net debt (154.3) (135.6)
--------------------------------- ------- -------
Going concern and long-term viability statement
The Group's business activities, key performance indicators, and
principal risks and uncertainties are described within the 2015
Annual Report and Accounts. In light of the continued trading
volatility, and as part of a regular assessment of the Group's
working capital and financing position, the directors have prepared
a detailed bottom-up two year trading budget and cash flow forecast
for the period through to October 2017, being at least 12 months
after the date of approval of the financial statements. This is in
addition to the Group's longer-term strategic planning process. In
assessing the forecast, the directors have considered:
-- trading risks presented by economic conditions in the defence
market, particularly in relation to government budgets and
spends;
-- the timing of delivering key contracts, in particular the
HMDS and 40mm orders for end users in the Middle East;
-- the impact of macroeconomic factors, particularly interest rates and foreign exchange rates;
-- the status of the Group's existing financial arrangements and
associated covenant requirements; and
-- the availability of mitigating actions should business
activities fall behind current expectations, including the deferral
of discretionary overheads and restricting cash flows.
Additional detailed sensitivity analysis has been performed on
the forecasts to consider the impact of severe, but plausible,
reasonable worse case scenarios on the covenant requirements. These
scenarios, which sensitised the forecasts for specific identified
risks, modelled the reduction in anticipated levels of underlying
EBITDA and the associated increase in net debt. These scenarios
included significant delays to major contracts and new product
launches, and the temporary closure of a major facility. This
sensitised scenario included mitigating actions that can be taken
if needed and, based on the application of these shows minimal
headroom on all covenant test dates for the foreseeable future.
The directors have acknowledged the latest guidance on going
concern. They have made appropriate enquiries and taken into
account factors which are detailed in the strategic report within
the 2015 Annual Report and Accounts. As a consequence, the
directors believe that the Company is well placed to manage its
risks.
The Group is seeking to raise GBP80.8 million via a Rights Issue
in order to achieve a more appropriate capital structure with
reduced indebtedness, and also to increase the headroom on its
near-term covenants to an appropriate level. This is subject to
shareholder approval, and the subsequent repayment of private
placement loan note debt is expected to complete by April 2016.
Both of these events will provide further headroom at all future
covenant test dates.
In making these statements, the directors have made the
following key assumptions:
-- the right issue is approved by shareholders and completes during February 2016; and
-- at least 60% of the gross proceeds from the Rights Issue are
used to repay private placement loan note debts during April
2016.
If the Rights Issue does not proceed to completion, certain of
the amendments to the financial covenants under the Group's
existing finance agreements will not become effective. While the
Group is, as at the most recent test date of 31 October 2015, in
compliance with the unmodified financial covenants in its existing
finance agreements, and has agreed an unconditional variation of
certain maximum leverage ratios under its existing finance
agreements for the 31 January 2016 test date, there is minimal
headroom under a reasonable worst case with no Rights Issue
proceeds and therefore a risk, in this scenario, that the Group
will exceed the unmodified maximum leverage ratios permitted under
the existing finance agreements as at 30 April 2016 and subsequent
quarterly test dates if the Rights Issue does not proceed.
The directors having considered the forecasts, the risks,
associated mitigating actions and probability of the Rights Issue
proceeding, have a reasonable expectation that adequate financial
resources will continue to be available for the foreseeable future.
Thus, they continue to support the going concern basis in preparing
the financial statements.
The directors have assessed the Group's viability over a three
year period to October 2018 based on the above assessment, combined
with the Group's strategic planning process, which gives greater
certainty over the forecasting assumptions used. Based on this
assessment and probability of the Rights Issue proceeding, the
directors have a reasonable expectation that the Group will be able
to continue in operation and meet all its liabilities as they fall
due up to October 2018.
Shareholder returns
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Underlying earnings per share from continuing operations were
8.1p (2014: 11.6p), a decrease of 30.2%. The total loss per share
from continuing operations was 2.7p (2014: 0.7p).
Shareholders' funds were GBP290.6 million (2014: GBP300.3
million), with the decrease principally comprising the loss after
tax for the year and dividends paid.
Dividends
In view of the proposed Rights Issue, the Board is not
recommending a final dividend in respect of FY15. The total
dividend in respect of FY15 will therefore be the interim dividend
of 2.4p per share (2014: 4.1p).
In addition, the Board does not currently intend to propose an
interim dividend in respect of the six month period ending 30 April
2016.
