TIDMCHG
RNS Number : 7541B
Chemring Group PLC
21 June 2016
FOR IMMEDIATE RELEASE 21 JUNE 2016
CHEMRING GROUP PLC
INTERIM RESULTS FOR THE SIX MONTHS TO 30 APRIL 2016
Continuing operations H1 2016 H1 2015
Revenue GBP180.1m GBP161.7m
Underlying operating profit(1) GBP3.8m GBP5.5m
Underlying loss before tax(1) GBP(4.0)m GBP(1.3)m
Net debt at 30 April GBP114.4m GBP148.5m
Net debt at 31 October GBP154.3m
Underlying loss per share(1,2) (1.3)p (0.5)p
Dividend per share - 2.4p
Total operating loss GBP(5.3)m GBP(8.3)m
Loss before tax GBP(16.8)m GBP(15.1)m
Total loss per share(2) (5.3)p (4.9)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, as stated in the 2015 Annual Report and
Accounts. Further details of underlying and total measures are
shown in notes 3 and 6.
2 Earnings per share figures for periods prior to the rights
issue have been restated to reflect the bonus element of the rights
issue.
Highlights
-- Revenue up 11.4% on comparative period, with increases in all
three strategic segments. Underlying operating profit GBP1.7
million below prior year due principally to lower margin sales mix,
phasing of revenue within FY16, and contract-specific issues
resolved in the half
-- Delayed 40mm ammunition contract now fully effective, with initial revenue recognised
-- Order book increased to GBP591.3 million (31 October 2015:
GBP569.6 million), with deliveries of over GBP240 million scheduled
in H2 representing approximately 90% of expected H2 revenue
-- Significant H2 weighting driven by substantial increase in
40mm contract revenues and greater consistency in production
-- FY16 full year anticipated to be slightly below market expectations(*)
-- Successful completion of rights issue and subsequent
repayment of GBP48.8 million of US loan notes, reducing future
finance costs
-- Renewed focus on operational improvement centred on site
rationalisation, process optimisation and working capital
management
-- Refreshed Board composition, with appointment of
Chairman-designate and two further non-executive directors
* As of 20 June 2016, Chemring's compiled consensus of analysts'
forecasts was for FY16 underlying operating profit of GBP48.7
million
Michael Flowers, Chemring Group Chief Executive, commented:
"While revenues increased in every segment, the H1 result was
impacted by the slightly later than expected commencement of the
40mm contract, together with a lower margin sales mix, phasing of
revenue within FY16, and contract-specific issues resolved in the
half. This performance contrasts with a growing sense of momentum
across the business as operational improvement initiatives are
accelerated following the deleveraging resulting from the rights
issue.
We continue to expect our full year FY16 result to be heavily
weighted to the second half, due to substantially higher 40mm
contract revenues and greater consistency in production. Whilst it
is encouraging that approximately 90% of expected H2 revenue is in
the order book, the Board's current assessment is that the FY16
out-turn is likely to be slightly below market expectations.
Having significantly strengthened the balance sheet through the
rights issue, we are now able to focus fully on the operational
priorities that will underpin our future growth. These priorities
include site rationalisation and capacity investment projects,
implementing significant cost saving initiatives, ensuring
excellence in contract delivery and delivering improved working
capital management. This work is being done while maintaining the
highest standards of safety and progressing key strategic long-term
US programmes."
For further information:
Group Chief Executive, Chemring
Michael Flowers Group PLC +44 (0) 1794 833901
Group Finance Director, Chemring
Steve Bowers Group PLC +44 (0) 1794 833901
Group Director of Corporate Affairs,
Rupert Pittman Chemring Group PLC +44 (0) 1794 833901
+44 (0) 20 3128
Andrew Jaques MHP Communications 8100
James White
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 2,700 people worldwide, and with
production facilities in four countries, Chemring meets the needs
of customers in more than fifty countries
-- Chemring is 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 ("R&D"), Chemring has the agility to
rapidly react to urgent customer needs
www.chemring.co.uk
Presentation
The presentation slides and a live audio webcast of the
presentation to analysts will be available at the Chemring Group
results centre www.chemring.co.uk/resultscentre at 09.30 (UK time)
on Tuesday 21 June 2016. The presentation can also be listened to
at that time by dialling +44 (0)20 3059 8125 and using the
participant password 'Chemring'. A recording of the audio webcast
will be available later that day.
Photography
Original high resolution photography is available to the media
by contacting Tom Horsman, MHP Communications: tom.horsman@mhpc.com
/ tel: +44 (0) 20 3128 8100.
INTERIM MANAGEMENT REPORT
Group overview
Revenue increased by 11.4% to GBP180.1 million (2015: GBP161.7
million) and underlying operating profit was GBP3.8 million (2015:
GBP5.5 million). There was an underlying loss per share of 1.3p
(2015: 0.5p). The results were principally impacted by a lower
margin sales mix, phasing of revenue within FY16, and
contract-specific issues resolved in the half. In H2 FY16,
substantially higher 40mm contract revenues and greater consistency
in production are expected. These and other factors are expected to
lead to a significant H2 weighting of profit and cash generation in
FY16, with working capital having risen in H1 in support of
expected H2 revenues.
The Group's order book at 30 April 2016 was GBP591.3 million (31
October 2015: GBP569.6 million), of which over GBP240 million is
scheduled for delivery during H2 FY16, representing cover of
approximately 90% of expected H2 revenue.
Markets
Global levels of defence spending remain broadly flat, and the
Board's expectation continues to be one of slow recovery. US
spending appears to be levelling, with the outlook for 2017 being
slightly more positive at the macro level. In Western Europe,
spending is flat but, importantly, countries with the largest
budgets, including the UK, have all signalled growth in coming
years. In the Middle East, outlook for defence spending is
uncertain, with the effects of regional instability conflicting
with the constraints of lower oil prices. In the Asia Pacific
region, there is growth in defence spending in Chemring's key
markets in the region, including Australia, India, Japan and
Singapore.
Chemring's areas of focus in the defence sector reflect these
broader themes, with US countermeasures procurement expected to
remain at the current low levels, but the broader global
countermeasures market being stronger. Customer budgets for Roke's
security-related consultancy services are rising, but production
awards for Sensors & Electronics products continue to be
subject to protracted customer decision making processes. Within
Energetic Systems, uncertainties over the oil price are, as
expected, translating into extended funding and procurement delays,
particularly for pyrotechnic products. In our long-term growth
areas, the US Programs of Record for counter-IED, chemical and
biological detection, and the F-35 Joint Strike Fighter ("F-35")
project, progress is continuing in line with our expectations,
whilst the global market for land-based electronic warfare
continues to grow.
Despite the slow recovery expected in global levels of defence
spending, growth opportunities continue to be pursued in Chemring's
traditional defence markets, as well as in national security and
non-defence sectors.
Board of directors
There has been a significant change in the composition of the
Board.
Ian Much and Andy Hamment stood down from the Board on 21 March
and 20 April 2016 respectively. Nigel Young succeeded Ian Much as
Senior Independent Director with effect from 21 March 2016.
Carl-Peter Forster joined the Board on 1 May 2016 as an
independent non-executive director and Chairman-designate. He and
will succeed Peter Hickson as Chairman of the Board following
Peter's retirement on 1 July 2016.
Daniel Dayan joined the Board as a non-executive director on 7
March 2016, becoming Chairman of the Remuneration Committee from
that date. Finally, since the period end, Andrew Davies has been
appointed as a non-executive director, joining the Board on 17 May
2016.
Health and safety
The lost time incident rate (incidents per 100 employees per
annum) as at 30 April 2016 was 0.38 (H1 FY15: 0.51), the lowest at
any time on record, evidencing the Group's enhanced safety culture
and continuing investment in safety. It is critical to remember
that many of Chemring's manufacturing activities are inherently
hazardous, and that despite major investment and process
improvements, the Group must continue to improve its facilities,
processes, training and risk management to ensure safety
performance continues to improve further. Despite this strong
performance, Chemring continues to have significant energetic
incidents, and the nature of operations dictates that this will
continue to be the case. What is important is that no injuries were
sustained in the period from these incidents, with hazard
protection and safety processes all functioning as designed.
The Group continues to improve its process safety management
systems and has increased the focus on the reporting and resolving
of safety "near misses". The Safety Leadership Programme remains a
key aspect of Chemring's safety management, reinforcing safety
leadership and providing tools to drive improvements in safety
culture.
Outlook
The Group continues to expect the full year FY16 result to be
heavily weighted to the second half, due to substantially higher
40mm contract revenues in H2 and increased revenue resulting from
greater consistency in production. Whilst it is encouraging that
approximately 90% of expected H2 revenue is in the order book, the
Board's current assessment is that the FY16 out-turn is likely to
be slightly below market expectations.
Having significantly strengthened the balance sheet through the
rights issue, Chemring is now able to focus fully on the
operational priorities that will underpin its future growth. These
priorities include site rationalisation and capacity investment
projects, implementing significant cost saving initiatives,
ensuring excellence in contract delivery and delivering improved
working capital management. This work is being done while
maintaining the highest standards of safety and progressing key
strategic long-term US programmes. Overall, Chemring continues to
make good strategic and operational progress and looks to the
future with optimism.
Countermeasures review
The Countermeasures segment had a mixed first half, with revenue
increasing by 5.5% to GBP52.2 million (2015: GBP49.5 million) and
the segment reporting an underlying operating loss of GBP1.4
million (2015: GBP4.7 million profit). The underlying operating
margin was a 2.7% loss (2015: 9.5% profit).
