RNS No 7669a
CHEMRING GROUP PLC
17th December 1997
CHEMRING GROUP PLC
Preliminary Results for the Year Ended
30 September 1997
New top level management
Group to concentrate on core businesses
Strong core business order book, at record level
Core businesses made operating profit of #901,000 in second
half
Non-core businesses to be disposed of in an orderly way
Dividend for whole year 3.0p
Total Group turnover for year #64,653,000
Exceptional write-offs #19,938,000 including goodwill on
acquisition of non-core businesses of #9,191,000
Commenting on the results, Ken Scobie, Chairman said: As a result
of the review your Board believes the Group has a solid future
which will enable us to grow. The orderly disposal of non-core
businesses will enable us to reach an acceptable level of debt.
For further enquiries, please contact:
Ken Scobie, Chairman Chemring 0171 930 0777
Peter Molony, Chief Executive Chemring 0171 930 0777
Peter Gaze Cardew & Co 0171 930 0777
STATEMENT BY THE CHAIRMAN
I was appointed Chairman in June 1997 to implement a fundamental
reorganisation and recovery plan of the Group.
In July 1997 Peter Molony, who has previous experience of similar
problems to those faced by the Group, was appointed Group Chief
Executive.
A detailed strategic review was completed in September and
approved by the Board. The direction determined by your board is
set out in this statement. The businesses which are core and
employ the Group s strengths will be retained; those that are non-
core and peripheral will be disposed of in an effective but orderly
manner.
Looking back over recent years, it is apparent that the Group
diversified into non-defence industries with the main purpose of
reducing its dependence on defence-related activities. The concept
was not successful for a number of reasons. Some newly acquired
businesses were bought for too high a price, and mostly proceeded
to absorb funds, not deliver expected returns, creating inexorable
pressure on the Group s borrowing.
Your Board believes the Group has a solid future based on a more
focused set of activities which will enable us to resume growth.
The orderly disposal of non-core businesses will enable us to reach
an acceptable level of debt.
STRATEGIC ISSUES
As a result of the review, your Board determined that the Group
must re-focus its activities with the objectives of returning the
Group to profitability and reducing debt to an acceptable level.
The Group will concentrate on its historical competences in
countermeasures, pyrotechnics and marine safety.
The Board has taken into account the variability of defence budgets
internationally but believes Chemring s range of products and
presence in over 70 countries provides a secure base for the
future.
RESULTS
The profit and loss account has been split between core and non-
core activities. Turnover reduced from #80,382,000 to #64,653,000,
with the major fall in sales being experienced in our core defence
business. At the operating level, before exceptional items, the
loss of the continuing core activities was #197,000 and the loss of
the non-core activities was #117,000.
The Group s loss before tax credits, after exceptional items, was
#24,022,000. The exceptional items, below operating loss, of
#18,518,000 include goodwill of #9,191,000 previously written-off
on acquisition of certain non-core businesses. Whilst this
goodwill adjustment has no impact on the Group s total capital and
reserves, we have written down the cost of investments on non-core
businesses in the parent company. This has reduced distributable
reserves available for payment of dividends.
Shareholders funds have fallen to #10,120,000 while the Group s
net bank borrowings at the year end were #18,472,000.
BANK INDEBTEDNESS
In April the Group arranged additional banking facilities and
subsequently, both the Medium Term Loan and overdraft have been
confirmed. Your Board is satisfied that the facilities in place
provide the Group with adequate cover.
Your Board expects to restore the Group s level of debt to an
acceptable level within two years. That will be accomplished by:
the sale of the businesses classified as non-core activities
the disposal of surplus properties
improving retained earnings
better working capital management
DIVIDENDS
Last year was exceptional. The Board recommends a total dividend
for the year of 3.00p, which reflects the difficulties the Group
has experienced. Accordingly a final dividend of 1.00p will be
recommended to shareholders. As a result of the detailed review of
operations and the action programme that has resulted, your Board
takes a more positive view of the future and expects to rebuild
dividend levels as the Group s financial performance recovers.
REPORTING PERIODS
The Group s reporting periods end in March for the half-year and in
September for the full year. These months coincide with major
peaks associated with the defence industry. In order to avoid this
concentration, the Group s year end for 1997/98 will be extended by
one month. This will not affect the interim period to March 1998.
PEOPLE
Given the difficulties of the past year, I must pay special tribute
to all the people who have responded so magnificently. This is no
less true at the present time, given that the strategic decisions
have not for the most part been carried out and individuals will be
affected by those decisions.
