TIDMCHG
RNS Number : 5552U
Chemring Group PLC
19 January 2017
FOR IMMEDIATE RELEASE 19 January 2017
CHEMRING GROUP PLC
RESULTS FOR THE YEARED 31 OCTOBER 2016
As reported At 2015 exchange
rates
Change 2016 Change 2016 2015
Continuing operations
Revenue +26.5% GBP477.1m +16.7% GBP440.3m GBP377.3m
Underlying operating
profit(1) +41.0% GBP48.5m +25.0% GBP43.0m GBP34.4m
Underlying profit
before tax(1) +71.7% GBP34.0m +47.0% GBP29.1m GBP19.8m
Net debt -43.2% GBP87.6m -57.7% GBP65.2m GBP154.3m
Underlying earnings
per share(1 2) +45.1% 10.3p 7.1p
Dividend per share(2) 1.3p 2.1p
Total operating profit GBP26.2m GBP5.5m
Total profit/(loss) GBP8.0m GBP(9.1)m
before tax
Total earnings/(loss)
per share(2) 2.5p (2.4)p
1 Underlying measures referred to in this announcement are
stated before costs relating to acquisitions and disposals,
business restructuring and incident costs, profit/loss on disposal
of businesses, items deemed to be of an exceptional nature,
impairment of goodwill and acquired intangibles, impairment of
assets held for sale, amortisation of acquired intangibles and
gains/losses on the movement in the fair value of derivative
financial instruments. A reconciliation of underlying and total
operating profit is set out in note 3.
2 Prior year figure restated as a result of the rights issues.
See note 4 for further details.
Highlights
-- Operational and financial performance improved in H2 with
strong 40mm volumes and favourable currency impact
-- Cash generation improved with cash flows from operating
activities of GBP76.4 million (2015: GBP35.4 million), giving cash
conversion* of underlying operating profit of 123% (2015: 53%)
-- Net debt reduced to GBP87.6 million; net debt to EBITDA at 1.15x
-- Continued improvement in safety performance, with LTI rate the lowest on record
-- Continued progress on R&D phases of key US Programs of Record and on F-35
-- Operational Excellence Programme launched to drive further
improvements in safety, knowledge sharing, gross margins and cash
generation
-- New Group Finance Director appointed post period end
-- Order book at year end of GBP592.9 million (2015: GBP569.6
million), of which GBP368.0 million is currently expected to be
recognised as revenue in FY17
-- Board recommending a final dividend of 1.3p per share (2015: nil)
* See note 5 for further details
Michael Flowers, Chemring Group Chief Executive, commented:
"2016 was a busy year for Chemring, both from a corporate and
operational perspective, and it is pleasing to see that the efforts
of so many have delivered a positive result. Order intake and
revenue has been solid across the Group, and strong in the
Energetics segment. Subsequent to the completion of the rights
issue and with good cash conversion, the balance sheet is now
strengthened, positioning us well for the future.
Against the backdrop of a stronger balance sheet and improving
delivery performance, I see continued opportunities for the Group.
The ongoing execution against the US Programs of Record within the
Sensors businesses, combined with a slow but steady ramp up of F-35
countermeasure requirements, are key to future growth, as is the
continued level of performance at Roke. Our base business in
Energetic Systems and Countermeasures continues to be solid, and
the order book provides good visibility.
Progress on site and business consolidations in 2017, combined
with efforts to ensure our cost base matches market need, is
expected to underpin profitability, and the Board's expectations
for FY17 are unchanged, based on current FX rates. The initiation
of an Operational Excellence Programme, designed to further enhance
safety, improve gross margins and cash conversion, is expected to
deliver improved returns in the coming years."
For further information:
Group Chief Executive, Chemring Group
Michael Flowers PLC 01794 833901
Deputy Group Finance Director, Chemring
Andrew Davies Group PLC 01794 833901
Group Director of Corporate Affairs, Chemring
Rupert Pittman Group PLC 01794 833901
Andrew Jaques
John Olsen
James White MHP Communications 0203 128 8100
Cautionary statement
This announcement contains forward-looking statements that are
based on current expectations or beliefs, as well as assumptions
about future events. These forward-looking statements can be
identified by the fact that they do not relate only to historical
or current facts. Forward-looking statements often use words such
as anticipate, target, expect, estimate, intend, plan, goal,
believe, will, may, should, would, could, is confident, or other
words of similar meaning. Undue reliance should not be placed on
any such statements because they speak only as at the date of this
document and, by their very nature, they are subject to known and
unknown risks and uncertainties and can be affected by other
factors that could cause actual results, and Chemring's plans and
objectives, to differ materially from those expressed or implied in
the forward-looking statements. There are a number of factors which
could cause actual results to differ materially from those
expressed or implied in forward-looking statements. Among the
factors that could cause actual results to differ materially from
those described in the forward-looking statements are; increased
competition, the loss of or damage to one or more key customer
relationships, changes to customer ordering patterns, delays in
obtaining customer approvals for engineering or price level
changes, the failure of one or more key suppliers, the outcome of
business or industry restructuring, the outcome of any litigation,
changes in economic conditions, currency fluctuations, changes in
interest and tax rates, changes in raw material or energy market
prices, changes in laws, regulations or regulatory policies,
developments in legal or public policy doctrines, technological
developments, the failure to retain key management, or the key
timing and success of future acquisition opportunities or major
investment projects. Chemring undertakes no obligation to revise or
update any forward-looking statement contained within this
announcement, regardless of whether those statements are affected
as a result of new information, future events or otherwise, save as
required by law and regulations.
Notes to editors
-- Chemring is a global business that specialises in the
manufacture of high technology products and the provision of
services to the aerospace, defence and security markets
-- Employing approximately 2,700 people worldwide, and with
production facilities in four countries, Chemring meets the needs
of customers in more than fifty countries
-- Chemring is now organised under three strategic product
segments: Countermeasures, Sensors & Electronics, and Energetic
Systems
-- Chemring has a diverse portfolio of products that deliver
high reliability solutions to protect people, platforms, missions
and information against constantly changing threats
-- Operating in niche markets and with strong investment in
research and development, Chemring has the agility to rapidly react
to urgent customer needs
www.chemring.co.uk
Presentation and photography
The presentation slides and a live audio webcast of the
presentation to analysts will be available at the Chemring Group
results centre www.chemring.co.uk/resultscentre at 09.30 (UK time)
on 19 January 2017. A recording of the audio webcast will be
available later that day. Original high-resolution photography is
available to the media by contacting Kirsty Wilson, MHP
Communications: kirsty.wilson@mhpc.com / tel: 020 3128 8100.