The decline in margins, and associated profitability, was
largely a result of the impact of several energetic incidents in
the period, the closing-out of a significant low margin contract
and short-term production issues on particular product lines which
have now been resolved. It is expected that the resultant shortfall
in performance will be recovered in the second half through higher
production rates.
Over the past year new systems have been implemented to improve
the management of safety and production, and further initiatives
are underway to focus on the delivery of production efficiencies,
waste reduction and more efficient working capital management.
There has been continued softness in the US countermeasures
market, and as a consequence both US businesses are rebalancing
their cost base to reflect expected future revenue levels, to
ensure long-term competitiveness. At Alloy Surfaces the priority is
the reduction from two facilities to one. Planning activities for
this plant consolidation have commenced and all necessary approvals
are in place. The plant rationalisation is expected to be completed
by early 2017, with a pause in production during Q1 FY17 to
expedite the rationalisation. The costs of the project are expected
to be approximately $3.0 million, with the project expected to
deliver approximately $1.4 million in annualised savings from FY18.
A significant reduction in headcount is taking place at Kilgore
during FY16 as operations are restructured to reflect anticipated
lower future demand levels.
Under a new leadership team, the US countermeasures business
continues to improve its operational performance. At Alloy
Surfaces, production was focused on manufacture of MJU-66
countermeasures for the US, and a critical further $9.0 million
order for MJU-66 flares was received in April. This order provides
production volumes for the remainder of 2016. Kilgore's focus has
been continued support to the JSF programme, closing out the
legacy, low margin M212 programme and improving performance on its
other programmes. It is encouraging to report that a $24.9 million
order for countermeasures was received from the US Department of
Defense ("DoD") in June 2016, providing key production volumes for
the next twelve months.
The UK countermeasures business had a mixed first half. While
revenue was in line with expectations, margins were adversely
impacted by technical issues on one product line. Order intake has
remained strong, and an additional production shift is currently
being put in place which, together with a more favourable product
mix, is expected to yield improvement in margins in H2. The
automated mixing and pressing facility continues to contribute
valuable additional production capacity, which will enable greater
flexibility in future production planning as the facility is
qualified to manufacture a growing range of countermeasures. A full
period of operation of this facility led to an increase in
depreciation of GBP1.4 million.
At Chemring Australia, year-on-year revenues reduced due to a
strong comparator period and the phasing of FY16 revenue. The
Australian site was impacted by an incident that occurred at its
automated countermeasure production facility in March. Following a
recommissioning of the facility, production restarted in early
May.
On 25 November 2015, the Group announced that it had reached
agreement with Esterline Corporation to buy patents, equipment,
stock and selected contracts relating to its UK-based subsidiary,
Wallop Defence Systems, for an initial cash consideration of GBP2.5
million. Having received approval by the UK Ministry of Defence
("MoD") and the UK Competition and Markets Authority, the asset
purchase completed on 4 May 2016. The assets acquired relate to air
countermeasures and pyrotechnic products that will be manufactured
at Chemring's existing UK operations. Conditional on the future
receipt of specific orders, additional payments of up to GBP9.0
million may be made to Wallop Defence Systems over the next three
years.
The key strategic focus within Countermeasures remains the
Group's position on the F-35 programme, on which further progress
has been made. In the US, production and delivery of flares is
supporting initial operational capability for the US Navy and US
Air Force. Chemring Australia made steady progress in the period
towards qualification as the second source manufacturer of
countermeasures for the F-35.
Countermeasures' order book at 30 April 2016 was GBP171.5
million (October 2015: GBP184.1 million, April 2015: GBP199.3
million). The decline principally reflects the gradual depletion of
the order books at Alloy Surfaces and Kilgore, as a result of
improved production consistency and the progressive working through
of orders placed in earlier years.
Sensors & Electronics review
Revenue for Sensors & Electronics increased by 21.3% to
GBP50.2 million (2015: GBP41.4 million). The restructuring of Roke
and Chemring Technology Solutions undertaken in FY15 has resulted
in improved performance in this segment, with underlying operating
profit increasing to GBP5.7 million (2015: GBP0.9 million). The
underlying operating margin was 11.4% (2015: 2.2%).
In the US, Sensors & Electronics activity has continued to
focus on the progression of the long-term US Programs of Record and
on production opportunities for customers in the Middle East. The
engineering and manufacturing development ("EMD") phase of the
Husky Mounted Detection System ("HMDS") A2 variant, was awarded a
further $5.8 million R&D contract in March 2016. The next award
is expected in H2, providing funding to the end of 2016. The next
major milestone for the HMDS A2 Program of Record is a design
review expected to be concluded in February 2017. Customer
engagement in the Middle East remains encouraging, with vehicle
mounted ground penetrating radar ("GPR") variants being evaluated
by a number of potential customers.
The Group has continued to build on its success in transferring
vehicle mounted GPR technology to the hand-held market. Orders for
hand-held detection equipment with a value of approximately $10.0
million were received in the period, and negotiations with
potential customers in the Middle and Far East are ongoing. The
Group is positioning itself for key US programmes in this area.
In chemical and biological detection the Group has continued to
focus activity on the long-term DoD Programs of Record. Chemring
has progressed to the prototype phase on two of the three variants
of the Next Generation Chemical Detector programme, and is awaiting
a decision on contract award on the third. Funded development of
Chemring's sole source position on the Joint Biological Tactical
Detection System programme is continuing.
In the UK, the separation of the contract R&D activities of
Roke from the products-based business undertaken by Chemring
Technology Solutions, is delivering increasingly positive results.
Roke's orders and revenue in the period were above expectations,
and utilisation rates have continued to rise. This has been driven
by significant opportunities in the communications intelligence and
cyber areas, combined with the impact of the new operating model.
In response to increased customer demand, Roke is establishing a
satellite office in Gloucester to build closer links with key
customers and to broaden access to new talent.
Chemring continues to focus its efforts in Electronic Warfare
("EW") and force protection, with a wider portfolio in
communications and cyber protection. The Resolve EW product has
broadened its user base, with recent orders and sales achieved in
relation to new customers in Europe and the Far East; however, the
market in the Middle East remains subdued as uncertainties over oil
prices continue to translate into extended funding and procurement
delays. The existing Resolve customer base continues to view the
product as the premium man-portable tactical EW capability, and
follow-on order opportunities will be progressed throughout
2016.
The order book for Sensors & Electronics at 30 April 2016
was GBP91.5 million (October 2015: GBP75.8 million, April 2015:
GBP88.8 million).
Energetic Systems review
Revenue for Energetic Systems increased by 9.7% to GBP77.7
million (2015: GBP70.8 million), while underlying operating profit
fell by 16.7% to GBP3.0 million (2015: GBP3.6 million). The
underlying operating margin was 3.9% (2015: 5.1%), reflecting a
sales mix biased towards externally sourced product. Margins are
expected to increase in H2, due to the anticipated ramp-up of the
40mm contract and to normal seasonal variations.
On 4 April 2016, the Group announced that the letter of credit
was in place and that it had received the advance payment
associated with the 40mm ammunition contract to an end user in the
Middle East. This has enabled initial revenues of GBP6.4 million to
be recognised in the period and deliveries will be ongoing during
H2. The 40mm contract remains a significant contributor to FY16 and
its delayed start has therefore resulted in a heavier H2 weighting
and a slightly lower than expected contribution to the full year.
Expectations for the ramp up in 40mm production and subsequent
contribution to FY16 are conditional on an assumed level of volume
of product from suppliers.
Chemring Ordnance achieved strong growth in sales of procured
non-standard ammunition product. In March 2016, Chemring Ordnance
and Alliant Techsystems Operations LLC were jointly awarded an
indefinite delivery, indefinite quantity ("IDIQ") contract to
supply non-standard ammunition to the US DoD valued at up to $750.0
million. The IDIQ contract is spread over five years and each
individual award will be subject to competitive tendering. Due to
the externally-sourced nature of the products involved, margins on
non-standard ammunition sales are typically lower than for
manufactured product. Previously reported delays in DoD acceptance
for the Anti-Personnel Obstacle Breaching System ("APOBS")
experienced towards the end of FY15 were all overcome during the
period. Initial export sales of the APOBS system will be undertaken
in H2.
The planned closure of the Torrance California facility in 2018
is progressing according to plan, and the fit-out and occupation of
the new building at the Illinois facility has commenced, with all
planning approvals in place. This project is still anticipated to
cost approximately $7.0 million, with the site rationalisation
expected to deliver approximately $5.0 million in annual savings
from FY19.
In the UK, the business continues to diversify into the civil
market, maintaining the order book for the Metron range of
pyro-mechanical devices. The Group has also built upon its position
and experience as the supplier of choice for demolition stores for
the UK MoD, and is developing a range of bespoke high explosive
products for decommissioning purposes in the oil and gas
market.
In Norway, recent investment in capacity and manufacturing
processes at Chemring Nobel has delivered positive results and has
been reflected in a record order book and higher revenues. This is
particularly encouraging when set against the backdrop of a
declining oil and gas market, which represented a third of
traditional business. There remains a need to continue to invest in
the Norwegian site to ensure production capacity keeps pace with
growing volumes.
The global demand for pyrotechnics continues to soften, and
procurement timescales of Middle East customers have lengthened.
These factors are having a particularly marked impact at Chemring
Defence, where order intake in the period has been subdued.
Reductions in headcount are being implemented at Chemring Defence
to ensure the anticipated lower production volumes can be handled
profitably.
The order book for Energetic Systems at 30 April 2016 was
GBP328.3 million (October 2015: GBP309.7 million, April 2015:
GBP214.7 million), and included over GBP100.0 million in respect of
the 40mm ammunition contract.