BOARD
When Sir William Barlow took on the role as Chairman following
Philip Billington s resignation on 6 May, he indicated that he
would not wish to stay on following my appointment; he resigned on
4 September and his advice will be much missed. On 15 July, Peter
Molony was appointed to the Board: he, David Evans and Ray Gibbs
constitute the Executive Committee responsible to the Board for the
day-to-day management of the Group.
PROSPECTS
Your Group has a clear strategy for the future. I am confident
that when I report to you next, I will be able to demonstrate a
recovery in the fortunes of the Group through an improvement in our
financial performance, progress on the disposal programme and a
reduction in Group debt.
K C Scobie
Chairman
REVIEW BY THE CHIEF EXECUTIVE
CONTINUING CORE BUSINESSES
The Group s core activities are covered under the following
headings:
Defence Trading and Brand Names
Countermeasures Pains-Wessex,Chemring
Countermeasures,
Alloy Surfaces
Military Pyrotechnics and Explosives Pains-Wessex,Haley& Weller,
Schermuly
Non-Defence
Marine Safety Pains-Wessex, McMurdo, Nova
Marine
Chemical and Plating Systems Alloy Surfaces,Pulse
Plating, Chemring Plating
Systems
Turnover in core activities at #39.6 million was #13.2 million
(25%) below the previous year s performance. The decline was
primarily due to a shortfall in defence orders in the first half of
the year. The turnover was split 56/44% between defence and non-
defence.
DEFENCE CORE BUSINESSES
The fall in defence turnover was initially due to a low opening order book of
#6.4 million, which did not start to recover until the second half. It was
reported at the half year that the unprecedented low order intake reflected a
combination of delays by customers placing orders for known requirements and
existing customers reducing reserve stock levels.
Margins suffered because of inefficiencies resulting from the
downturn in sales and from the effect of redundancies during the
restructuring to reduce the cost base.
During the second half of the year, the order book recovered
substantially to provide an opening position for the current year
of #20 million. In the first month of the new financial year, this
increased to #25 million, providing full order cover for budgeted
defence sales in the first half.
Countermeasures
The Group is a world leader in the development and manufacture of
expendable countermeasures to protect military platforms.
Because of the delays to orders in 1997, turnover at #8.4 million
was #5.1 million down. The order book has recovered from #1.6
million in September 1996 and opens 1997/98 at #12 million.
In the first half of the year, the chaff business was relocated
from Portsmouth and integrated into the Pains-Wessex operation; the
reduction in overheads will benefit 1998 performance.
T h e c ountermeasures sales and marketing teams have been
strengthened. A Chemring Countermeasures identity has been
established in the market place.
For aircraft countermeasures, the most significant contract over
the last year was the OER 2/89 infra red flare contract, for the
development and production of a new advanced flare for tactical
aircraft. The development phase has been completed and production
has commenced. Applications will include the RAF s front line
squadrons in the Gulf and Bosnia. We have also been awarded the
prestigious Eurofighter EFA 2000 flare development and production
contract. Development will take place over the next year, with
production commencing in late 1998.
These two contracts and Chemring s chaff capability firmly place
Chemring as the leading European producer of airborne passive
countermeasures.
There were no requirements for chaff from UK MoD in the year under
review. A chaff contract for the German Air Force should lead to
increased requirements for 1998. Activity is building in the US
for substantial quantities of chaff as the BOL dispenser is
qualified on USN F18s and USAF F15s, with possible production
orders towards the end of 1998.
The RAF has accepted the proprietary Chemring Chaff Block (CCB)
after a successful series of flight trials that started in February
and were finally completed in October in the US. The CCB will go
on the C130, Canberra, and Nimrod 2000. The new M130 Chaff Block
has entered a similar series of trials for RAF, RN and Army
Helicopters.
The CCB and M130 Block have paved the way for a new generation of
Chemring products called the MEB (Modular Expendable Blocks). MEBs
will incorporate both flare and chaff material and are targeted for
helicopters and light fast jet aircraft. The MEBs will be on the
UK Attack Helicopter, the Czech L159, the South African Revoilk and
Oryx Helicopters, the Lynx and the Hawk.
In the naval market this year, there were few orders but the
situation has improved. We launched a new distraction round, for
which a first production contract is expected. Orders have been
received for the Pirate IR round and Mk214 Seagnat chaff round for
delivery in 1998. Other research and development includes the new
Chemring 130mm dual chaff/IR round (which is being tested in early
1998 by the Danish Navy) and solutions for the joint UK/USA Tracer
project.