The Board recognises that dividends are an important component
of total shareholder returns. The Board intends to propose a final
dividend for FY16, assuming it is prudent to do so, and to continue
paying dividends thereafter.
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 2015. 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;
2. the strategic report includes 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; and
3. the annual report and financial statements,
taken as a whole, are fair, balanced and understandable,
and provide the information necessary for
shareholders to assess the Company's performance,
business model and strategy.
This responsibility statement was approved by the Board of
directors on 21 January 2016, and has been signed on its behalf by
Michael Flowers and Steve Bowers.
CONSOLIDATED INCOME STATEMENT
for the year ended 31 October 2015
2015 2014
Underlying Non-underlying Underlying Non-underlying
performance* items Total performance* items Total
GBPm GBPm GBPm GBPm GBPm GBPm
Continuing operations
Revenue 377.3 - 377.3 403.1 - 403.1
------------- --------------- -------- ------------- --------------- --------
Operating profit/(loss) 34.4 (28.9) 5.5 46.7 (21.3) 25.4
Finance income - - - 0.1 - 0.1
Finance expense (14.6) - (14.6) (18.7) (12.0) (30.7)
------------- --------------- -------- ------------- --------------- --------
Profit/(loss)
before tax 19.8 (28.9) (9.1) 28.1 (33.3) (5.2)
Tax (charge)/credit
on profit/(loss) (4.1) 7.9 3.8 (5.7) 9.5 3.8
------------- --------------- -------- ------------- --------------- --------
Profit/(loss)
after tax 15.7 (21.0) (5.3) 22.4 (23.8) (1.4)
Discontinued
operations
Profit/(loss)
after tax from
discontinued
operations - 4.9 4.9 1.5 (55.0) (53.5)
------------- --------------- -------- ------------- --------------- --------
Profit/(loss)
after tax 15.7 (16.1) (0.4) 23.9 (78.8) (54.9)
------------- --------------- -------- ------------- --------------- --------
Earnings/(loss) per
ordinary share
Continuing operations
Basic 8.1p (10.8)p (2.7)p 11.6p (12.3)p (0.7)p
Diluted 7.9p (10.6)p (2.7)p 11.3p (12.0)p (0.7)p
------------- --------------- -------- ------------- --------------- --------
Continuing operations and
discontinued operations
Basic 8.1p (8.3)p (0.2)p 12.4p (40.8)p (28.4)p
Diluted 7.9p (8.1)p (0.2)p 12.1p (40.5)p (28.4)p
------------- --------------- -------- ------------- --------------- --------
* Further information about non-underlying items is set out in
note 4.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the year ended 31 October 2015
2015 2014
GBPm GBPm
Loss after tax attributable to equity
holders of the parent as reported (0.4) (54.9)
Items that will not be reclassified
subsequently to profit or loss
Actuarial losses on defined benefit
pension schemes - (4.8)
Movement on deferred tax relating
to pension schemes - 1.1
-------- ----------
- (3.7)
-------- ----------
Items that may be reclassified subsequently
to profit or loss
Exchange differences on translation
of foreign operations (2.6) (14.6)
Current tax on items taken directly
to equity 0.6 -
Deferred tax on exchange differences
on translation of foreign operations (0.6) 0.5
-------- ----------
(2.6) (14.1)
-------- ----------
Total comprehensive loss attributable
to equity holders of the parent (3.0) (72.7)
-------- ----------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended 31 October 2015
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
2014 2.0 230.7 12.9 1.2 (32.6) 95.7 (9.6) 300.3
------------------------- -------- -------- -------- ------------ ------------ --------- ------- ------
Loss after
tax - - - - - (0.4) - (0.4)
Other comprehensive
income/(loss) - - - - 0.3 (2.9) - (2.6)
Tax relating
to components
of other comprehensive
income - - - - - - - -
Total comprehensive
income/(loss) - - - - 0.3 (3.3) - (3.0)
Dividends
paid - - - - - (7.9) - (7.9)
Share-based
payments (net
of settlement) - - - - - 1.2 - 1.2
At 31 October
2015 2.0 230.7 12.9 1.2 (32.3) 85.7 (9.6) 290.6
-------- -------- -------- ------------ ------------ --------- ------- ------
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
2013 2.0 230.7 12.9 1.3 (26.0) 172.5 (9.6) 383.8
------------------------- -------- -------- -------- ------------ ------------ --------- ------- -------
Loss after
tax - - - - - (54.9) - (54.9)
Other comprehensive