Financial performance
The underlying operating profit of GBP3.8 million (2015: GBP5.5
million), after unallocated central costs, resulted in an
underlying operating margin of 2.1% (2015: 3.4%). The lower margin
primarily reflects a lower margin sales mix, phasing of revenue
within FY16, and contract-specific issues resolved in the half. On
the basis of the prevailing exchange rates in H1 FY15 revenue would
have been GBP175.6 million and underlying operating profit would
have been GBP3.9 million.
After a net underlying finance expense of GBP7.8 million (2015:
GBP6.8 million), there was an underlying loss before tax of GBP4.0
million (2015: GBP1.3 million). The effective tax rate on the
underlying loss before tax from continuing operations was 21.5%
(2015: 20.3%). The underlying loss per share was 1.3p (2015:
0.5p).
Including non-underlying items, details of which are set out
below, the operating loss from continuing operations was GBP5.3
million (2015: GBP8.3 million), reflecting the reduction in
underlying operating profit offset by a reduction in the level of
non-underlying items. Including non-underlying items, the loss
before tax from continuing operations was GBP16.8 million (2015:
GBP15.1 million loss). The effective tax rate on the result before
tax from continuing operations was 23.2% (2015: 28.5%). The total
loss per share was 5.3p (2015: 4.9p).
Dividend
As previously announced, the Board is not proposing an interim
dividend in respect of the period ended 30 April 2016.
Analysis of non-underlying items
The use of underlying measures, in addition to total measures,
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.
H1 2016 H1 2015
Continuing operations: GBPm GBPm
Acquisition related costs 0.2 0.3
Business restructuring and incident costs 0.6 1.8
Claim related (credit)/costs (0.2) 4.7
Loan note repayment and covenant amendment
fees 1.5 -
Intangible amortisation arising from business
combinations 6.7 7.1
Loss/(gain) on fair value movement of derivative
financial instruments 0.3 (0.1)
-------- --------
Non-underlying items excluded from underlying
operating profit 9.1 13.8
Accelerated interest costs 3.7 -
Non-underlying items excluded from underlying
profit before tax 12.8 13.8
-------- --------
Discontinued operations:
Disposal related credit (2.0) (3.0)
-------- --------
Non-underlying items excluded from profit
before tax 10.8 10.8
-------- --------
Business restructuring and incident costs of GBP0.6 million
include GBP0.3 million relating to the initial phase of the
restructuring occurring during FY16 at Kilgore. Further
restructuring costs will be incurred in H2 FY16 in respect of
Chemring Defence and Kilgore.
There was a credit in respect of claim related costs of GBP0.2
million following agreement being reached with the US Department of
Justice relating to historic supplies of product by Kilgore. Of the
agreed settlement value of GBP4.1 million, GBP0.2 million was paid
in the period and the remainder is payable in instalments over five
years.
Intangible amortisation arising from business combinations was
GBP6.7 million (2015: GBP7.1 million).
Fees in relation to the amendments to debt facilities associated
with the rights issue and the application of a proportion of the
rights issue proceeds in repayment of loan notes were GBP1.5
million. The repayment of GBP48.8 million of loan notes in March
2016 led to recognition of accelerated interest costs of GBP3.7
million.
Disposal related items comprised a credit of GBP2.0 million in
respect of discontinued operations, resulting from the release of
certain provisions established on the disposal of businesses in
prior years, which are no longer required.
Working capital
A summary of working capital as at 30 April 2016 and 31 October
2015 is set out below:
H1 2016 FY 2015
GBPm GBPm
Inventories 111.8 96.2
Trade receivables 49.1 66.1
Contract receivables 12.6 15.2
Trade payables (40.5) (46.7)
Advance payments (10.9) (11.5)
Other items (18.9) (37.5)
-------- --------
103.2 81.8
-------- --------
Working capital rose by GBP21.4 million in the period, of which
GBP4.7 million was attributable to foreign exchange translation
effects, primarily in respect of working capital held in the US.
The remaining increase was principally driven by the anticipated
significant H2 weighting of FY16 revenue. As previously announced,
cash generation is expected to be heavily weighted to H2, due to
the rise in working capital in H1 that has been necessary to
support expected H2 revenues.
Inventory rose at all three operating segments; however, the
majority of the increase arose in Energetic Systems. Inventory at
Chemring Ordnance rose by GBP3.6 million, principally in relation
to the APOBS programme, as customer-funded inventory levels fell
whilst US DoD acceptance issues were finalised, in order to ensure
the smooth re-start of deliveries that has now taken place.
Inventory at Chemring Energetic Devices rose by GBP3.7 million, in
part due to a lengthening of customer timescales for completing
product acceptance. Inventory also rose at the procurement
business, as Middle East customers delayed settlement of invoices
for energetic products, resulting in further shipments of inventory
being held back. Countermeasures and Sensors & Electronics
accounted for GBP4.9 million of the inventory increase, with
inventory rising in respect of multi-year contracts for which
advance payments were received in FY15, and in anticipation of
higher revenue levels in H2.
Trade receivables reduced by GBP17.0 million to GBP49.1 million.
Whilst this partly reflects a lower level of invoicing during April
2016 compared to the prior year end, benefit was also seen from
prompt collections at a number of business units. At 30 April 2016,
the receivable due in respect of the 40mm Middle East contract, net
of the advance payment received in the period, was GBP7.3 million.
As noted above, there has been some delay in settlement of invoices
from Middle East customers, unrelated to the 40mm contract;
however, this has largely been mitigated to date by the deferral of
associated payments to the supply chain.
There was a reduction in trade payables and advance payments,
reflecting supply chain contractual requirements and procurement
timescales.
The net liability for other working capital items reduced due to
advances made to supply chain partners in respect of future
supplies of product for the 40mm Middle East contract, and due to
lower levels of accruals and provisions, in part resulting from the
payment of GBP4.8 million of claim related costs during the
period.
Significant management focus is being applied to improve working
capital management, and a number of initiatives were commenced in
the period. Improved accuracy in forecasting production levels, the
completion of the implementation of new IT systems at several
sites, and resolution of overdue debtor balances are some of the
workstreams that are underway.
Balance sheet
On 24 February, the Group successfully completed a 4 for 9
rights issue, raising GBP80.8 million in gross proceeds. The rights
issue has reduced Chemring's structural indebtedness and is
enabling the Group to pursue certain growth opportunities. The net
proceeds of the rights issue after equity issue costs were GBP75.2
million, with GBP0.8 million of these costs to be paid after the
period end.
A summary of changes in net debt during the six months to 30
April 2016 and 30 April 2015 is set out below:
H1 2016 H1 2015
GBPm GBPm
Net debt at start of period (154.3) (135.6)
Net rights issue proceeds 76.0 -
Accelerated interest payment and related fees (4.5) -
Other changes in net debt, including operating
cash flows (20.5) (6.9)
Effect of foreign exchange rate changes (11.1) (6.0)
--------- --------
Net debt at end of period (114.4) (148.5)
--------- --------
Net debt reduced by GBP39.9 million in the period. This
principally reflected the GBP76.0 million proceeds from the rights
issue received in the period, offset by a GBP11.1 million foreign
exchange translation effect on US dollar denominated debt and the
net effect of all other items of GBP25.0 million.
Within H1, cash generation improved markedly in the second
quarter, with debt reducing from GBP198.4 million at the start of
the second quarter of the financial year to GBP114.4 million at the
period end.
Capital expenditure, including capitalised development costs,
was GBP7.3 million (2015: GBP7.6 million), principally comprising
spend on enhancements of production facilities, and development
spend related to the chemical and biological detection Programs of
Record in the US.
Loan note repayment
Following the rights issue, GBP48.8 million ($67.7 million) was
applied in repayment of outstanding US private placement loan
notes, representing just over 60% of the gross proceeds of the
rights issue, with an accelerated interest payment becoming due
based on the contractual interest payments due over the remaining
term of the notes repaid. The principal value of loan notes repaid
represented 26.5% of the principal outstanding prior to the
repayment. Following the repayment, the remaining loan notes amount
to GBP128.7 million, repayable in November 2016 (GBP24.6 million),
November 2017 (GBP47.0 million) and November 2019 (GBP57.1
million).
Debt facilities
In 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, came into effect unconditionally. These
unconditional changes were 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 at the 31 January 2016 test date.
The remaining amendments to covenant ratios were conditional on
the successful completion of the rights issue and, in the case of
amendments relating to the loan notes, on the application of 60% of
the gross proceeds of the rights issue being applied to repay loan
notes during the period. These amendments therefore became
effective on these events having occurred during the period. The
amendments had the effect of increasing the permitted leverage
ratio under the revolving credit facility from 3.00x to 3.90x at
the 31 October 2015 and 31 January 2016 test dates, and of reducing
the permitted interest cover ratio under that facility from 4.00x
to 3.50x at the 31 October 2015 and 31 January 2016 test dates. For
the private placement loan notes, these amendments were an increase
in the permitted adjusted debt leverage ratio from 3.00x to 4.00x
at the 31 October 2015 test date, and the permitted total debt
leverage ratio from 3.75x to 4.00x at the 31 October 2015 and 31
January 2016 test dates.