Overview
2016 has been a year of progress with the Group continuing its
recent focus on operational and safety improvements, in addition to
restructuring its balance sheet. After a disappointing first half
that was impacted by delayed contract starts and operational
issues, full year performance was heavily weighted to the second
half. Production and delivery performance across all sites in the
second half was at or above target levels and the Group therefore
met the Board's expectations for the year.
This improved performance reflects the progress that has been
made, and continues to be made, across the Group. Improved
operational focus and greater collaboration amongst the businesses
is delivering tangible benefit in a market that is starting to
recover from multi-year softness, while the Programs of Record in
the Sensors & Electronics segment offer opportunities for
future growth.
In January 2016, the Company raised GBP80.8 million via a rights
issue, the primary purpose of which was to alleviate the
constraints that its indebtedness was putting on growth
opportunities. GBP48.8 million of the proceeds was used to repay a
proportion of the Group's outstanding US loan notes, reducing the
Group's future finance costs.
Having strengthened the balance sheet, the Group is now fully
focusing on the operational priorities that will underpin its
future growth. These priorities include capacity investment
projects, implementing significant cost saving initiatives,
ensuring excellence in contract delivery and delivering improved
working capital management.
The effects of this renewed focus are visible in these results
and, in particular, the improving operational performance across
the Group in the second half of the year.
Safety
As always, safety remains the Group's first priority and the
Group continues to drive improvement in this area.
Lost time injury performance continues to improve, and the lost
time injury rate of 0.35 is the best result to date. Of the nine
lost time injuries, only one resulted from an energetic incident.
This improvement in performance has been driven by a four pronged
approach to safety - process improvement, capital improvement,
enhanced leadership engagement and cultural improvement. Capital
investment in safety has continued, with key projects undertaken
during the year including the automated countermeasure slurry
process at Kilgore, detonator loading at Chemring Energetics and
improvements to energetic waste disposal facilities.
Despite best efforts, some energetic incidents did occur during
the year, most notably at the Australian and US countermeasures
facilities. Whilst these caused some disruption to operations and
impacted first half financial performance, these incidents resulted
in no injuries, with all safety systems operating as planned,
protective equipment exceeding design performance, and personnel
response appropriate.
In the forthcoming year we shall prioritise our effort to reduce
further the exposure of our people to potentially lethal hazards.
The focus will be on removing the hazard where possible, followed
by the reduction in exposure through plant and engineering controls
and automation.
Strategy and organisation
Countermeasures
The Countermeasures strategy remains unchanged as the Group
seeks to strengthen its position in the global market. A new
special material decoy has been launched with initial and follow-on
orders received. In Australia, qualification as the second source
supplier for F-35 Joint Strike Fighter ("F-35") flares continues,
with three of the four qualification phases now completed. In the
US, Low Rate Initial Production ("LRIP") 5 F-35 deliveries were
completed, the Group is under contract for LRIP 6, and has won the
competition for initial supply of F-35 training flares. The
acquisition of key assets and technology from Wallop Defence
Systems in the UK, which was completed in May 2016, has further
strengthened the air countermeasures portfolio and positioning,
particularly in the European market.
Sensors & Electronics
Within Sensors & Electronics, the focus continues to be on
expansion of capability and product portfolio in the major
operating niches of tactical electronic warfare ("EW"), counter-IED
and explosives detection, chemical warfare detection and biological
warfare detection. Progression against the US Programs of Record
continues, with the progression into stage 3 (prototype
development) of the Next Generation Chemical Detector ("NGCD") most
noteworthy. Success on the major US Programs of Record remains the
Group's absolute focus, both due to the financial return from these
programmes, and the leading global technological position that will
result.
Multiple orders have been received for the Resolve tactical EW
system, including repeat orders in Europe and the Middle East, with
the winning of the Land 500 programme in Australia being the
largest order achieved to date. Post year end, a further order was
received from a new NATO customer. Post year end negotiations have
commenced with the US Government for the first hardware test stage
for Husky Mounted Detection System ("HMDS") enhanced systems, with
supply of an initial eight systems for trial in-theatre. In
addition, the Group received an upgrade contract for the same
enhanced capability from another NATO HMDS user.
Roke's focus will remain on delivering consultancy and contract
R&D services to critical government and commercial customers.
Investment focus shall be on people, to ensure their training and
development matches emergent market needs. Having opened a new
satellite office in Gloucester to better service the needs of the
customer base, further geographic expansion may be undertaken as
market needs dictate.
Energetic Systems
The Energetic Systems businesses continue to be managed in order
to maximise market position in their operating niches, maintain
product qualification, and ensure safe and effective operations.
Recognising that this segment is far more commodity based than the
other segments, with price being the key discriminator, cost base
management, footprint and delivery performance remain critical to
ensure maximum returns.
Given its strong position in the space, missile and aerospace
market, the Group shall continue to invest in the niche market
positions held by Chemring Energetic Devices. Future investment
will focus on new devices for forthcoming satellite applications,
development of an in-house precision manufacturing capability, and
relocation of the primary explosives capability from California to
Illinois. This will result in a single, vertically integrated
facility that will better meet emergent customer needs.
During 2016 the US management structure has been revised to
improve efficiency.
Trading summary
Revenue from continuing operations was GBP477.1 million (2015:
GBP377.3 million). This revenue generated an underlying operating
profit of GBP48.5 million (2015: GBP34.4 million). Including
non-underlying items, total operating profit was GBP26.2 million
(2015: GBP5.5 million).
Underlying profit before tax increased by 71.7% from GBP19.8
million to GBP34.0 million, resulting in underlying earnings per
share of 10.3p (2015: 7.1p).
The closing order book for continuing operations increased by
GBP23.3 million during the year and at 31 October 2016 was GBP592.9
million (2015: GBP569.6 million).
The Group's net debt at 31 October 2016 was GBP87.6 million
(2015: GBP154.3 million).
Operational overview
Following a disappointing first half, driven by delayed contract
starts and operational execution that was below expectations, the
Group delivered a strong second half with production and delivery
performance across all sites at or above targeted levels, leading
to GBP297 million of revenue and GBP45 million of operating profit
in the half.