loss - - - - (6.6) (12.8) - (19.4)
Tax relating
to components
of other comprehensive
income - - - - - 1.6 - 1.6
Total comprehensive
loss - - - - (6.6) (66.1) - (72.7)
Dividends
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January 21, 2016 02:00 ET (07:00 GMT)
paid - - - - - (12.0) - (12.0)
Share-based
payments (net
of settlement) - - - - - 1.2 - 1.2
Transfers
between reserves - - - (0.1) - 0.1 - -
At 31 October
2014 2.0 230.7 12.9 1.2 (32.6) 95.7 (9.6) 300.3
-------- -------- -------- ------------ ------------ --------- ------- -------
CONSOLIDATED BALANCE SHEET
as at 31 October 2015
2015 2014
GBPm GBPm GBPm GBPm
Non-current assets
Goodwill 121.2 119.7
Development costs 36.1 33.2
Other intangible assets 74.2 85.9
Property, plant and equipment 168.0 177.1
Deferred tax 47.5 31.9
-------- -------- -------- ----------
447.0 447.8
-------- -------- -------- ----------
Current assets
Inventories 96.2 78.1
Trade and other receivables 93.1 90.7
Cash and cash equivalents 7.6 21.8
Derivative financial
instruments 0.5 0.7
197.4 191.3
-------- -------- -------- ----------
Total assets 644.4 639.1
-------- -------- -------- ----------
Current liabilities
Borrowings - (0.3)
Obligations under finance
leases (0.5) (1.0)
Trade and other payables (96.2) (86.0)
Provisions (5.1) (2.9)
Current tax (7.9) (6.7)
Derivative financial
instruments (1.6) (1.7)
(111.3) (98.6)
-------- -------- -------- ----------
Non-current liabilities
Borrowings (161.3) (155.6)
Obligations under finance
leases - (0.4)
Trade and other payables (1.7) (2.0)
Provisions (16.3) (24.1)
Deferred tax (45.1) (35.5)
Preference shares (0.1) (0.1)
Retirement benefit obligations (17.7) (21.8)
Derivative financial
instruments (0.3) (0.7)
-------- -------- -------- ----------
(242.5) (240.2)
-------- -------- -------- ----------
Total liabilities (353.8) (338.8)
-------- -------- -------- ----------
Net assets 290.6 300.3
-------- -------- -------- ----------
Equity
Share capital 2.0 2.0
Share premium account 230.7 230.7
Special capital reserve 12.9 12.9
Revaluation reserve 1.2 1.2
Translation reserve (32.3) (32.6)
Retained earnings 85.7 95.7
-------- -------- -------- ----------
300.2 309.9
Own shares (9.6) (9.6)
-------- -------- -------- ----------
Equity attributable to
equity holders of the
parent 290.6 300.3
-------- -------- -------- ----------
Total equity 290.6 300.3
-------- -------- -------- ----------
CONSOLIDATED CASH FLOW STATEMENT
for the year ended 31 October 2015
2015 2014
GBPm GBPm
Cash flows from operating activities
Cash generated from continuing underlying
operations 35.4 45.9
Cash generated from discontinued underlying
operations - 17.6
------- ------------
35.4 63.5
Acquisition and disposal related costs (0.7) (7.5)
Business restructuring and incident
costs (7.6) (6.4)
Claim related costs (0.1) -
------- ------------
27.0 49.6
Tax paid (1.3) (3.4)
------- ------------
Net cash inflow from operating activities 25.7 46.2
------- ------------
Cash flows from investing activities
Purchases of intangible assets (8.9) (12.1)
Purchases of property, plant and equipment (8.2) (10.9)
Receipt of finance income - 0.2
Receipts from sales of businesses,
net of cash transferred - 137.1
Acquisition of subsidiary undertaking,
net of cash acquired - (1.4)
Proceeds on disposal of property,
plant and equipment - 0.4
Net cash (outflow)/inflow from investing
activities (17.1) 113.3
------- ------------
Cash flows from financing activities
Dividends paid (7.9) (12.0)
Finance expense paid (11.8) (32.8)
Capitalised facility fees paid (1.8) (2.8)
Repayments of borrowings (0.3) (102.1)
Repayments of obligations under finance
leases (0.9) (1.6)
Net cash outflow from financing activities (22.7) (151.3)
------- ------------
(Decrease)/increase in cash and cash
equivalents (14.1) 8.2
Cash and cash equivalents at beginning
of the year 21.8 14.2
Effect of foreign exchange rate changes (0.1) (0.6)
------- ------------
Cash and cash equivalents at end of
the year 7.6 21.8
------- ------------
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 2015 or
31 October 2014 but is derived from those accounts. Statutory
accounts for 2014 have been delivered to the Registrar of
Companies, and those for 2015 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 section 498(2) or section 498(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 2015.