The table below details the results of the covenant tests at 30
April 2016 and at 31 October 2015:
30 April 31 October
2016 2015
Covenant ratios - revolving credit facility
Maximum allowed ratio of net debt to underlying
EBITDA 3.00x 3.90x
Actual ratio of net debt to underlying EBITDA 2.00x 2.83x
Minimum allowed ratio of underlying EBITDA to
finance costs 4.00x 3.50x
Actual ratio of underlying EBITDA to finance
costs 4.77x 4.75x
Covenant ratios - loan note agreements
Maximum allowed ratio of adjusted debt to underlying
EBITDA 3.00x 4.00x
Actual ratio of adjusted debt to underlying
EBITDA 2.02x 2.84x
Maximum allowed ratio of total debt to underlying
EBITDA 3.75x 4.00x
Actual ratio of total debt to underlying EBITDA 2.10x 2.92x
Minimum allowed ratio of underlying EBITDA to
finance costs 3.50x 3.50x
Actual ratio of underlying EBITDA to finance
costs 4.60x 4.67x
--------- -----------
The Group complied with its financial covenants throughout the
period and this compliance is expected by the directors to continue
for the foreseeable future.
The directors have acknowledged the latest guidance on going
concern. Management have considered the latest forecasts available
to them and additional sensitivity analysis has been prepared on
the covenant forecasts to consider the impact on covenants of any
reduction in anticipated levels of EBITDA. This sensitised scenario
shows headroom on all covenant test dates. After consideration of
the above, the directors have a reasonable expectation that the
Group has adequate resources to continue in operational existence
for the foreseeable future. Thus, they continue to adopt the going
concern basis in preparing the half-yearly condensed financial
statements. Further details are set out in note 1.
The table below details net debt at 30 April 2016 and at 31
October 2015:
30 April 31 October
2016 2015
GBPm GBPm
Loan notes, net of facility fees (124.6) (161.3)
Revolving credit facility - -
Other loans and finance leases (0.3) (0.6)
--------- -----------
Gross debt (124.9) (161.9)
Cash 10.5 7.6
--------- -----------
Net debt (114.4) (154.3)
--------- -----------
The majority of the Group's net debt is denominated in US
dollars and is treated as a net investment hedge, matched against
US dollar denominated assets. A one cent movement in the value of
the US dollar against sterling leads to the value of reported net
debt changing by approximately GBP1 million. A significant
proportion of the Group's revenue arises in the US, and the Group's
US dollar denominated interest expense provides a partial hedge
against the translation risk in the income statement.
Principal risks and uncertainties
The principal risks and uncertainties which could have a
material impact on the Group's performance and could cause actual
results to differ materially from expected and historical results
have not changed significantly from those set out in the Group's
2015 Annual Report and Accounts. A detailed description of the
Group's principal risks and uncertainties and the ways they are
mitigated can be found at Annex 1. These risks can be summarised
as:
-- 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.
Cautionary statement
This Interim Management Report has been prepared solely to provide
additional information to shareholders to assess the Group's strategies
and the potential for those strategies to succeed. The Interim
Management Report should not be relied on by any other party or
for any purpose.
The Interim Management Report contains certain forward-looking
statements. These statements are made by the directors in good
faith based on information available to them up to the time of
their approval of this report but such statements should be treated
with caution due to the inherent uncertainties, including both
economic and business risk factors, underlying any such forward-looking
information.
-------------------------------------------------------------------------
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The directors are responsible for the maintenance and integrity
of the Company website.
Legislation in the United Kingdom governing the preparation and
dissemination of financial information differs from legislation in
other jurisdictions.
Responsibility statement
We confirm that to the best of our knowledge:
a) the Condensed Set of Financial Statements has been prepared
in accordance with IAS 34 Interim Financial Reporting;
b) the Interim Management Report includes a fair review of the
information required by DTR 4.2.7R (indication of important
events during the first six months and description of principal
risks and uncertainties for the remaining six months of the
year); and
c) the Interim Management Report includes a fair review of the
information required by DTR 4.2.8R (disclosure of related
parties' transactions and changes therein).
By order of the Board
Michael Flowers Steve Bowers
Group Chief Executive Group Finance Director
21 June 2016 21 June 2016
CONDENSED CONSOLIDATED INCOME STATEMENT
for the half year to 30 April 2016
Unaudited Unaudited
Half year to Half year to
30 April 2016 30 April 2015
Note Underlying Non-underlying Underlying Non-underlying
performance* items* Total performance* items* Total
GBPm GBPm GBPm GBPm GBPm GBPm
Continuing operations
Revenue 180.1 - 180.1 161.7 - 161.7
-------------- --------------- ------- -------------- --------------- -------
Operating profit/(loss) 3.8 (9.1) (5.3) 5.5 (13.8) (8.3)
Finance expense (7.8) (3.7) (11.5) (6.8) - (6.8)
-------------- --------------- ------- -------------- --------------- -------
Loss before tax (4.0) (12.8) (16.8) (1.3) (13.8) (15.1)
Tax credit on loss 5 0.9 3.0 3.9 0.3 4.0 4.3
-------------- --------------- ------- -------------- --------------- -------
Loss after tax (3.1) (9.8) (12.9) (1.0) (9.8) (10.8)
Discontinued operations
Profit after tax from
discontinued operations 3,10 - 1.8 1.8 - 3.0 3.0
Loss after tax for
the period 3 (3.1) (8.0) (11.1) (1.0) (6.8) (7.8)
-------------- --------------- ------- -------------- --------------- -------
Unaudited Unaudited
Half year to Half year to
30 April 2016 30 April 2015
As restated
Underlying Non-underlying Underlying Non-underlying
performance* items* Total performance* items* Total
Loss per ordinary
share
Continuing operations
Basic 6 (1.3)p (4.0)p (5.3)p (0.5)p (4.4)p (4.9)p
Diluted 6 (1.3)p (4.0)p (5.3)p (0.5)p (4.4)p (4.9)p
-------------- --------------- ------- -------------- --------------- -------
Continuing operations
and discontinued
operations
Basic 6 (1.3)p (3.3)p (4.6)p (0.5)p (3.0)p (3.5)p
Diluted 6 (1.3)p (3.3)p (4.6)p (0.5)p (3.0)p (3.5)p
-------------- --------------- ------- -------------- --------------- -------
* Further information about non-underlying items is set out in
note 3.
CONDENSED CONSOLIDATED INCOME STATEMENT (continued)
for the half year to 30 April 2016
Audited
Year to
31 Oct 2015
Note Underlying Non-underlying
performance* items* Total
GBPm GBPm GBPm
Continuing operations
Revenue 377.3 - 377.3
-------------- --------------- -------
Operating profit/(loss) 34.4 (28.9) 5.5
Finance expense (14.6) - (14.6)
-------------- --------------- -------
Profit/(loss) before tax 19.8 (28.9) (9.1)
Tax (charge)/credit on profit/(loss) 5 (4.1) 7.9 3.8
-------------- --------------- -------
Profit/(loss) after tax 15.7 (21.0) (5.3)
Discontinued operations
Profit after tax from discontinued operations 3,10 - 4.9 4.9
-------------- --------------- -------
Profit/(loss) after tax for the year 3 15.7 (16.1) (0.4)
-------------- --------------- -------
Audited
Year to
31 Oct 2015
As restated
Underlying Non-underlying
performance* items* Total
GBPm GBPm GBPm
Earnings/(loss) per ordinary share
Continuing operations
Basic 6 7.1p (9.5)p (2.4)p
Diluted 6 7.0p (9.4)p (2.4)p
-------------- --------------- -------
Continuing operations and discontinued
operations
Basic 6 7.1p (7.3)p (0.2)p
Diluted 6 7.0p (7.2)p (0.2)p
-------------- --------------- -------
* Further information about non-underlying items is set out in
note 3.