This improved performance has been driven by improvements in
consistency of production at the Countermeasures businesses, with
prior investment in design and process control starting to bear
fruit. Production gains have been made at Chemring Ordnance, where
40mm ammunition manufacture quickly ramped-up. Similarly, second
half performance at other Energetic Systems sites has met
expectations.
The major restructuring completed at Roke during 2015 has
delivered positive results, with operating profit and cash flow
returns improving year-on-year. Other structural, cost base
optimisation and site consolidation efforts are delivering to plan,
with further initiatives in development.
In late 2016 a Group-wide Operational Excellence Programme was
initiated with the clear aims of further improving safety,
increasing operating margins, and delivering greater levels of cash
conversion. This programme includes initiatives driven at the
Group's centre, such as process alignment and further investment
prioritisation; however, the key elements of the programme are
business and segment focused. These centre around knowledge and
best practice sharing to enable all businesses to meet internal
best practice, combined with external benchmarking to further
enhance operations. The programme has also identified a number of
business unit and segment specific activities that will be
progressed, such as further vertical integration in the Group's
space and missile energetic components businesses, lean and
engineering process control implementation within all businesses,
and alternate energetic material mixing technologies for
countermeasures.
Countermeasures
-- Revenue: GBP138.3 million (2015: GBP125.8 million)
-- Underlying operating profit: GBP12.8 million (2015: GBP17.5 million)
-- Underlying operating margin: 9.3% (2015: 13.9%)
Countermeasures revenue reflected the continued recovery in the
segment, increasing by 9.9% on the prior year to GBP138.3 million
(2015: GBP125.8 million). The impact of the production issues and
energetic incidents that were experienced in the first half were
partly offset by GBP2.8 million of insurance proceeds related to an
earlier energetic incident. This resulted in a decline in margins
from 13.9% to 9.3% and an underlying profit of GBP12.8 million,
compared with GBP17.5 million in 2015. On a constant currency basis
using 2015 rates, revenue was GBP127.8 million and underlying
operating profit was GBP11.7 million.
The closing order book for Countermeasures was GBP177.0 million,
down 3.9% on 2015. The decline, principally in the US, reflects the
improved production consistency and the progressive working through
of orders placed in earlier years, but also reflects the budget
constraints that continue to be experienced with many customers.
The transition from legacy aircraft to next generation platforms
together with the continued depletion of customer inventory, built
up during the Iraq and Afghanistan conflicts, is currently
resulting in low order placement. Encouragingly however, low rate
initial production contracts on the next generation platforms
including the F-35 are beginning to be placed more frequently.
Against this backdrop the US businesses have focused on
rebalancing their cost base and driving production efficiencies in
order to ensure long term competitiveness.
The facility consolidation at Philadelphia continues to plan.
All necessary approvals are in place and, depending on customer
delivery requirements, will complete in Q2 FY17. The remaining site
will temporarily close in Q2 FY17 to enable the relocation of
assets and the modification of the plant's layout and services. The
cash 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 2018.
The implementation of a long-term manufacturing plan in the US,
incorporating productivity improvements, waste and waste removal
cost reduction, personnel reduction and overhead reduction is
underway. This initiative is expected to position the business well
for the future.
The UK Countermeasures business had an improved second half,
overcoming technical issues on one product line that occurred in
the first half, although the resolution of these issues meant
operating margins were lower than expected. The stronger second
half performance was further aided through a shift in product mix
utilising existing spare capacity. In particular, demand for chaff
products was higher than in previous years and this increased
demand was met through manufacturing efficiency improvements
implemented during the previous twelve months.
2017 trading performance for Countermeasures, while underpinned
by a good order book, is expected to be slightly down year on year,
as production will be impacted by US site consolidation activities
in the first half.
Sensors & Electronics
-- Revenue: GBP96.9 million (2015: GBP99.1 million)
-- Underlying operating profit: GBP11.4 million (2015: GBP9.3 million)
-- Underlying operating margin: 11.8% (2015: 9.4%)
Revenue in the Sensors & Electronics segment decreased by
2.2% from the prior year to GBP96.9 million (2015: GBP99.1
million), reflecting the completion of production contracts with
the US Department of Defense in the comparative period, although
revenue grew at the UK businesses. Margins improved from 9.4% to
11.8% and Sensors & Electronics increased its operating profit
by 22.6% to GBP11.4 million (2015: GBP9.3 million). On a constant
currency basis using 2015 rates, revenue was GBP92.4 million and
underlying operating profit was GBP11.3 million.
Many of the Group's Sensors and Electronics products relate to
long-term counter-IED, chemical and biological detection Programs
of Record for the US DoD. These programmes are currently
transitioning through research and development phases, where
contract sizes and margins are significantly smaller than full rate
production contracts. The closing order book for Sensors &
Electronics was GBP49.3 million, a decrease of 34.9% on 2015. This
decrease principally reflects the reversing of an order from Turkey
that was booked in 2014. The progression of this contract in its
originally envisaged form is now considered unlikely given the
overall political uncertainty within Turkey. The Board therefore
considered it prudent to de-book this contract until greater
clarity exists.
Activity in the US has primarily focused on the progression of
long-term Programs of Record for the US DoD, and good progress has
been made this year.
In response to identified capability needs, the US Government
realigned the HMDS upgrade programme to incorporate spiral
development. The next major milestone for the Program of Record
will be contract award for deliveries of enhanced capability
detectors for in-theatre trial, to be followed, if successful, by
contracting for fleet upgrade. Concurrently, further customer
funded R&D will be undertaken to develop ongoing system
enhancements. Overall funding allocation is unchanged. Customer
engagement in the Middle East remains encouraging, with vehicle
mounted ground penetrating radar ("GPR") variants being evaluated
by a number of potential customers.
In chemical and biological detection, the Group has also
continued to focus activity on the long-term DoD Programs of
Record. In addition to the progress being made on the NGCD
programme, funded development of Chemring's sole source position on
the Joint Biological Tactical Detection System programme is
ongoing. In 2017 it is expected that the JBTDS programme, for which
Chemring is the sole source supplier, will move from the
engineering and manufacturing development ("EMD") phase into low
rate initial production. The NGCD programme, for which the Group is
contracted for the R&D phase of all three streams, is expected
to move into the EMD phase in 2017. Winning of these phases will be
subject to competitive tender.