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 post full financial statements that comply with IFRSs on
its website today (see note 12 below).
2. ANALYSIS OF REVENUE
2015 2014
Continuing Discontinued Total Continuing Discontinued Total
GBPm GBPm GBPm GBPm GBPm GBPm
Countermeasures 125.8 - 125.8 96.1 - 96.1
Sensors & Electronics 99.1 - 99.1 154.4 - 154.4
Energetic Systems 152.4 - 152.4 152.6 - 152.6
Discontinued
operations - - - - 71.8 71.8
----------- ------------- ------ ----------- ------------- ------
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January 21, 2016 02:00 ET (07:00 GMT)
377.3 - 377.3 403.1 71.8 474.9
----------- ------------- ------ ----------- ------------- ------
3. ANALYSIS OF UNDERLYING OPERATING PROFIT AND PROFIT
BEFORE TAX
2015 2014
Continuing Discontinued Total Continuing Discontinued Total
GBPm GBPm GBPm GBPm GBPm GBPm
Countermeasures 17.5 - 17.5 9.7 - 9.7
Sensors & Electronics 9.3 - 9.3 31.9 - 31.9
Energetic Systems 15.1 - 15.1 15.0 - 15.0
Discontinued
operations - - - - 2.3 2.3
41.9 - 41.9 56.6 2.3 58.9
Unallocated
corporate costs (7.5) - (7.5) (9.9) - (9.9)
----------- ------------- ------- ----------- ------------- -------
Underlying operating
profit 34.4 - 34.4 46.7 2.3 49.0
Net finance
expense (14.6) - (14.6) (18.6) (0.1) (18.7)
----------- ------------- ------- ----------- ------------- -------
Underlying profit
before tax 19.8 - 19.8 28.1 2.2 30.3
----------- ------------- ------- ----------- ------------- -------
4. RECONCILIATION OF TOTAL OPERATING 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 acquisitions and disposals, business
restructuring and incident costs, profit/loss 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.
Set out below is a reconciliation of total operating profit from
continuing operations to underlying operating profit from
continuing operations:
2015 2014
GBPm GBPm
Total operating profit from continuing
operations 5.5 25.4
Add back:
Acquisition and disposal related
costs 0.5 0.6
Business restructuring and incident
costs 6.4 7.2
Claim related costs 8.5 -
Profit on disposal - (0.5)
Intangible amortisation arising
from business combinations 14.0 13.5
(Gain)/loss on the movement in the
fair value of derivative financial
instruments (0.5) 0.5
------ --------
Underlying operating profit from
continuing operations 34.4 46.7
------ --------
Further details on the non-underlying items are provided earlier
in this announcement.
5. EARNINGS PER SHARE
Earnings per share are based on the average number of shares in
issue, excluding own shares held, of 193,297,912 (2014:
193,296,666) and the loss on continuing operations after tax of
GBP5.3 million (2014: GBP1.4 million). Diluted earnings per share
has been calculated using a diluted average number of shares in
issue, excluding own shares held, of 193,297,912 (2014:
193,296,666) and the loss on continuing operations after tax of
GBP5.3 million (2014: GBP1.4 million). No dilution has been
recognised for the purposes of basic earnings per share due to
there being a loss per share for both the years ended 31 October
2015 and 31 October 2014. Dilution has, however, been recognised in
the calculation of underlying earnings per share for the years
ended 31 October 2015 and 31 October 2014, using a diluted average
number of shares in issue, excluding own shares held, of
197,653,532 (2014: 197,285,824).