CONDENCED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the half year to 30 April 2016
Unaudited Unaudited
Half year Half year Audited
to to Year to
30 April 30 April 31 Oct
2016 2015 2015
GBPm GBPm GBPm
Loss after tax attributable to equity holders
of the parent (11.1) (7.8) (0.4)
----------- ----------- ---------
Items that will not be reclassified subsequently
to profit or loss
Actuarial (losses)/gains on defined benefit
pension schemes (1.9) 1.0 -
Movement on deferred tax relating to pension
schemes - (0.6) -
----------- ----------- ---------
(1.9) 0.4 -
----------- ----------- ---------
Items that may be reclassified subsequently
to profit or loss
Exchange differences on translation of
foreign operations 6.4 2.0 (2.6)
Current tax on items taken directly to
equity - - 0.6
Deferred tax on exchange differences on
translation of foreign operations - - (0.6)
----------- ----------- ---------
6.4 2.0 (2.6)
----------- ----------- ---------
Total comprehensive loss attributable to
equity holders of the parent (6.6) (5.4) (3.0)
----------- ----------- ---------
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the half year to 30 April 2016
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 2015 2.0 230.7 12.9 1.2 (32.3) 85.7 (9.6) 290.6
-------------------------- --------- --------- --------- ------------ ------------ ---------- -------- -------
Loss after tax - - - - - (11.1) - (11.1)
Other comprehensive
(loss)/income - - - - (0.6) 5.1 - 4.5
Total comprehensive loss - - - - (0.6) (6.0) - (6.6)
Ordinary shares issued 0.8 74.4 - - - - - 75.2
Share-based payments
(net of settlement) - - - - - 1.0 - 1.0
At 30 April 2016 2.8 305.1 12.9 1.2 (32.9) 80.7 (9.6) 360.2
--------- --------- --------- ------------ ------------ ---------- -------- -------
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 - - - - - (7.8) - (7.8)
Other comprehensive
income - - - - 2.0 0.4 - 2.4
Total comprehensive
income/(loss) - - - - 2.0 (7.4) - (5.4)
Share-based payments
(net of settlement) - - - - - 0.6 - 0.6
At 30 April 2015 2.0 230.7 12.9 1.2 (30.6) 88.9 (9.6) 295.5
--------- --------- --------- ------------ ------------ ---------- -------- ------
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)
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
--------- --------- --------- ------------ ------------ ---------- -------- ------
CONDENSED CONSOLIDATED BALANCE SHEET
as at 30 April 2016
Note Unaudited Unaudited
As at As at Audited
30 April 30 April As at
2016 2015 31 Oct 2015
GBPm GBPm GBPm
Non-current assets
Goodwill 123.6 121.4 121.2
Development costs 36.5 35.2 36.1
Other intangible assets 71.0 81.5 74.2
Property, plant and equipment 168.7 174.1 168.0
Deferred tax 48.9 33.5 47.5
---------- ---------- -------------
3 448.7 445.7 447.0
---------- ---------- -------------
Current assets
Inventories 111.8 96.3 96.2
Trade and other receivables 85.7 87.5 93.1
Cash and cash equivalents 8 10.5 13.4 7.6
Derivative financial instruments 0.8 1.4 0.5
208.8 198.6 197.4
---------- ---------- -------------
Total assets 657.5 644.3 644.4
---------- ---------- -------------
Current liabilities
Borrowings (24.2) (0.1) -
Obligations under finance leases (0.2) (0.5) (0.5)
Trade and other payables (85.1) (95.1) (96.2)
Provisions (5.0) (6.7) (5.1)
Current tax (5.3) (2.9) (7.9)
Derivative financial instruments (2.1) (3.0) (1.6)
(121.9) (108.3) (111.3)
---------- ---------- -------------
Non-current liabilities
Borrowings (100.4) (160.8) (161.3)
Obligations under finance leases - (0.4) -
Trade and other payables (3.5) (1.3) (1.7)
Provisions (10.4) (20.4) (16.3)
Deferred tax (43.6) (38.0) (45.1)
Preference shares (0.1) (0.1) (0.1)
Retirement benefit obligations 11 (17.4) (18.6) (17.7)
Derivative financial instruments - (0.9) (0.3)
---------- ---------- -------------
(175.4) (240.5) (242.5)
---------- ---------- -------------
Total liabilities (297.3) (348.8) (353.8)
---------- ---------- -------------
Net assets 360.2 295.5 290.6
---------- ---------- -------------
Equity
Share capital 2.8 2.0 2.0
Share premium account 305.1 230.7 230.7
Special capital reserve 12.9 12.9 12.9
Revaluation reserve 1.2 1.2 1.2
Translation reserve (32.9) (30.6) (32.3)
Retained earnings 80.7 88.9 85.7
---------- ---------- -------------
369.8 305.1 300.2
Own shares (9.6) (9.6) (9.6)
---------- ---------- -------------
Equity attributable to equity
holders of the parent 360.2 295.5 290.6
---------- ---------- -------------
Total equity 360.2 295.5 290.6
---------- ---------- -------------
CONDENSED CONSOLIDATED CASH FLOW STATEMENT
for the half year to 30 April 2016
Note Unaudited Unaudited
Half year Half year
to to Audited
30 April 30 April Year to
2016 2015 31 Oct 2015
GBPm GBPm GBPm
Cash flows from operating activities
Cash generated from underlying operations 13 4.9 12.9 35.4
Acquisition and disposal related
costs (0.2) (0.2) (0.7)
Business restructuring and incident
costs (2.2) (3.6) (7.6)
Claim related costs (4.8) - (0.1)
----------- ----------- -------------
(2.3) 9.1 27.0
Tax paid (2.5) (2.8) (1.3)
----------- ----------- -------------
Net cash (outflow)/inflow from operating
activities (4.8) 6.3 25.7
----------- ----------- -------------
Cash flows from investing activities
Purchases of intangible assets (2.8) (4.5) (8.9)
Purchases of property, plant and
equipment (4.5) (3.1) (8.2)
Net cash outflow from investing
activities (7.3) (7.6) (17.1)
----------- ----------- -------------
Cash flows from financing activities
Net proceeds of share issue 76.0 - -
Dividends paid - - (7.9)
Finance expense paid (10.7) (6.2) (11.8)
Loan note repayment costs (0.8) - -
Capitalised facility fees paid (0.3) (0.6) (1.8)
Repayments of borrowings (48.8) (0.2) (0.3)
Repayments of finance leases (0.3) (0.5) (0.9)
Net cash inflow/(outflow) from financing
activities 15.1 (7.5) (22.7)
----------- ----------- -------------
Increase/(decrease) in cash and
cash equivalents 3.0 (8.8) (14.1)
Cash and cash equivalents at beginning
of period/year 7.6 21.8 21.8
Effect of foreign exchange rate
changes (0.1) 0.4 (0.1)
----------- ----------- -------------
Cash and cash equivalents at end
of period/year 10.5 13.4 7.6
----------- ----------- -------------
INDEPENT REVIEW REPORT TO CHEMRING GROUP PLC
We have been engaged by the Company to review the condensed set
of financial statements in the half-yearly financial report for the
six months ended 30 April 2016, which comprises the condensed
consolidated income statement, the condensed consolidated statement
of comprehensive income, the condensed consolidated statement of
changes in equity, the condensed consolidated balance sheet, the
condensed consolidated cash flow statement, and related notes 1 to
18. We have read the other information contained in the half-yearly
financial report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the condensed set of financial statements.
This report is made solely to the company in accordance with
International Standard on Review Engagements (UK and Ireland) 2410
"Review of Interim Financial Information Performed by the
Independent Auditor of the Entity" issued by the Auditing Practices
Board. Our work has been undertaken so that we might state to the
Company those matters we are required to state to it in an
independent review report and for no other purpose. To the fullest
extent permitted by law, we do not accept or assume responsibility
to anyone other than the Company, for our review work, for this
report, or for the conclusions we have formed.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the directors. The directors are responsible
for preparing the half-yearly financial report in accordance with
the Disclosure and Transparency Rules of the United Kingdom's
Financial Conduct Authority.
As disclosed in note 1, the annual financial statements of the
Group are prepared in accordance with IFRSs as adopted by the
European Union. The condensed set of financial statements included
in this half-yearly financial report has been prepared in
accordance with International Accounting Standard 34, "Interim
Financial Reporting", as adopted by the European Union.
Our responsibility
Our responsibility is to express to the Company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 "Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity" issued by the Auditing Practices Board for use in
the United Kingdom. A review of interim financial information
consists of making inquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures. A review is substantially less in scope than an
audit conducted in accordance with International Standards on
Auditing (UK and Ireland) and consequently does not enable us to
obtain assurance that we would become aware of all significant
matters that might be identified in an audit. Accordingly, we do
not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 30
April 2016 is not prepared, in all material respects, in accordance
with International Accounting Standard 34 as adopted by the
European Union and the Disclosure and Transparency Rules of the
United Kingdom's Financial Conduct Authority.
Deloitte LLP
Chartered Accountants and Statutory Auditors
London, United Kingdom
21 June 2016
NOTES TO THE CONDENSED SET OF FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
Basis of preparation
The condensed consolidated income statement for each of the six
month periods and the condensed consolidated balance sheet as at 30
April 2016 do not constitute statutory accounts as defined by
section 435 of the Companies Act 2006 and have not been delivered
to the Registrar of Companies. The half-yearly financial report was
approved by the Board of Directors on 21 June 2016. The information
for the year ended 31 October 2015 does not constitute statutory
accounts as defined in section 435 of the Companies Act 2006. Full
accounts for the year ended 31 October 2015, which include an
unqualified audit report, did not include a reference to any
matters to which the auditors drew attention by way of emphasis
without qualifying the report and did not contain statements under
section 498(2) or (3) of the Companies Act 2006, have been
delivered to the Registrar of Companies.
These half-yearly financial statements have been prepared in
accordance with International Financial Reporting Standards
("IFRSs"), as adopted by the European Union. The condensed set of
financial statements included in the half-yearly financial report
has been prepared in accordance with International Accounting
Standard 34 Interim Financial Reporting as adopted by the European
Union.
The preparation of financial statements in conformity with
generally accepted accounting principles requires the use of
estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
period. Although these estimates are based on management's best
knowledge of the amount, event or actions, actual results
ultimately may differ from those estimates.
Going concern
The directors believe the Group is well placed to manage its
business risks successfully, despite the current uncertain economic
outlook. The Group's forecasts and projections, taking account of
reasonably possible changes in trading performance, show that the
Group should be able to operate within the level of its current
committed facilities.
As part of their regular assessment of Chemring's working
capital and financing position, the directors have prepared a
detailed trading and cash flow forecast for a period which covers
at least twelve months after the date of approval of the financial
statements. In assessing the forecast, the directors have
considered:
-- trading risks presented by the current economic conditions in
the defence market, particularly in relation to government budgets
and spending;
-- the impact of macroeconomic factors, particularly interest rates and foreign exchange rates;
-- the status of the Group's financial arrangements and associated covenant requirements;
-- progress made in developing and implementing cost reduction
programmes and operational improvements;
-- mitigating actions available should business activities fall
behind current expectations, including the deferral of
discretionary overheads and restricting cash outflows; and
-- the long-term nature of the Group's business which, taken
together with the Group's order book, provides a satisfactory level
of confidence to the Board in respect of trading.
The directors have acknowledged the latest guidance on going
concern. Management have considered the latest forecasts available
to them and additional sensitivity analysis has been prepared on
the covenant forecasts to consider the impact on covenants of any
reduction in anticipated levels of EBITDA. This sensitised scenario
shows headroom on all covenant test dates. After consideration of
the above, the directors have a reasonable expectation that the
Group has adequate resources to continue in operational existence
for the foreseeable future. Thus, they continue to adopt the going
concern basis in preparing the half-yearly condensed financial
statements.
Accounting policies
The accounting policies applied by the Group in this half-yearly
financial report are the same as those applied by the Group in its
consolidated financial statements for the year ended 31 October
2015.