While good progress has been made, the transition through
research and development phases and the resulting pause in
manufacturing for some of the Group's key sensors and electronics
products has resulted in a decline in earnings derived from these
products. Chemring Sensors & Electronic Systems ("CSES") has
therefore taken the necessary action to address its structure and
cost base. NIITEK and Chemring Detection Systems have been merged
into a single legal entity under one senior management team. The
merger of these two businesses will facilitate the closure of one
facility. Overhead reduction measures continue to be balanced with
the need for continued investment in research and development
capability.
In the UK, the separation of the contract R&D activities of
Roke from the products-based business undertaken by Chemring
Technology Solutions has delivered positive results. Roke exceeded
its order and revenue targets and utilisation rates have continued
to rise. A growing number of opportunities in the communications
intelligence and cyber areas, combined with the impact of the new
operating model, have driven an increase in profitability.
2017 trading performance for Sensors & Electronics is
expected to benefit from the continued improvement in profitability
in the UK businesses, primarily in electronic warfare and cyber
security. Research and development activities in the US are
expected, subject to contract award, to transition to engineering
and manufacturing development ("EMD") and low rate initial
production ("LRIP") phases as the year progresses.
Energetic Systems
-- Revenue: GBP241.9 million (2015: GBP152.4 million)
-- Underlying operating profit: GBP31.7 million (2015: GBP15.1 million)
-- Underlying operating margin: 13.1% (2015: 9.9%)
Revenue for the Energetic Systems segment increased by GBP89.5
million to GBP241.9 million (2015: GBP152.4 million). This improved
performance was primarily as a result of the 40mm ammunition
contract with a customer in the Middle East which, despite its
delayed start, has performed well and contributed GBP44.5 million
of revenue. Margins improved from 9.9% to 13.1% and Energetic
Systems increased its operating profit by 109.9% to GBP31.7 million
(2015: GBP15.1 million). On a constant currency basis using 2015
rates, revenue was GBP220.1 million and underlying operating profit
was GBP27.4 million.
With the exception of Chemring Defence, which continues to
experience very challenging markets, every business within the
segment saw order book growth. The closing order book for Energetic
Systems was GBP366.6 million, an increase of 18.4% on 2015.
Delays in necessary permits and export approvals associated with
the 40mm ammunition contract meant that production under this
contract did not fully commence until late in the first half of the
year. This resulted in a heavier second half weighting and slightly
lower than expected contribution to the full year. Production and
deliveries ramped-up during the second half, in line with
expectations. The contract continues to perform well and, assuming
the extension of the existing letter of credit, is expected to be a
strong contributor to 2017 performance.
At Chemring Energetic Devices, the consolidation of the Downers
Grove, Illinois and Torrance, California facilities is progressing
in line with expectations, with all planning approvals in place.
Over 40% of the Torrance product line has now been successfully
transferred, and the NASA Standard Initiator qualification at
Downers Grove, the most critical element of the transition, is
progressing to plan. Manufacture of Torrance product at Downers
Grove is achieving improved on-time in-full performance, with
initial evidence showing gross margin improvement in addition to
the overhead savings to be achieved once the Torrance site is
closed. Customers continue to support the efforts to transition
production to the Illinois facility, and this improved adherence to
customers' delivery schedules has resulted in increased order
intake. This project is still anticipated to have a cash cost of
approximately $7.0 million, with the site rationalisation expected
to deliver approximately $5.0 million in annual savings from
2019.
Chemring Defence has for some time been operating in very
challenging markets and has recently experienced a substantial
downturn in customer requirements. Depressed oil prices and
significantly reduced budgets have led to changing customer needs,
and many of the expected orders from the business's largest
customers have been delayed or have failed to materialise. In light
of these reduced customer requirements, a major restructuring
programme has been implemented in order to reduce the current
overcapacity within the business and place it on a more sustainable
footing for the future.
2017 trading performance for Energetic Systems is again expected
to be strong, with the segment benefiting from a strong order book,
and continued improvement in delivery performance across the
segment.
Rights issue
The rights issue was successfully completed on 23 February 2016
raising GBP80.8 million. The net proceeds of the rights issue after
equity issue costs were GBP75.2 million, and GBP48.8 million was
immediately used to pay down loan notes. The balance of the raise
was used for make-whole premiums pursuant to the terms of the loan
notes (GBP3.7 million), repayment costs (GBP1.4 million) and
general corporate purposes. In respect of the latter, the scheduled
repayment of loan notes due in November 2016 of $36.0 million was
repaid from cash at hand, enabled in part by rights issue
funds.
The high level of indebtedness has ceased to be a day-to-day
management issue for the business subsequent to the rights issue,
allowing focus to be placed on operational and strategic
initiatives that will support growth and deliver shareholder value.
As advised when launching the rights issue, the Group's target
capital structure is 1.0x - 1.5x net debt to EBITDA, a range the
Group was well within at the end of 2016.
Board of Directors
This year has seen the Group reshape the membership of the
Board.
Peter Hickson retired as a director at the end of June, having
been appointed as Chairman of the Group in October 2010. During
Peter's tenure the Group transitioned through a period of
unprecedented change within the defence industry, following the end
to the wars in Iraq and Afghanistan. This was not an easy period
and Peter deserves the Group's gratitude for his leadership and
commitment.
Carl-Peter Forster joined the Board on 1 May 2016 as an
independent non-executive director and Chairman-designate. He
succeeded Peter Hickson as Chairman of the Board following Peter's
retirement on 30 June 2016.
Daniel Dayan joined the Board as an independent non-executive
director on 7 March 2016, becoming Chairman of the Remuneration
Committee from that date.
Ian Much and Andy Hamment stood down from the Board on 21 March
2016 and 20 April 2016 respectively. Nigel Young succeeded Ian Much
as Senior Independent Director with effect from 21 March 2016.
Andrew Davies joined the Board as an independent non-executive
director on 17 May 2016.
On 29 June 2016, the Group announced that Steve Bowers, Group
Finance Director, had informed the Board of his intention to leave
the Group. Steve left the Group on 30 September 2016 and his role
has since been covered on an interim basis by Andrew P. Davies,
Deputy Group Finance Director.
On 13 December 2016, the Group announced the appointment of
Andrew Lewis as Group Finance Director. He was previously Group
Finance Director of Avon Rubber p.l.c. Andrew joined Chemring on 9
January 2017 and will join the Board of Chemring on 19 January 2017
after the approval and announcement of the 2016 results.
Current trading and outlook
Trading since the start of FY17 has been in line with
expectations across all businesses.