Alloy Surfaces, our US subsidiary, opens the current year with a
record order book of US$10.7 million and will move to a new
facility next year to cope with expansion plans. Alloy s special
materials feature in almost all new advanced flare countermeasures
development programmes for air and naval use in the USA.
Military Pyrotechnics and Explosives
The Group is a leading supplier to the UK MoD, and worldwide, of
its range of specialist pyrotechnic and explosive products used in
training and other non-aggressive operations.
Sales declined by #7.8 million to #13.8 million in the year, of
which #5 million of the reduction was in UK MoD business. Two
significant orders were received from UK MoD for miniflares and
rockets in September 1997 for delivery in 1998. The opening order
book was #7.9 million, compared to #4.8 million at September 1996.
Over the past two years a number of competitors have dropped out of
the market, opening wider opportunities for collaboration with
overseas companies and governments. We have entered into several
new collaborative ventures this year including one with Royal
Ordnance. The agreement encourages both companies to focus on
their respective core strengths in pyrotechnics and explosives.
The agreement will assist Royal Ordnance and Chemring to supply the
UK MoD and their many overseas customers with a service that is
comprehensive in its range of products and competitive in the world
market.
NON-DEFENCE CORE BUSINESSES
Non-defence core sales were static in the year at #17.5 million.
However, we expect growth in this area as market demand for Pulse
Plating increases and additional marine legislation driven by the
EU comes into force.
Marine Safety
The Group has leading international brand names in marine safety.
Its range of marine products includes pyrotechnics, emergency
safety beacons, radar transponders, lights and VHF radios.
Turnover in marine safety remained stable in 1997 at #14 million.
New legislation for marine lights and VHF radios comes into force
during 1998 and products have been developed to meet these
requirements.
A lower cost EPIRB is planned for 1998. McMurdo has developed an
innovative hydrostatic release unit that is currently undergoing
approval.
McMurdo has recently broken into the US market for aviation lights
and has received substantial orders for these products.
Margins are under pressure from the strong pound, against which
unit costs are decreasing.
Chemical and Plating Systems
Alloy Surfaces special chemicals for use in diffusion coating of
engine components has benefited from an upturn in the aerospace
sector and demand is expected to remain at current levels
throughout 1998.
Chemring Plating Systems is well accepted in the market place and
achieved turnover of over #1.5 million in 1997. Sales have been
made to leading printed board manufacturers in Europe and the Far
East. The management has been strengthened to pursue significant
sales potential worldwide. A recent order from Ruwelwerke in
Germany to equip two of their plants gets 1998 off to a good start.
PROSPECTS
The new financial year has started well with a healthy level of
orders and a continuing high level of enquiries for our niche range
of products. Restructuring has been completed and the management
is in place to ensure the success of continuing core businesses.
NON-CORE BUSINESSES UNDER REVIEW
Hutchwilco - Buoyancy Aids
Hutchwilco New Zealand is a long-established leader in the field of
buoyancy aids, mainly flotation jackets. It has benefited from
tight safety regulations in New Zealand and retains more than 50%
of that country s market, and about one fifth of the Australian
market. A new and patented moulded jacket for the wet bike market
is generating interest, with private label sales into the US
already in sight of our 1998 targets. Approximately one third of
sales comprise wholesale accessories and chandleries in the yacht
market. Hutchwilco moved its office and manufacturing facilities
from Wellington to Auckland during the year with a consequent
reduction in overheads. Turnover in 1996/97 was #2 million.
Kembrey - Cable Harnesses
Kembrey Wiring Systems, based in Swindon, is one of the largest UK
manufacturers of high specification cable harnesses for the
aerospace and rail mass transit markets. The company has a strong
order book for more than a year ahead, and an excellent reputation
for supplying quality wiring systems to manufacturers of aircraft
engines and rail systems. Major customers include Rolls-Royce and
GEC Traction. Growth is budgeted to continue in 1998. Turnover in
1996/97 was #5 million.
McMurdo - Connectors
McMurdo Connectors, located in Portsmouth, designs, manufactures
and supplies electrical connectors. The company represents a
relatively small percentage of the enormous electrical supply
industry, but has an excellent brand name going back more than half
a century. Through this reputation, and by constantly proposing
new solutions to its distributors, McMurdo has established a strong
position in its niche markets. Turnover in 1996/97 was #4 million,
of which exports were 15% and sales direct to OEMs including GEC
and Lucas were 24%.
McMurdo - Minerally Insulated Cable Extrusions
McMurdo MICE, located in Portsmouth, manufactures a range of brass
end-fittings mainly under contract to BICC. Turnover in 1996/97
was nearly #1 million.