2. REVENUE BY DESTINATION
Unaudited Unaudited
Half year Half year Audited
to to Year to
30 April 30 April 31 Oct
2016 2015 2015
GBPm GBPm GBPm
UK 36.4 31.9 63.9
USA 86.7 75.4 171.4
Europe 15.7 14.1 37.8
Asia Pacific 16.1 20.6 49.0
Middle East 23.9 19.0 54.0
Rest of the world 1.3 0.7 1.2
Total 180.1 161.7 377.3
----------- ----------- ---------
The directors consider the only countries that are significant
in accordance with IFRS 8 Operating Segments are the USA and
UK.
3. SEGMENTAL ANALYSIS
IFRS 8 Operating Segments requires operating segments to be
identified on the basis of internal reports about components of the
Group that are regularly reviewed by the Group Chief Executive and
the Board to allocate resources to the segments and to assess their
performance. For management purposes, the Group's operating and
reporting structure clusters similar businesses together within the
following three operating segments - Countermeasures, Sensors &
Electronics, and Energetic Systems. These segments are the basis on
which the Group reports its segmental information.
Segmental analyses of revenue and underlying operating profit
are set out below:
Unaudited Unaudited
Half year Half year Audited
to to Year to
30 April 30 April 31 Oct
2016 2015 2015
GBPm GBPm GBPm
Revenue
Countermeasures 52.2 49.5 125.8
Sensors & Electronics 50.2 41.4 99.1
Energetic Systems 77.7 70.8 152.4
Total 180.1 161.7 377.3
----------- ----------- ---------
Unaudited Unaudited
Half year Half year Audited
to to Year to
30 April 30 April 31 Oct
2016 2015 2015
GBPm GBPm GBPm
Underlying operating (loss)/profit
Countermeasures (1.4) 4.7 17.5
Sensors & Electronics 5.7 0.9 9.3
Energetic Systems 3.0 3.6 15.1
Unallocated corporate costs (3.5) (3.7) (7.5)
Total 3.8 5.5 34.4
----------- ----------- ---------
Analyses of operating profit to (loss)/profit before tax are set
out below, with separate reconciliations provided for continuing
and discontinued operations, and for the underlying and total
measures of profit:
Unaudited
Half year to 30 April 2016
Continuing Continuing Discontinued Discontinued Total
Underlying Total Underlying Total Underlying Total
GBPm GBPm GBPm GBPm GBPm GBPm
Underlying operating profit 3.8 3.8 - - 3.8 3.8
Acquisition and disposal
related (costs)/credit - (0.2) - 2.0 - 1.8
Business restructuring
and incident costs - (0.6) - - - (0.6)
Claim related credit - 0.2 - - - 0.2
Loan note repayment and
covenant amendment fees - (1.5) - - - (1.5)
Intangible amortisation
arising from business
combinations - (6.7) - - - (6.7)
Loss on fair value movement
of derivative financial
instruments - (0.3) - - - (0.3)
------------ ----------- ------------- ------------- ------------ -------
Non-underlying items - (9.1) - 2.0 - (7.1)
------------ ----------- ------------- ------------- ------------ -------
Operating profit/(loss) 3.8 (5.3) - 2.0 3.8 (3.3)
Finance expense (7.8) (7.8) - - (7.8) (7.8)
Non-underlying accelerated
interest costs - (3.7) - - - (3.7)
(Loss)/profit before tax
for the period (4.0) (16.8) - 2.0 (4.0) (14.8)
Tax credit/(charge) on
(loss)/profit 0.9 3.9 - (0.2) 0.9 3.7
------------ ----------- ------------- ------------- ------------ -------
(Loss)/profit after tax
for the period (3.1) (12.9) - 1.8 (3.1) (11.1)
------------ ----------- ------------- ------------- ------------ -------
Unaudited
Half year to 30 April 2015
Continuing Continuing Discontinued Discontinued Total
Underlying Total Underlying Total Underlying Total
GBPm GBPm GBPm GBPm GBPm GBPm
Underlying operating profit 5.5 5.5 - - 5.5 5.5
Acquisition and disposal
related (costs)/credit - (0.3) - 3.0 - 2.7
Business restructuring
and incident costs - (1.8) - - - (1.8)
Claim related costs - (4.7) - - - (4.7)
Intangible amortisation
arising from business
combinations - (7.1) - - - (7.1)
Gain on the movement in
the fair value of derivative
financial instruments - 0.1 - - - 0.1
------------ ----------- ------------- ------------- ------------ -------
Non-underlying items - (13.8) - 3.0 - (10.8)
------------ ----------- ------------- ------------- ------------ -------
Operating profit/(loss) 5.5 (8.3) - 3.0 5.5 (5.3)
Finance expense (6.8) (6.8) - - (6.8) (6.8)
(Loss)/profit before tax
for the period (1.3) (15.1) - 3.0 (1.3) (12.1)
Tax credit on loss/profit 0.3 4.3 - - 0.3 4.3
------------ ----------- ------------- ------------- ------------ -------
(Loss)/profit after tax
for the period (1.0) (10.8) - 3.0 (1.0) (7.8)
------------ ----------- ------------- ------------- ------------ -------
Audited
Year to 31 October 2015
Continuing Continuing Discontinued Discontinued Total
Underlying Total Underlying Total Underlying Total
GBPm GBPm GBPm GBPm GBPm GBPm
Underlying operating profit 34.4 34.4 - - 34.4 34.4
Acquisition and disposal
related (costs)/credit - (0.5) - 4.9 - 4.4
Business restructuring
and incident costs - (6.4) - - - (6.4)
Claim related costs - (8.5) - - - (8.5)
Intangible amortisation
arising from business
combinations - (14.0) - - - (14.0)
Gain on the movement in
the fair value of derivative
financial instruments - 0.5 - - - 0.5
------------ ----------- ------------- ------------- ------------ -------
Non-underlying items - (28.9) - 4.9 - (24.0)
------------ ----------- ------------- ------------- ------------ -------
Operating profit 34.4 5.5 - 4.9 34.4 10.4
Finance expense (14.6) (14.6) - - (14.6) (14.6)
Profit/(loss) before tax
for the year 19.8 (9.1) - 4.9 19.8 (4.2)
Tax (charge)/credit on
profit/(loss) (4.1) 3.8 - - (4.1) 3.8
------------ ----------- ------------- ------------- ------------ -------
Profit/(loss) after tax
for the year 15.7 (5.3) - 4.9 15.7 (0.4)
------------ ----------- ------------- ------------- ------------ -------
There are no material intra-group transactions included within
the revenue and profit values disclosed in this note.
Underlying profit before tax has been defined as earnings 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. The
directors consider this measure of profit allows a more meaningful
comparison of earnings trends.
Segmental analyses of depreciation and amortisation are set out
below. All depreciation is reflected in both underlying and total
measures of operating profit. The analysis of amortisation is shown
for both the underlying and total operating profit measures.
Unaudited Unaudited
Half year Half year Audited
to to Year to
30 April 30 April 31 Oct
2016 2015 2015
GBPm GBPm GBPm
Depreciation
Countermeasures 4.7 3.6 8.0
Sensors & Electronics 1.1 1.3 2.5
Energetic Systems 2.5 2.4 4.8
Unallocated corporate
items 0.6 0.2 1.0
----------- ----------- ---------
8.9 7.5 16.3
----------- ----------- ---------
Within underlying operating
profit Within total operating profit
Unaudited Unaudited Unaudited Unaudited
Half year Half year Audited Half year Half year Audited
to to Year to to to Year to
30 April 30 April 31 Oct 30 April 30 April 31 Oct
2016 2015 2015 2016 2015 2015
GBPm GBPm GBPm GBPm GBPm GBPm
Amortisation
Countermeasures 0.9 0.7 1.6 0.9 0.7 1.6
Sensors & Electronics 2.4 1.8 3.6 5.7 5.5 10.8
Energetic Systems 0.3 0.4 1.0 3.7 3.8 7.8
Unallocated corporate
items - 0.2 0.2 - 0.2 0.2
3.6 3.1 6.4 10.3 10.2 20.4
----------- ----------- --------- ----------- ----------- ---------
An analysis of non-underlying items charged in determining
operating profit by segment is provided below:
Unaudited Unaudited
Half year Half year Audited
to to Year to
30 April 30 April 31 Oct
2016 2015 2015
GBPm GBPm GBPm
Non-underlying items by segment
Countermeasures 0.3 4.8 4.4
Sensors & Electronics 3.3 5.2 13.1
Energetic Systems 3.6 3.4 11.3
Discontinued operations (2.0) (3.0) (4.9)
Unallocated 1.9 0.4 0.1
7.1 10.8 24.0
----------- ----------- ---------
Unallocated items in the period to 30 April 2016 include GBP1.5
million (H1 2015: GBPnil, 2015: GBPnil) of costs associated with
the repayment of loan notes and covenant amendments.
In the period to 30 April 2016, there was an acquisition and
disposal related credit of GBP1.8 million (H1 2015: GBP2.7 million,
2015: GBP4.4 million) which includes a GBP2.0 million credit in
respect of discontinued operations, resulting from the release of
certain provisions established on the disposal of businesses in
prior years, which are no longer required, and the retranslation of
remaining provisions. This GBP2.0 million credit has been included
with discontinued operations. The remaining GBP0.2 million cost in
the period to 30 April 2016 relates to acquisition related
costs.