The earnings and number of shares used in the calculations are
as follows:
2015 2014
Ordinary Earnings Ordinary Earnings
shares per shares per
Loss Number share Loss Number share
GBPm 000s Pence GBPm 000s Pence
Basic - continuing
operations (5.3) 193,298 (2.7) (1.4) 193,297 (0.7)
Additional shares
issuable other than
at fair value in
respect of options
outstanding - - - - - -
------------ --------- --------- ------------ --------- ---------
Diluted - continuing
operations (5.3) 193,298 (2.7) (1.4) 193,297 (0.7)
------------ --------- --------- ------------ --------- ---------
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/loss 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,
net of related tax effects. The directors consider this measure of
earnings allows a more meaningful comparison of earnings
trends.
2015 2014
Ordinary Earnings Ordinary Earnings
(Loss)/ shares per (Loss)/ shares per
profit Number share profit Number share
GBPm 000s Pence GBPm 000s Pence
Basic (5.3) 193,298 (2.7) (1.4) 193,297 (0.7)
Non-underlying items 21.0 - 10.8 23.8 - 12.3
--------- --------- --------- --------- ------------- ---------
Underlying 15.7 193,298 8.1 22.4 193,297 11.6
--------- --------- --------- --------- ------------- ---------
6. CASH GENERATED FROM UNDERLYING OPERATIONS
2015 2014
GBPm GBPm
Operating profit from continuing operations 5.5 25.4
Operating profit/(loss) from discontinued
operations 4.9 (53.6)
-------- ------------
10.4 (28.2)
Impairment of goodwill - 45.9
Impairment of acquired intangibles - 10.7
Impairment of assets held for sale - 13.6
Amortisation of development costs 6.2 6.5
Intangible amortisation arising from
business combinations 14.0 16.1
Amortisation of patents and licences 0.2 0.2
Loss/(profit) on disposal of non-current
assets 0.3 (0.2)
Depreciation of property, plant and
equipment 16.3 17.0
(Gain)/loss on the movement in the
fair value of derivative financial
instruments (0.5) 0.7
Share-based payment expense 1.2 1.2
Employer contributions to retirement
benefit obligations (5.0) (8.2)
-------- ------------
Operating cash flows before movements
in working capital 43.1 75.3
(Increase)/decrease in inventories (19.1) 2.3
(Increase)/decrease in trade and other
receivables (3.1) 24.0
Increase/(decrease) in trade and other
payables 9.3 (26.8)
Decrease in provisions (5.3) (1.5)
-------- ------------
24.9 73.3
Add back non-underlying items:
Acquisition and disposal related costs (4.4) 8.6
Business restructuring and incident
costs 6.4 7.2
Claim related costs 8.5 -
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Profit on disposal of business - (26.5)
Loss on disposal of associate - 0.9
-------- ------------
Cash generated from underlying operations 35.4 63.5
-------- ------------
7. RECONCILIATION OF NET CASH FLOW TO MOVEMENT
IN NET DEBT
2015 2014
GBPm GBPm
(Decrease)/increase in cash and cash
equivalents during the year (14.1) 8.2
Decrease in debt and lease financing
due to cash flows 3.0 106.5
-------- ------------
(Increase)/decrease in net debt resulting
from cash flows (11.1) 114.7
Effect of foreign exchange rate changes (5.5) 1.3
Amortisation of debt finance costs (2.1) (2.9)
-------- ------------
Movement in net debt (18.7) 113.1
Net debt at beginning of the year (135.6) (248.7)
-------- ------------
Net debt at end of the year (154.3) (135.6)
-------- ------------
8. ANALYSIS OF NET DEBT
As at Exchange As at
1 Nov Cash Non-cash rate 31 Oct
2014 flows changes effects 2015
GBPm GBPm GBPm GBPm GBPm
Cash at bank and in
hand 21.8 (14.1) - (0.1) 7.6
Debt due within one
year (0.3) 0.3 - - -
Debt due after one
year (155.6) 1.8 (2.1) (5.4) (161.3)
Finance leases (1.4) 0.9 - - (0.5)
Preference shares (0.1) - - - (0.1)
------------ ------------- ------------- ------------- -----------
(135.6) (11.1) (2.1) (5.5) (154.3)
------------ ------------- ------------- ------------- -----------
9. DIVIDEND
No final dividend is being proposed. The total dividend for the
year will therefore be 2.4p (2014: 4.1p).