The Board's expectations for the Group's performance for FY17
remain unchanged, based on current foreign exchange rates.
The expected profile of orders, revenue and margins, combined
with routine seasonality within the business, means that the Group
continues to expect FY17 to reflect a significant second-half
weighting in profitability.
The order book as at 31 October 2016 increased 4.1% to GBP592.9
million, of which GBP368.0 million is currently expected to be
recognised as revenue in FY17. On a constant currency basis using
2015 rates, the order book was GBP489.8 million.
The order book at 31 December 2016 was GBP572.1 million.
Group results
An analysis of underlying and total results is set out
below:
2016 2016 2015 2015
Underlying Total Underlying Total
GBPm GBPm GBPm GBPm
-------------------------- ----------- ------ ----------- ------
Revenue
- continuing operations 477.1 477.1 377.3 377.3
- discontinued operations - - - -
-------------------------- ----------- ------ ----------- ------
477.1 477.1 377.3 377.3
-------------------------- ----------- ------ ----------- ------
Operating profit
- continuing operations 48.5 26.2 34.4 5.5
- discontinued operations - 4.7 - 4.9
-------------------------- ----------- ------ ----------- ------
48.5 30.9 34.4 10.4
Net finance expense (14.5) (18.2) (14.6) (14.6)
-------------------------- ----------- ------ ----------- ------
Profit/(loss) before tax 34.0 12.7 19.8 (4.2)
Tax (7.1) (1.6) (4.1) 3.8
-------------------------- ----------- ------ ----------- ------
Profit/(loss) after tax 26.9 11.1 15.7 (0.4)
-------------------------- ----------- ------ ----------- ------
The use of underlying measures, in addition to total measures,
is considered by the Board to improve comparability of business
performance between periods. Underlying measures referred to are
stated before costs relating to acquisitions and disposals,
business restructuring and incident costs, profit/loss on disposal
of businesses, items deemed to be of an exceptional nature,
impairment of goodwill and acquired intangibles, impairment of
assets held for sale, amortisation of acquired intangibles and
gains/losses on the movement in the fair value of derivative
financial instruments. A reconciliation of underlying and total
operating profit is set out in note 3.
During the year, changes in foreign exchange rates, principally
the depreciation of sterling against the US dollar, increased
reported revenue from continuing operations by GBP36.8 million. At
constant exchange rates, revenue from continuing operations was
GBP440.3 million, an increase of 16.7%.
Chemring's operating segments are Countermeasures, Sensors &
Electronics and Energetic Systems. An analysis of segmental revenue
and underlying operating profit is set out below:
2016 2016 2015 2015
Underlying Underlying Underlying Underlying
2016 operating operating 2015 operating operating
Revenue profit margin Revenue profit margin
GBPm GBPm % GBPm GBPm %
---------------------- -------- ----------- ----------- -------- ----------- -----------
Countermeasures 138.3 12.8 9.3 125.8 17.5 13.9
Sensors & Electronics 96.9 11.4 11.8 99.1 9.3 9.4
Energetic Systems 241.9 31.7 13.1 152.4 15.1 9.9
---------------------- -------- ----------- ----------- -------- ----------- -----------
477.1 55.9 11.7 377.3 41.9 11.1
Unallocated corporate
costs - (7.4) - - (7.5) -
---------------------- -------- ----------- ----------- -------- ----------- -----------
Continuing operations 477.1 48.5 10.2 377.3 34.4 9.1
---------------------- -------- ----------- ----------- -------- ----------- -----------
Underlying operating profit from continuing operations was
GBP48.5 million (2015: GBP34.4 million), an increase of 41.0%. The
underlying operating margin was 10.2% (2015: 9.1%).
Discontinued operations mainly comprises the release of disposal
provisions relating to the European munitions businesses - Mecar,
based in Belgium, and Simmel, located in Italy - which were sold in
May 2014.
The total operating profit was GBP30.9 million (2015: GBP10.4
million). This includes non-underlying costs of GBP17.6 million
(2015: GBP24.0 million), split between continuing costs of GBP22.3
million and discontinued credits of GBP4.7 million, which are
analysed later in this announcement.
Net underlying finance expense was GBP14.5 million (2015:
GBP14.6 million). The reduction reflects the repayment of loan note
debt during the year and lower usage of the revolving credit
facility, offset by adverse foreign exchange movements and an
increase in the amortisation of prepaid facility fees.
Underlying profit before tax from continuing operations was
GBP34.0 million (2015: GBP19.8 million), an increase of 71.7%. Tax
on underlying profit before tax from continuing operations was
GBP7.1 million (2015: GBP4.1 million), representing an effective
tax rate of 20.9% (2015: 20.7%). The tax rate on underlying profit
before tax remains comparable to the UK corporation tax rate, and
continues to benefit from the utilisation of R&D and other tax
credits. Including non-underlying items, the total profit before
tax from continuing operations was GBP8.0 million (2015: GBP9.1
million loss).
The effective tax rate on the total profit before tax from
continuing operations was 18.8% (2015: 41.8%) due to the geographic
mix of profits, changes to the amounts of deferred tax assets
considered recoverable in respect of both tax losses and US
interest limitations, prior year adjustments and the recent changes
in UK corporation tax rates.
Analysis of non-underlying items
The use of underlying measures, in addition to the total
measures noted above, is considered by the Board to improve
comparability of business performance between periods and,
consistent with past practice, certain items are classed as
non-underlying, as set out below:
2016 2015
Continuing operations: GBPm GBPm
Acquisition and disposal related costs 0.3 0.5
Business restructuring and incident costs 5.4 6.4
Claim related (credit)/costs (0.6) 8.5
Loan note repayment costs 1.4 -
Intangible amortisation arising from business
combinations 14.8 14.0
Loss/(gain) on fair value movements of derivative
financial instruments 1.0 (0.5)
Non-underlying items excluded from underlying
operating profit 22.3 28.9
Accelerated interest costs 3.7 -
--------------------------------------------------- ------ ------
Non-underlying items excluded from underlying
profit before tax 26.0 28.9
--------------------------------------------------- ------ ------
Discontinued operations:
Disposal related credit (4.7) (4.9)
--------------------------------------------------- ------ ------
Non-underlying items excluded from profit
before tax 21.3 24.0
--------------------------------------------------- ------ ------
Disposal related credits of GBP4.7 million relate to the expiry
of certain tax and environmental liabilities arising from the
disposal of several businesses in prior years. Business
restructuring and incident costs of GBP5.4 million principally
comprise of restructuring costs in relation to Chemring Defence UK
and across the US businesses.