Octavius Hunt - Specialist Smokes
Octavius Hunt, located in Bristol, manufactures smokes for
specialist applications, such as fumigation and pest control.
Turnover in 1996/97 was #1.8 million.
Ronstan - Rigging and Deck Fittings
Ronstan is a leading international brand in the manufacture and
distribution of marine fittings. In addition to acting as agent
for other marine brands, Ronstan has pioneered the use of yacht
fittings for architectural purposes, both decorative and
functional. Many products are manufactured in its factory in
Melbourne, where the facilities are skilled and flexible, including
injection moulding, stainless steel machining, tool repair and
design. Turnover in 1996/97 was #8 million.
Vacuum Reflex - Specialist Clothing
Vacuum Reflex, located in Ipswich, manufactures a range of
specialist bespoke clothing, mainly military protective clothing
for the MoD, and contract uniforms. Turnover in 1996/97 was
#1.3 million.
DISCONTINUED BUSINESSES
Microsulis - Medical Microwave Device
Microsulis, located near Portsmouth, has developed a specialist
microwave technique for treating certain medical conditions.
Successful trials and academic approvals have been encouraging, but
sales have been slow. Terms for the sale of the technology and
undertaking were agreed in September, and since then the business
has been run for the benefit of the purchaser. It was sold for a
nominal sum on 5 December 1997.
Toggi and Splashdown - Specialist Clothing
This business was closed down on 11 June 1997, when the stock was
sold to Grampian Holdings plc.
FINANCE
Funding and Treasury Management
The Group s principal bankers, National Westminster Bank, agreed a
five year LIBOR loan for #12 million on 29 July 1996. The rate of
interest is hedged at an effective rate of 8%.
Overdraft facilities of #11 million have been agreed, together with
bonding and other requirements, through 1998. For the most part,
overseas companies maintain their own banking facilities, which
they operate in credit.
In the majority of cases, companies in the Group invoice in their
own currency, so that exposure on the profit and loss account is at
a minimum. In the rare cases that the UK companies invoice in a
currency other than sterling, appropriate forward contracts are
sought.
Cash Flow
The consolidated cash flow statement is on page 15. The Group
generated substantial cash from its operating activities, almost
exclusively from improvement in working capital. This improvement
arose partly from the drop in turnover, but also from tighter
control of stocks and debtors. A continuing regime of tight
control on cash and working capital resources has been implemented
in parallel with the budgets for 1997/98. The overdraft facilities
will provide adequate cover for the Group; a good margin of
headroom has been maintained over the last six months.
Future Investment
The budgets for 1997/98 include planned expenditure on capital
programmes, both hardware and computer systems, of #3.8 million.
This figure should reduce as new owners are found for our non-core
businesses.
A major investment exceeding US$5 million has been approved by the
Board for the relocation of Alloy Surfaces to a new building and a
new site; #1.6 million of this arises in 1997/98.
The investment by Pains-Wessex (Australia) in a new site and
licenced buildings outside Melbourne, at a cost of A$2.4 million,
was completed in September 1997.
Management and Budgeting
David Evans is responsible to me for all core businesses, except
Chemring Plating Systems, which together with all the other
businesses report directly to me.
Every business in the Group is injuncted to remain within its
budgeted plans for the year, all reports against budget arriving at
Head Office on the 12th day following the end of each reporting
period.
Results are reviewed by the Executive Committee, which is composed
of the Managing Director of Pains-Wessex (David Evans), the Finance
Director (Ray Gibbs) and myself. The Committee meets at least
every two weeks, and reviews all corporate, legal and executive
matters which require attention by Head Office.
Head Office
In mid October 1997, Head Office transferred from a freehold
property on the Solent Business Park to smaller premises on a 5
year minimum lease. The freehold property was sold for #840,000
(before costs) on 31 October. Total personnel at Head Office has
been reduced to 11.