In the period to 30 April 2016, restructuring and incident costs
were GBP0.6 million (H1 2015: GBP1.8 million, 2015: GBP6.4 million)
and included GBP0.3 million relating to the restructuring of
Kilgore. In the period to 30 April 2015, restructuring and incident
costs were associated with the restructuring of Chemring Technology
Solutions in the UK. In the year to 31 October 2015, restructuring
costs included GBP4.6 million relating to restructuring of the UK
Sensors & Electronics businesses, GBP1.3 million relating to
restructuring of the US Sensors & Electronics businesses, and
GBP0.5 million relating to simplification and integration
activities at other business units.
There was a credit in respect of claim related costs of GBP0.2
million (H1 2015: GBP4.7 million cost, 2015: GBP8.5 million cost)
following agreement being reached with the US Department of Justice
relating to historic supplies of product by Kilgore. Of the agreed
settlement value of GBP4.1 million, GBP0.2 million was paid in the
first half and the remainder is payable in instalments over the
next five years. In the period to 30 April 2015, the claim related
costs also related to this matter. In the year to 31 October 2015,
claim related costs included GBP4.2 million in relation to these
historic supplies of product by Kilgore 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.
In addition to the amounts detailed above, there was a
non-underlying finance expense of GBP3.7 million (H1 2015: GBPnil,
2015: GBPnil) in respect of accelerated interest due on early
repayment of loan notes.
Non-current assets by location
The Group does not disclose assets or liabilities by segment in
the monthly management accounts provided to the Group Chief
Executive and the Board. The Improvements to IFRSs amendment
document issued in April 2009 only requires to be disclosed that
information that is provided to the chief operating decision maker
as a key decision-making tool. The Group has adopted this amendment
in order to clarify that the chief operating decision maker does
not use this information as a key decision making tool. IFRS 8
Operating Segments requires a geographic analysis of non-current
assets, and a disclosure of non-current assets by location is
therefore shown below:
Unaudited Unaudited Audited
As at As at As at
30 April 30 April 31 Oct
2016 2015 2015
GBPm GBPm GBPm
Non-current assets by location
UK 240.3 233.3 244.4
USA 180.7 184.2 177.1
Europe 4.4 4.8 4.3
Australia 23.3 23.4 21.2
448.7 445.7 447.0
---------- ---------- --------
4. SEASONALITY OF REVENUE
Revenue for all three of the business segments is more weighted
towards the second half of the financial year. This second half
weighting arises due to customer behaviours in the defence
marketplace, the timing of expected contract activity and planned
facility maintenance work programmes, and the acceptance testing of
product by customers.
5. TAX
Including discontinued operations, the effective tax rate on
underlying profit before tax for the period is 21.5% (H1 2015:
20.3%, 2015: 20.7%) and is based on the estimated effective tax
rate on underlying profit before tax for the full year. The tax
credit on non-underlying items for the period, including
discontinued operations, results in an effective tax rate of 25.9%
(H1 2015: 37.0%, 2015: 32.9%). The tax rate on total profit before
tax, including discontinued operations, is therefore 25.0% (H1
2015: 35.5%, 2015: 90.5%). The full year effective tax rate on
total profit before tax, including discontinued operations, is
currently forecast to be 18.7% (H1 2015: 35.5%, 2015: 90.5%).
6. (LOSS)/EARNINGS PER SHARE
On 24 February 2016, 85,915,828 new ordinary shares were issued
pursuant to the rights issue, with four new ordinary shares issued
for every nine existing ordinary shares held. As a result, the
total share capital increased to 279,226,442 ordinary shares. For
the calculation of earnings per share, the weighted average number
of shares in issue for periods prior to the rights issue has been
increased by 14.2% to reflect the bonus element of the rights
issue.
(Loss)/earnings per share are based on the average number of
shares in issue, excluding own shares held, 241,914,294 (H1 2015
(as restated): 220,674,248, 2015 (as restated): 220,675,049) and
the loss on continuing operations after tax of GBP12.9 million (H1
2015: GBP10.8 million loss, 2015: GBP5.3 million loss). Diluted
earnings per share has been calculated using a diluted average
number of shares in issue, excluding own shares held, of
241,914,294 (H1 2015 (as restated): 220,674,248, 2015 (as
restated): 220,675,049) and the loss on continuing operations after
tax of GBP12.9 million (H1 2015: GBP10.8 million loss, 2015: GBP5.3
million loss).
No dilution has been recognised for the purposes of basic
earnings per share from continuing operations due to there being a
loss per share for the period to 30 April 2016, the period to 30
April 2015 and for the year to 31 October 2015. In addition, no
dilution has been recognised for the purposes of underlying
earnings per share for the period to 30 April 2016 and for the
period to 30 April 2015, due to there being a loss per share for
those periods. Dilution has, however, been recognised in the
calculation of underlying earnings per share for the year to 31
October 2015, using a diluted average number of shares in issue,
excluding own shares held, of 225,030,669 (as restated).
The earnings and number of shares used in the calculations are
as follows:
Unaudited Unaudited
Half year Half year Audited
to to Year to
30 April 30 April 31 Oct
2016 2015 2015
Number Number Number
000s 000s 000s
Average number of shares in issue before adjustment
to reflect bonus element of rights issue 214,537 193,297 193,298
Impact of bonus element of the rights issue 27,377 27,377 27,377
---------- ---------- --------
Weighted average number of shares used to calculate
basic and
diluted loss per share 241,914 220,674 220,675
Additional shares issuable other than at fair
value in respect of options outstanding - - 4,356
---------- ---------- --------
Weighted average number of shares used to calculate
diluted
underlying (loss)/earnings per share 241,914 220,674 225,031
---------- ---------- --------
Continuing operations
Unaudited Unaudited
Half year Half year Audited
to to Year to
30 April 30 April 31 Oct
2016 2015 2015
Basic Diluted Basic Diluted Basic Diluted
GBPm GBPm GBPm GBPm GBPm GBPm
Underlying (loss)/profit
after tax (3.1) (3.1) (1.0) (1.0) 15.7 15.7
Non-underlying items (9.8) (9.8) (9.8) (9.8) (21.0) (21.0)
------ ---------- ----------- ----------- ----------- -----------
Total loss after tax (12.9) (12.9) (10.8) (10.8) (5.3) (5.3)
------ ---------- ----------- ----------- ----------- -----------
Basic Diluted Basic Diluted Basic Diluted
Pence Pence Pence Pence Pence Pence
As restated As restated As restated As restated
Loss per share (5.3) (5.3) (4.9) (4.9) (2.4) (2.4)
------ ---------- ----------- ----------- ----------- -----------
Underlying (loss)/earnings
per share (1.3) (1.3) (0.5) (0.5) 7.1 7.0
------ ---------- ----------- ----------- ----------- -----------
Continuing and discontinued operations
Unaudited Unaudited
Half year Half year Audited
to to Year to
30 April 30 April 31 Oct
2016 2015 2015
Basic Diluted Basic Diluted Basic Diluted
GBPm GBPm GBPm GBPm GBPm GBPm
Underlying (loss)/profit
after tax (3.1) (3.1) (1.0) (1.0) 15.7 15.7
Non-underlying items (8.0) (8.0) (6.8) (6.8) (16.1) (16.1)
------ ---------- ----------- ----------- ----------- -----------
Total loss after tax (11.1) (11.1) (7.8) (7.8) (0.4) (0.4)
------ ---------- ----------- ----------- ----------- -----------
Basic Diluted Basic Diluted Basic Diluted
Pence Pence Pence Pence Pence Pence
As restated As restated As restated As restated
Loss per share (4.6) (4.6) (3.5) (3.5) (0.2) (0.2)
------ ---------- ----------- ----------- ----------- -----------
Underlying (loss)/earnings
per share (1.3) (1.3) (0.5) (0.5) 7.1 7.0
------ ---------- ----------- ----------- ----------- -----------
7. DIVIDS
Unaudited Unaudited
Half year Half year Audited
to to Year to
30 April 30 April 31 Oct
2016 2015 2015
GBPm GBPm GBPm
Dividends paid on ordinary shares of 1p each
Final dividend for the year to 31 October 2014:
1.7p - - 3.2
Interim dividend for the year to 31 October
2015: 2.4p - - 4.7
Total dividends - - 7.9
------------ ------------ ---------
8. CASH AND CASH EQUIVALENTS
Included within cash is GBP0.1 million of restricted cash (H1
2015: GBP0.4 million, 2015: GBP0.1 million).
9. FINANCIAL INSTRUMENTS
As at 30 April 2016, there were no significant differences
between the book value and fair value (as determined by market
value) of the Group's financial assets and liabilities.
The fair value of derivative financial instruments is estimated
by discounting the future contracted cash flow using readily
available market data and represents a Level 2 measurement in the
fair value hierarchy under IFRS 7 Financial Instruments:
Disclosures. As at 30 April 2016, the total fair value of forward
foreign exchange contracts recognised in the condensed consolidated
balance sheet were an asset of GBP0.8 million (H1 2015: GBP1.0
million, 2015: GBP0.5 million) and a liability of GBP2.1 million
(H1 2015: GBP3.9 million, 2015: GBP1.9 million). The fair value of
interest rate swap contracts recognised in the condensed
consolidated balance sheet was an asset of GBPnil (H1 2015: GBP0.4
million asset, 2015: GBPnil).
10. ACQUISITIONS AND DISCONTINUED OPERATIONS
In the period to 30 April 2016 there was a non-underlying credit
of GBP2.0 million (H1 2015: GBP3.0 million, 2015: GBP4.9 million)
resulting from the release of certain provisions established on the
disposal of businesses in prior years, which were no longer
required, and the retranslation of remaining provisions.