An impairment analysis, based on value-in-use calculations
reflecting current conditions in the defence industry, has been
conducted and no impairments are considered to exist at 31 October
2016.
The amortisation of intangible assets arising from business
combinations was GBP14.8 million (2015: GBP14.0 million). This cost
is treated as non-underlying to improve comparability and
understanding of the results given its large size and non-cash
nature.
The cash outflow from non-underlying items was GBP8.1 million
(2015: GBP8.4 million).
Research and development
R&D expenditure was GBP57.8 million (2015: GBP56.3 million).
Continued investment in R&D is a key aspect of the Group's
strategy, and levels of internally-funded R&D are expected to
be maintained as investment in product development continues,
particularly within Sensors & Electronics. An analysis of
R&D expenditure is set out below:
2016 2015
GBPm GBPm
------------------------------------ ----- -----
Customer-funded R&D 43.4 38.2
Internally-funded R&D
- expensed to the income statement 7.7 9.2
- capitalised 6.7 8.9
------------------------------------ ----- -----
Total R&D expenditure 57.8 56.3
------------------------------------ ----- -----
Amortisation of development and patent costs was GBP6.9 million
(2015: GBP6.4 million), with the increase reflecting a number of
previously capitalised projects coming on-stream. A further
increase in amortisation of development and patent costs is
anticipated for 2017 as additional Sensors & Electronics
projects complete their development phase.
Pensions
The deficit on the Group's defined benefit pension schemes was
GBP17.3 million (2015: GBP17.7 million), measured in accordance
with IAS 19 (Revised) Employee Benefits.
The deficit relates to the Chemring Group Staff Pension Scheme
(the "Scheme"), a UK defined benefit scheme whose assets are held
in a separately administered fund. The Scheme was closed to future
accrual in April 2012. A full actuarial valuation for the Scheme as
at 6 April 2015 has been prepared and updated to 31 October 2016,
using the projected unit credit method. This valuation showed a
deficit of GBP17.3 million (2015: GBP17.8 million). The reduction
reflects the funding structure agreed with the trustees in June
2013, under which contributions of GBP5.0 million were paid in
2016, offset by the effect of changes in actuarial assumptions. The
Group has given a bank guarantee and letters of credit totalling
GBP8.5 million (2015: GBP13.5 million) to the Scheme in respect of
future contributions, which are progressively reducing as
contributions are paid under the new funding structure.
Cash flow
The cash inflow generated from underlying operations was GBP76.4
million (2015: GBP35.4 million). A summary of underlying free cash
flow is set out below:
2016 2015
GBPm GBPm
-------------------------------------------------------- ------ ------
Underlying operating profit 48.5 34.4
Depreciation and loss on disposal of non-current assets 18.6 16.6
Amortisation of development costs, patents and licences 6.9 6.4
-------------------------------------------------------- ------ ------
74.0 57.4
Decrease/(increase) in working capital 6.4 (18.2)
Other movements (4.0) (3.8)
-------------------------------------------------------- ------ ------
Cash generated from underlying operations 76.4 35.4
Expenditure on capitalised development costs (6.7) (8.9)
Net expenditure on property, plant and equipment (10.3) (8.2)
Tax (3.1) (1.3)
Interest (11.9) (11.8)
-------------------------------------------------------- ------ ------
Underlying free cash flow 44.4 5.2
-------------------------------------------------------- ------ ------
Expenditure on property, plant and equipment was GBP10.3 million
(2015: GBP8.2 million). This comprised various projects related to
health and safety improvements, production automation and systems
upgrades.
Expenditure on capitalised development projects was GBP6.7
million (2015: GBP8.9 million), of which GBP5.1 million (2015:
GBP7.2 million) related to the Sensors & Electronics segment,
where significant investment has been made in technology developed
in association with DoD Programs of Record. The carrying value of
capitalised development costs at 31 October 2016 was GBP40.9
million (2015: GBP36.1 million).
Tax payments were GBP3.1 million (2015: GBP1.3 million), with
the increase reflecting the higher profitability of the Group.
Working capital
A summary of working capital in respect of continuing operations
is set out below:
2016 2016 2015
constant
currency
GBPm GBPm GBPm
--------------------- ------ --------- ------
Inventories 104.8 87.1 96.2
Trade receivables 82.7 70.5 66.1
Contract receivables 7.0 7.0 15.2
Prepayments 22.0 15.5 6.8
Trade payables (53.5) (44.9) (46.7)
Advance payments (12.4) (10.1) (11.5)
Other items (51.5) (47.0) (44.3)
--------------------- ------ --------- ------
Working capital 99.1 78.1 81.8
--------------------- ------ --------- ------
Working capital was GBP99.1 million (2015: GBP81.8 million), an
increase of GBP17.3 million, with GBP21.0 million of this increase
attributable to foreign exchange translation. At constant currency
(2015 exchange rates) working capital was GBP78.1 million, a
reduction of GBP3.7 million.
Inventory increased in Countermeasures and Sensors &
Electronics but fell in Energetic Systems.
Trade receivables increased by GBP16.6 million and trade
payables increased by GBP6.8 million as a result of the high levels
of activity in the final quarter of the year.
Prepayments increased significantly in the year, principally in
Energetic Systems. This was mainly due to advance supplier payments
made in order to secure continuing production on supplies needed
for the 40mm and other Middle East contracts.
Net debt and covenants
Net debt at 31 October 2016 was GBP87.6 million (2015: GBP154.3
million). The Group's principal debt facilities comprise GBP153.4
million of private placement loan notes and a GBP100.0 million
revolving credit facility. The revolving credit facility was
established in July 2014, is with a syndicate of three banks and
has a four-year term, and was increased from GBP70.0 million during
the year. The Group had GBP108.0 million (2015: GBP78.5 million) of
undrawn borrowing facilities at the year end.
In addition to borrowing facilities, the Group has GBP60.4
million (2015: GBP62.4 million) of facilities in respect of bonding
and trade finance requirements. At 31 October 2016, GBP23.9 million
(2015: GBP28.0 million) of these facilities were utilised.
The Group is subject to two key financial covenants, which are
tested quarterly. These covenants relate to the leverage ratio
between underlying EBITDA and debt; and the interest cover ratio
between underlying EBITDA and finance costs. The calculation of
these ratios involves the translation of non-sterling denominated
debt using average, rather than closing, rates of exchange. The
revolving credit facility and the loan notes have differing
covenant compliance calculations.