P J Molony
Chief Executive
SUMMARY FINANCIAL INFORMATION
FOR THE YEAR ENDED 30 SEPTEMBER 1997
Year 6 month Year
ended period ended
30 Sep ended 30 Sep
1997 3 Apr 1997 1996
#000 #000 #000
Turnover: Core Businesses
Defence
Countermeasures 8,411 3,781 13,469
Pyrotechnics and
explosives 13,751 5,782 21,616
Non-Defence
Commerical marine 14,154 6,351 14,768
Chemical and Plating
Systems 3,323 1,756 2,996
39,639 17,670 52,849
Turnover: Non-Core Businesses 25,014 13,500 27,533
64,653 31,170 80,382
Operating (loss)/profit
before all exceptional items
Core businesses (197) (1,098) 9,027
Non-core businesses (2,413) (93) 918
All exceptional items
Goodwill written off 9,191 3,400 -
Other 10,747 7,879 794
19,938 11,279 794
Pre-tax (loss)/profit after
all exceptional items (24,022) (13,119) 8,107
Shareholders funds 10,120 13,565 23,227
Dividend per ordinary share 3.00p 2.00p 11.45p
AUDITED CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 30 SEPTEMBER 1997
1997 1997 1997 1996
Core Non-Core Total Total
#000 #000 #000 #000
Turnover
- Continuing 39,639 22,533 62,172 76,788
- Discontinued - 2,481 2,481 3,604
39,639 25,014 64,653 80,382
Operating (loss)/profit
- Continuing
- normal operations (197) (117) (314) 10,556
- exceptional items (1,420) - (1,420) -
(1,617) (117) (1,734) 10,556
- Discontinued
- normal operations - (2,296) (2,296) (611)
- exceptional items - - - (794)
- (2,296) (2,296) (1,405)
(1,617) (2,413) (4,030) 9,151
Exceptional Items (see
below)
Loss on disposal of
discontinued operations (4,608) -
Fundamental
reorganisation of
continuing operations (12,523) -
Loss on disposal of fixed
assets in continuing
operations (1,387) -
(18,518) -
(Loss)/profit on ordinary
activities before
interest (22,548) 9,151
Associated undertaking 98 166
Interest payable (1,572) (1,210)
(Loss)/profit on ordinary
activities after taxation (24,022) 8,107
Tax on (loss)/profit on
ordinary activities 2,250 (2,785)
(Loss)/profit on ordinary
activities after taxation (21,772) 5,322
Dividends (715) (2,704)
Retained (loss)/profit
for the year (22,487) 2,618
(Loss)/earnings per
ordinary share (92.05)p 22.60p
(Loss)/earnings per
ordinary share fully
diluted before
exceptional items and
excluding non-core
business (4.69)p 24.50p
(Loss)/earnings per
ordinary share fully
diluted after exceptional
items and including non-
core businesses (90.30)p 22.30p
Exceptional items (see
above)
Goodwill written off 9,191 -
Other exceptional items 9,327 -
18,518 -
AUDITED CONSOLIDATED BALANCE SHEET
AS AT 30 SEPTEMBER 1997
1997 1996
#000 #000 #000 #000
Fixed Assets
Intangible assets 243 610
Tangible assets 18,499 19,882
Investments 843 808
19,585 21,300
Current Assets
Stocks 13,359 16,241
Debtors 15,804 24,041
Cash at bank and in
hand 1,506 4,572
30,669 44,854
Creditors-
Amounts falling due
within one year (27,133) (28,780)
Net Current Assets 3,536 16,074
Total Assets Less
Current Liabilities 23,121 37,374
Creditors-
Amounts falling due
after more than one
year (13,001) (13,598)
Provisions for
Liabilities and
Charges - (549)
10,120 23,227
Capital and Reserves
Called up share
capital 1,246 1,243
Reserves
Share premium account 10,771 10,698
Revaluation reserve 2,866 1,596
Revenue reserves (4,763) 9,690
8,874 21,984
Shareholders Funds 10,120 23,227
Attributable to
equity shareholders 10,058 23,165
Attributable to non-
equity shareholders 62 62
10,120 23,227
AUDITED CONSOLIDATED CASH FLOW STATEMENT
AS AT 30 SEPTEMBER 1997
1997 1996
#000 #000 #000 #000
Net cash flow from
operating activities 10,251 7,997
Loss on discontinued
operations (2,912) -
Fundamental
reorganisation of
operations (4,453) - -
2,886 7,997
Returns on investments
and servicing of
finance (1,553) (1,213)
Taxation (241) (2,119)
Capital expenditure (2,274) (5,787)
Acquisitions and
disposals - (625)
Equity dividends paid (2,290) (2,608)
Cash outflow before
use of liquid
resources and
financing (3,472) (4,355)
Financing
- issue of shares 76 172
- increase in debt 414 12,514
490 12,686
(Decrease)/increase in
cash in the year (2,982) 8,331
Reconciliation of net
cash flow to movement
in net debt
(Decrease)/increase in
cash in the period (2,982) 8,331
Cash inflow from the
increase in debt and (414) (12,514)
lease financing
Change in net debt
resulting from cash (3,396) (4,183)
flows
Translation difference (670) -
(4,066) (4,183)
END
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