11. PENSIONS
The defined benefit obligations are calculated using an
actuarial valuation as at 30 April 2016. In the period to 30 April
2016, retirement benefit obligations decreased to GBP17.4 million
(H1 2015: GBP18.6 million, 2015: GBP17.7 million), principally as a
result of employer contributions paid in accordance with the
funding plan agreed with the trustees of the Chemring Group Staff
Pension Scheme in 2013, offset by actuarial losses in the
period.
The difference between the expected return on assets and the
actual return on assets has been recognised as an actuarial
gain/(loss) on defined benefit pension schemes in the condensed
consolidated statement of comprehensive income in accordance with
the Group's accounting policy.
12. RELATED PARTY TRANSACTIONS
The Group had no related party transactions during the period
requiring disclosure.
13. CASH GENERATED FROM UNDERLYING OPERATIONS
Unaudited Unaudited
Half year Half year
to to Audited
30 April 30 April Year to
2016 2015 31 Oct 2015
GBPm GBPm GBPm
Operating (loss)/profit from continuing
operations (5.3) (8.3) 5.5
Operating profit from discontinued operations 2.0 3.0 4.9
----------- ----------- -------------
(3.3) (5.3) 10.4
Amortisation of development costs 3.5 3.0 6.2
Amortisation of intangible assets arising
from business combinations 6.7 7.1 14.0
Amortisation of patents and licenses 0.1 0.1 0.2
Loss on disposal of non-current assets 0.1 - 0.3
Depreciation of property, plant and equipment 8.9 7.5 16.3
Loss/(gain) on the movement in the fair
value of derivative financial instruments 0.3 (0.1) (0.5)
Share-based payment expense 1.2 0.6 1.2
Employer contributions to retirement
pension obligations (2.5) (2.5) (5.0)
----------- ----------- -------------
Operating cash flows before movements
in working capital 15.0 10.4 43.1
Increase in inventories (10.7) (16.8) (19.1)
Decrease/(increase) in trade and other
receivables 6.6 6.0 (3.1)
(Decrease)/increase in trade and other
payables (2.1) 9.6 9.3
Decrease in provisions (4.0) (0.1) (5.3)
----------- ----------- -------------
4.8 9.1 24.9
Add back non-underlying items:
Acquisition and disposal related credit (1.8) (2.7) (4.4)
Business restructuring and incident costs 0.6 1.8 6.4
Claim related (credit)/costs (0.2) 4.7 8.5
Loan note repayment and covenant amendment
fees 1.5 - -
Cash generated from underlying operations 4.9 12.9 35.4
----------- ----------- -------------
14. RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
Unaudited Unaudited
Half year Half year
to to Audited
30 April 30 April Year to
2016 2015 31 Oct 2015
GBPm GBPm GBPm
Increase/(decrease) in cash and cash
equivalents 3.0 (8.8) (14.1)
Decrease in debt and lease financing
due to cash flows 49.4 1.3 3.0
----------- ----------- -------------
Decrease/(increase) in net debt resulting
from cash flows 52.4 (7.5) (11.1)
Effect of foreign exchange rate changes (11.1) (6.0) (5.5)
Accrued debt finance costs - 1.5 -
Amortisation of debt finance costs (1.4) (0.9) (2.1)
----------- ----------- -------------
Movement in net debt 39.9 (12.9) (18.7)
Net debt at beginning of the period/year (154.3) (135.6) (135.6)
----------- ----------- -------------
Net debt at end of the period/year (114.4) (148.5) (154.3)
----------- ----------- -------------
15. ANALYSIS OF NET DEBT
As at
1 Nov Cash Non-cash Exchange As at 30
2015 flows changes rate effects April 2016
GBPm GBPm GBPm GBPm GBPm
Cash at bank and in hand 7.6 3.0 - (0.1) 10.5
Debt due within one year - - (24.2) - (24.2)
Debt due after one year (161.3) 49.1 22.8 (11.0) (100.4)
Finance leases (0.5) 0.3 - - (0.2)
Preference shares (0.1) - - - (0.1)
-------- ------- --------- -------------- ------------
(154.3) 52.4 (1.4) (11.1) (114.4)
-------- ------- --------- -------------- ------------
16. CONTINGENT LIABILITIES
The Group is, from time to time, party to legal proceedings and
claims, and is involved in correspondence relating to potential
claims, which arise in the ordinary course of business.
The Group is currently engaged in pre-action correspondence with
the Defense Contract Audit Agency of the US Department of Defense
in relation to disputed pricing calculations on certain contracts
fulfilled by Alloy Surfaces.
In light of the current status of these matters, the directors
do not consider the outcome of all the proceedings, actions and
claims in which it is currently involved, either individually or in
aggregate, will have a material adverse effect upon the Group's
financial position. A provision of GBP3.4 million (H1 2015: GBP8.6
million, 2015: GBP7.9 million) exists to cover estimated legal
costs for the Group with regards to pending and probable legal
actions.
17. EVENTS AFTER THE BALANCE SHEET DATE
On 4 May 2016, following receipt of regulatory approval, the
Group acquired 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.
18. CORPORATE WEBSITE
Further information on the Group and its activities can be found
on the corporate website at www.chemring.co.uk.
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.
-- 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 ISO 14001, 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 revenues.
The Group's businesses strive to maintain relationships at all
levels within the political structure of certain key countries, in
order to ensure that they are aware of and can react to proposed
changes, if and when they occur.
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.
Close relationships are maintained with customers on all key
future programmes, to ensure product and capability development
aligns with customer requirements.
The Group has introduced a more focused product development and
technology investment approach, in order to ensure that resources
are applied appropriately across the Group in support of the five
year plan. A Technology Review Board has been established to review
all proposed research and development projects, to ensure that key
initiatives are being prioritised and to eliminate possible
duplication of effort in different parts of the Group. Working
groups have been established to drive and co-ordinate the Group's
technology growth in certain key areas, such as cyber-security.
-- Product liability and other customer claims - The Group may
be subject to product liability and other claims from customers or
third parties, in connection with (i) the non-compliance of
products or services with the customer's requirements, due to
faults in design or production; (ii) the delay or failed supply of
the products or the services indicated in the contract; or (iii)
possible malfunction or misuse of products.
As many of the Group's products are single-use devices, it is
often impossible to conduct functional testing without destroying
the product, and this increases the risk of possible product
failure, either in use or during customers' own sample-based
functional tests.
Substantial claims could harm the Group's business and its
financial position. In addition, any accident, product failure,
incident or liability, even if fully insured, could negatively
affect the Group's reputation among customers and the public,
thereby making it more difficult for the Group to compete
effectively.
Material breaches in the performance of contractual obligations
may also lead to contract termination and the calling of
performance bonds.
The businesses maintain rigorous control of their production
processes, monitoring critical parameters on a batch or unit basis.
State-of-the-art techniques, including statistical process control
or Six Sigma, are applied and, where appropriate, processes are
automated to reduce the scope for human error. Detailed assessments
of incoming components and materials are conducted to ensure
compliance with specifications.
Product liability claims from third parties for damage to
property or persons are generally covered by the Group's insurance
policies, subject to applicable insurance conditions.
-- Compliance and corruption risks - The Group operates in over
fifty countries worldwide, in a highly-regulated environment, and
is subject to applicable laws and regulations of each of these
jurisdictions. The Group must ensure that all of its businesses,
its employees and third parties providing services on its behalf
comply with all relevant legal obligations.
The nature of the Group's operations could also expose it to
government investigations relating to import-export controls, money
laundering, false accounting, and corruption or bribery.
The Group requires a significant number of permits, licences and
approvals to operate its business, which may be subject to
non-renewal or revocation.
Non-compliance could result in administrative, civil or criminal
liabilities, and could expose the Group to fines, penalties,
suspension or debarment, and reputational damage.
Loss of key operating permits and approvals could result in
temporary or permanent site closures, and loss of business.
The Group has a central legal and compliance function which
assists and monitors all Group businesses, supported by dedicated
internal legal resource in the US. The Group's internal audit
activities also incorporate a review of legal risks.
The Group operates under a Global Code of Business Principles,
which stipulates the standard of acceptable business conduct
required from all employees and third parties acting on the Group's
behalf. The Group has also adopted a Bribery Act Compliance Manual,
incorporating all of its anti-bribery policies and procedures.
A significant proportion of the Group's management have received
training in relation to ethics and anti-corruption.
-- Cyber related risks - Cyber security and related risks are
key emergent areas of critical importance for all businesses,
particularly for those involved in the defence and security sector.
Threats emanate from a wide variety of sources and could target a
range of systems for a wide range of purposes, making response
particularly difficult. The data and systems which need to be
protected include customer classified or sensitive information,
commercially sensitive information, employee-related data and
safety-critical manufacturing systems.
The Group may suffer from critical systems failures, or its
intellectual property, or that of its customers, may fall into the
hands of third parties.
In addition to business interruption and financial loss, the
Group may suffer reputational damage and its business of providing
cyber-security services to customers may be irreparably
damaged.
A detailed threat assessment has been completed, and an action
plan to counter the Group's identified major threats has been
implemented.
The Group adopts a number of cyber security defence measures,
encompassing, as appropriate to the nature of the threat and the
sensitivity of data or systems being protected, hardware, software,
system, process or people-based solutions. Where appropriate,
government or commercial accreditation of networks and systems is
obtained in support of the overall cyber security programme.
A review of the Group's IT and security systems is included
within the internal audit programme.
-- Financial risks - Details of the financial risks to which the
Group is potentially exposed and details of mitigating factors are
set out in the financial review and note 24 of the group financial
statements within the 2015 Annual Report and Accounts.
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR SEUFUSFMSELM
(END) Dow Jones Newswires
June 21, 2016 02:00 ET (06:00 GMT)
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