In respect of the revolving credit facility, leverage is
measured by reference to net debt. The maximum permitted ratio of
net debt to underlying EBITDA under the revolving credit facilities
is 3.00x. The permitted ratio at October 2015 and January 2016 was
amended to 3.90x with the agreement of the revolving credit
facility syndicate in January 2016.
The provisions of the private placement loan notes contain two
leverage tests, each of which are tested quarterly. The first test
measures leverage by reference to total gross debt. The maximum
permitted ratio of gross debt to underlying EBITDA is 3.75x. This
was amended to 4.00x for the October 2015 and January 2016 tests.
The second test measures leverage by reference to adjusted debt,
which is calculated as total gross debt less certain disposal
proceeds that had previously been offered to the noteholders but
had not been accepted. The value of such proceeds at 31 October
2016 was GBPnil (2015: GBP4.6 million). The maximum permitted ratio
of adjusted debt to underlying EBITDA is 3.00x. For the tests at
October 2015 and January 2016 this was also amended to 4.00x.
The Group complied with these covenants throughout the year and
the results of covenant tests at the year end are detailed
below:
2016 2015
--------------------------------------------------- ----- -----
Covenant ratios - revolving credit facility
Actual ratio of net debt to underlying EBITDA 1.15x 2.83x
Actual ratio of underlying EBITDA to finance costs 6.82x 4.75x
Covenant ratios - loan note agreements
Actual ratio of adjusted debt to underlying EBITDA 1.89x 2.84x
Actual ratio of total debt to underlying EBITDA 1.89x 2.92x
Actual ratio of underlying EBITDA to finance costs 6.54x 4.67x
--------------------------------------------------- ----- -----
The composition of gross and net debt is set out below:
2016 2015
GBPm GBPm
--------------------------------- ------- -------
Loan notes, net of facility fees (150.5) (161.3)
Other loans and finance leases (0.2) (0.6)
--------------------------------- ------- -------
Gross debt (150.7) (161.9)
Cash 63.1 7.6
--------------------------------- ------- -------
Net debt (87.6) (154.3)
--------------------------------- ------- -------
Shareholder returns
Underlying earnings per share from continuing operations were
10.3p (2015: 7.1p as restated), an increase of 45.1%. The total
earnings per share from continuing operations were 2.5p (2015: 2.4p
loss as restated).
Shareholders' funds were GBP413.4 million (2015: GBP290.6
million), with the increase principally comprising the effects of
the rights issue, favourable exchange rate movements and the profit
after tax for the year.
Exchange rates
The following exchange rates applied during the year:
Average rate Closing rate Average rate Closing rate
2016 2016 2015 2015
----------- ------------- ------------- ------------- -------------
US Dollar 1.28 1.22 1.53 1.54
----------- ------------- ------------- ------------- -------------
The translation of foreign currency items in the financial
statements are dependent on the prevailing foreign exchange rates.
For the year ended 31 October 2016, a 1 cent decrease in the US
dollar exchange rate would have increased reported underlying
operating profit by approximately GBP0.2 million and increased
reported net debt by approximately GBP0.9 million.
Dividends
In view of the rights issue that was announced in January 2016,
the Board did not recommend a final dividend in respect of 2015,
nor did it recommend an interim dividend in respect of the six
month period ended 30 April 2016.
Recognising that dividends are an important component of total
shareholder returns, and in view of the Group's improved trading
performance for 2016, the Board intends to resume paying dividends
and is recommending a final dividend for the year ended 30 October
2016 of 1.3p per ordinary share. If approved, the final dividend
will be paid on 18 May 2017 to shareholders on the register on 28
April 2017.
Going concern and long-term viability statement
The Group's business activities, key performance indicators, and
principal risks and uncertainties are described within the 2016
Annual Report and Accounts. In light of the continued trading
volatility, and as part of a regular assessment of the Group's
working capital and financing position, the directors have prepared
a detailed bottom-up two year trading budget and cash flow forecast
for the period through to October 2018, being at least twelve
months after the date of approval of the financial statements. This
is in addition to the Group's longer-term strategic planning
process. In assessing the forecast, the directors have
considered:
-- trading risks presented by economic conditions in the defence
market, particularly in relation to government budgets and
spends;
-- the timing of delivering key contracts, in particular the
HMDS and 40mm orders for end users in the Middle East;
-- the impact of macroeconomic factors, particularly interest rates and foreign exchange rates;
-- the status of the Group's existing financial arrangements and
associated covenant requirements; and
-- the availability of mitigating actions should business
activities fall behind current expectations, including the deferral
of discretionary overheads and restricting cash flows.
Additional detailed sensitivity analysis has been performed on
the forecasts to consider the impact of severe, but plausible,
reasonable worse case scenarios on the covenant requirements. These
scenarios, which sensitised the forecasts for specific identified
risks, modelled the reduction in anticipated levels of underlying
EBITDA and the associated increase in net debt. These scenarios
included significant delays to major contracts and new product
launches, and the temporary closure of a major facility. This
sensitised scenario shows headroom on all covenant test dates for
the foreseeable future.
The directors have acknowledged the latest guidance on going
concern. They have made appropriate enquiries and taken into
account factors which are detailed in the strategic report within
the 2016 Annual Report and Accounts. As a consequence, the
directors believe that the Company is well placed to manage its
risks.
The directors having considered the forecasts, the risks, and
associated mitigating actions, have a reasonable expectation that
adequate financial resources will continue to be available for the
foreseeable future. Thus, they continue to support the going
concern basis in preparing the financial statements.
The directors have assessed the Group's viability over a
three-year period to October 2019 based on the above assessment,
combined with the Group's strategic planning process, which gives
greater certainty over the forecasting assumptions used. Based on
this assessment the directors have a reasonable expectation that
the Group will be able to continue in operation and meet all its
liabilities as they fall due up to October 2019.
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 and the 2016 interim report. A
detailed description of the Group's principal risks and
uncertainties and the ways they are mitigated can be found at Annex
1. In summary, the principal risks relate to:
-- health and safety risks;
-- environmental laws and regulations;
-- possible defence budget cuts;
-- timing and value of orders;
-- contract-related risks;
-- political risks;
-- management resource;
-- manufacturing risks;
-- technological risks;
-- product liability and other customer claims;
-- compliance and corruption risks;
-- cyber-related risks; and
-- financial risks.