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. EVENTS AFTER THE BALANCE SHEET DATE
On 24 November 2015, the Group reached agreement with Esterline
to buy patents, equipment, stock and selected contracts relating to
Esterline's UK-based subsidiary, Wallop Defence Systems Limited,
for an initial cash consideration of GBP2.5 million. Additional
payments of up to GBP9.0 million, which are conditional on the
receipt of specific orders in the future, may be made over the next
three years. The assets to be purchased relate to air
countermeasures and pyrotechnic products, which, pending regulatory
approval, will be manufactured at Chemring's existing UK operations
and further expand the Group's product offerings in
Countermeasures. Completion of the transaction, which is subject to
approval by the MoD and the CMA, is expected to occur in early
2016. The asset purchase agreement contains customary warranties,
representations, indemnities and covenants for a transaction of
this nature.
Further to the announcement on 26 October 2015, the Board
announced on 21 January 2016 a fully underwritten rights issue to
raise gross proceeds of approximately GBP80.8 million to reduce its
indebtedness. The Rights Issue is being pursued in order to assist
the Group with reducing its indebtedness, thereby enabling
additional time and resources to be made available for further
operational improvement and capturing the longer-term growth
opportunities available to the Group. As set out earlier, the
Group's debt providers have agreed to waive any event of default
and amend the operation of the relevant covenants to ensure the
Group remains in compliance with its facility agreements. These
changes represent only a one-time modification that does not
fundamentally address the Group's balance sheet and capitalisation
concerns over the longer term. The Board believes that a
medium-term net debt to EBITDA target ratio of between 1.0x and
1.5x as an average annual is appropriate for the Group; the
proposed rights issue is a critical step towards achieving this
target.
Net proceeds of GBP75.2 million will be used to redeem GBP48.5
million in aggregate principal amount of the loan notes, with the
balance used for make-whole premiums, waiver fees and general
corporate purposes, with the Board having regard to future debt
maturities.
The Rights Issue is a fully underwritten 4 for 9 Rights Issue at
a price of 94 pence per new share issued. The issue price
represents a 38.2% discount to the theoretical ex-rights price of
an existing share, when calculated by reference to the closing
middle-market price of 178 pence per existing share on 20 January
2016 (being the last business day prior to the date of the
announcement of the Rights Issue). The Rights Issue is subject to
shareholder approval.
12. 2015 ANNUAL REPORT AND ACCOUNTS
The annual report and accounts for the year ended 31 October
2015 will be posted to shareholders on 19 February 2016. They will
also be available from that date at the registered office, Roke
Manor, Old Salisbury Lane, Romsey, Hampshire, SO51 0ZN. A copy will
be posted on the Company's website, www.chemring.co.uk, today.
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 five 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 quarterly to 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's key performance indicators also give insight into how these
risks and uncertainties are being managed. The Group mitigates
certain elements of 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. Upset conditions can occur during manufacturing
operations which may expose employees to increased quantities of
hazardous materials. The handling and disposal of energetics waste
can result in unplanned ignitions.
Incidents may occur which could result in harm to employees, the
temporary shutdown of facilities or other disruption to
manufacturing processes. The Group may be exposed to financial
loss, regulatory action, potential liabilities 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. The Board is committed to ensuring that
the Group's leadership operates with health and safety as the top
priority, and that the strength of the Group's safety culture and
the quality of its protective systems deliver operations where all
employees and visitors feel and are absolutely safe.
The Group's Safety Leadership Programme continues to be
rolled-out across the businesses, and has now been attended by more
than 130 senior employees. A "train-the-trainer" module has been
developed to enable the business units to run the programme
locally.
All employees 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 individuals.
All employees are encouraged to report potential hazards, and to
raise any health and safety concerns through the appropriate
channels.
A culture assessment tool has been developed for the internal
health and safety audit programme.
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 safety audits of operations are
undertaken on a regular basis.
Improved processes for managing upset conditions have been
adopted.
Following an incident at Chemring Australia's burning ground,
all waste burning sites and associated processes were audited
during the year, and an improvement programme has since been
implemented to raise standards across the Group.
All businesses are expected to pro-actively manage their own
risks but, in addition, the most significant 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.
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January 21, 2016 02:00 ET (07:00 GMT)
-- Environmental laws and regulations - The Group's operations
and ownership or use of real property are 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 may be 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 monitoring 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.
-- 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. Defence spending may therefore be
subject to significant fluctuations from year to year. Given the
large budget deficits and the prevailing economic conditions in
many NATO countries, there may be continued downward pressure on
defence budgets.
The Group's financial performance may be adversely impacted by
lower defence spending by its major customers. Short-term trading
and cash constraints may impact on the Group's ability to invest in
longer-term technologies and capabilities.
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 continues to
make progress on developing its routes to market in the Middle
East, India and the Far East.
The Group continually assesses whether its planned organic
growth strategies and product developments align with government
priorities for future funding. Opportunities for development of
commercial products are being explored in some areas.
Actions have been taken to restructure and "right-size" the
businesses, and reduce overheads, to ensure the businesses remain
sustainable. Further site consolidation continues to be explored,
within the constraints imposed by export control legislation and
customer requirements.
-- 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 cover
multi-year requirements. The Group anticipates that delays in the
placement of orders by NATO customers, as a result of budgetary
constraints, are likely to continue in the short to medium
term.
An unmitigated delay in the receipt of orders could affect the
Group's earnings and achievement of its budget, in any given
financial year.
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.
To mitigate the order placement dynamics within NATO markets,
the Group continues to focus 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 also 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, aimed at restoring the profitability of those Group
businesses which have suffered most from order delays.
Site optimisation plans continue to be refined to ensure that
the Group utilises its manufacturing facilities as efficiently as
possible, within the constraints imposed by export control
legislation and customer requirements.
-- Contract-related risks - The Group's government contracts may
be terminated at any time and may contain other unfavourable
provisions. The Group may need to commit resources in advance of
contracts becoming fully-effective, to ensure prompt fulfilment of
orders or to enable conditions precedent to be met.
The Group may suffer financial loss if its contracts are
terminated by customers, or a termination arising out of the
Group's default may have an adverse effect on its ability to
re-compete for future contracts and orders.
The Group negotiates with customers to ensure that the most
favourable contractual terms are agreed. Areas of significant
judgment or enhanced risk require the review and approval of the
executive directors. The Group endeavours to negotiate stage
payments with its customers wherever possible, in order to minimise
exposure to significant cash outflows on contracts which may be
terminated at short notice.
-- Political risks - The Group is active in several countries
that are suffering from political, social and economic instability.
In addition, there is a significant risk of political unrest and
changes in the political structure in certain non-NATO countries to
which the Group currently sells.
The Group's business in certain countries may be adversely
affected in a way that is material to the Group's financial
position and the results of its operations.
Political changes could impact future defence expenditure
strategy and the Group's ability to export products to certain
countries. During periods of unrest, delays in obtaining export
licences can result in delayed revenue.
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.
Wherever possible, the businesses implement financing
arrangements, such as letters of credit and advance payments, 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 continues to explore opportunities for collaboration
on the establishment of local manufacturing operations in certain
countries, which may remove some of the uncertainty regarding
export of products.
-- 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 an increased risk
of loss of key personnel. 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.
If key personnel are not incentivised appropriately to remain
within the Group, its operations may suffer from loss of management
expertise and knowledge.
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.
Succession plans are being developed further throughout the
business.
-- Manufacturing risks - The Group's manufacturing activities
may be exposed to business continuity risks, arising from plant
failures, supplier interruptions or quality issues.
Site consolidation plans may not be effectively implemented.
Interruptions to production and sales could result in financial
loss, reputational damage and loss of future business.
Failure to complete planned site consolidation activities may
result in long-term inefficiencies, and increasing misalignment of
organisational skills and market requirements.
All of the Group's businesses are required to prepare business
continuity plans.
The Group continues to refine its requirements for reporting of
key performance indicators, 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.
Detailed plans are developed for all restructuring and
consolidation projects, and progress is monitored by the Group
Executive Committee.
-- Technological risks - The Group may fail to maintain its
position on key future programmes due to issues with capability
development, technology transfer or cost-effective manufacture.
The Group needs to continually add new products to its current
range, through innovation and continuing emphasis on research and
development. New product development may be subject to delays, or
may fail to achieve the requisite standards to satisfy volume
manufacturing requirements and the production of products against
high reliability and safety criteria to meet customer
specifications.
The Group also needs to ensure that it continues to upgrade its
existing product range to compete with emerging technologies.
Failure to obtain production contracts on major development
programmes may significantly impact the future performance and
value of individual businesses. Failure to complete planned product
development and upgrades successfully may have financial and
reputational impacts, and may result in obsolescence or loss of
future business.
(MORE TO FOLLOW) Dow Jones Newswires
January 21, 2016 02:00 ET (07:00 GMT)
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