Management have detailed mitigation plans and assurance
processes to manage and monitor these risks.
RESPONSIBILITY STATEMENT OF THE DIRECTORS ON THE ANNUAL REPORT
AND ACCOUNTS
The responsibility statement below has been prepared in
connection with the Company's full annual report and accounts for
the year ended 31 October 2016. Certain parts thereof are not
included within this announcement.
We confirm to the best of our knowledge:
1. the financial statements, prepared in accordance with International
Financial Reporting Standards as adopted by the European
Union, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company and
the undertakings included in the consolidation taken as a
whole;
2. the strategic report includes a fair review of the development
and performance of the business and the position of the Company
and the undertakings included in the consolidation taken
as a whole, together with a description of the principal
risks and uncertainties they face; and
3. the annual report and financial statements, taken as a whole,
are fair, balanced and understandable, and provide the information
necessary for shareholders to assess the Company's performance,
business model and strategy.
This responsibility statement was approved by the Board of
directors on 19 January 2017, and has been signed on its behalf by
Michael Flowers and Sarah Ellard.
CONSOLIDATED INCOME STATEMENT
for the year ended 31 October 2016
2016 2015
Underlying Non-underlying Underlying Non-underlying
performance* items* Total performance* items* Total
GBPm GBPm GBPm GBPm GBPm GBPm
Continuing operations
Revenue 477.1 - 477.1 377.3 - 377.3
------------- --------------- -------- ------------- --------------- --------
Operating profit/(loss) 48.5 (22.3) 26.2 34.4 (28.9) 5.5
Finance expense (14.5) (3.7) (18.2) (14.6) - (14.6)
------------- --------------- -------- ------------- --------------- --------
Profit/(loss) before
tax 34.0 (26.0) 8.0 19.8 (28.9) (9.1)
Tax (charge)/credit (7.1) 5.6 (1.5) (4.1) 7.9 3.8
------------- --------------- -------- ------------- --------------- --------
Profit/(loss) after
tax 26.9 (20.4) 6.5 15.7 (21.0) (5.3)
Discontinued operations
Profit after tax from
discontinued operations - 4.6 4.6 - 4.9 4.9
------------- --------------- -------- ------------- --------------- --------
Profit/(loss) after
tax 26.9 (15.8) 11.1 15.7 (16.1) (0.4)
------------- --------------- -------- ------------- --------------- --------
Earnings/(loss) per ordinary
share
Continuing operations
Basic 10.3p (7.8)p 2.5p 7.1p (9.5)p (2.4)p
Diluted 10.1p (7.7)p 2.4p 7.0p (9.4)p (2.4)p
------------- --------------- -------- ------------- --------------- --------
Continuing operations and discontinued
operations
Basic 10.3p (6.1)p 4.2p 7.1p (7.3)p (0.2)p
Diluted 10.1p (5.9)p 4.2p 7.0p (7.2)p (0.2)p
------------- --------------- -------- ------------- --------------- --------
* Further information about non-underlying items is set out in
note 3.
Comparative restated for rights issue. See note 4 for
reconciliation.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the year ended 31 October 2016
2016 2015
GBPm GBPm
Profit/(loss) after tax attributable to equity
holders of the parent as reported 11.1 (0.4)
Items that will not be reclassified subsequently
to profit or loss
Actuarial losses on defined benefit pension
schemes (3.8) -
Movement on deferred tax relating to pension
schemes 0.8 -
------- --------
(3.0) -
------- --------
Items that may be reclassified subsequently
to profit or loss
Exchange differences on translation of foreign
operations 33.0 (2.6)
Current tax on items taken directly to equity 0.8 0.6
Deferred tax on exchange differences on translation
of foreign operations 4.7 (0.6)
------- --------
38.5 (2.6)
------- --------
Total comprehensive income/(loss) attributable
to equity holders of the parent 46.6 (3.0)
------- --------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended 31 October 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
----------------------- -------- -------- -------- ------------ ------------ --------- ------- ------
Profit after tax - - - - - 11.1 - 11.1
Other comprehensive
income - - - - 11.6 17.6 - 29.2
Tax relating to
components of other
comprehensive income - - - - - 6.3 - 6.3
Total comprehensive
income - - - - 11.6 35.0 - 46.6
Ordinary shares
issued 0.8 74.4 - - - - - 75.2
Share-based payments
(net of settlement) - - - - - 1.0 - 1.0
Transfers between
reserves - - - (0.1) - 0.1 - -
At 31 October 2016 2.8 305.1 12.9 1.1 (20.7) 121.8 (9.6) 413.4
-------- -------- -------- ------------ ------------ --------- ------- ------
Share Special
Share premium capital Revaluation Translation Retained Own
capital account reserve reserve reserve earnings shares Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 November 2014 2.0 230.7 12.9 1.2 (32.6) 95.7 (9.6) 300.3
----------------------- -------- -------- -------- ------------ ------------ --------- ------- ------
Loss after tax - - - - - (0.4) - (0.4)
Other comprehensive
income/(loss) - - - - 0.3 (2.9) - (2.6)
Tax relating to
components of other
comprehensive income - - - - - - - -
Total comprehensive
income/(loss) - - - - 0.3 (3.3) - (3.0)
Dividends paid - - - - - (7.9) - (7.9)
Share-based payments
(net of settlement) - - - - - 1.2 - 1.2
At 31 October 2015 2.0 230.7 12.9 1.2 (32.3) 85.7 (9.6) 290.6
-------- -------- -------- ------------ ------------ --------- ------- ------
CONSOLIDATED BALANCE SHEET
as at 31 October 2016
2016 2015
GBPm GBPm GBPm GBPm
Non-current assets
Goodwill 132.9 121.2
Development costs 40.9 36.1
Other intangible assets 77.1 74.2
Property, plant and equipment 179.9 168.0
Deferred tax 59.6 47.5
-------- -------- -------- --------
490.4 447.0
-------- -------- -------- --------
Current assets
Inventories 104.8 96.2
Trade and other receivables 114.2 93.1
Cash and cash equivalents 63.1 7.6
Derivative financial instruments 0.5 0.5
282.6 197.4
-------- -------- -------- --------
Total assets 773.0 644.4
-------- -------- -------- --------
Current liabilities
Borrowings (29.5) -
Obligations under finance leases (0.1) (0.5)
Trade and other payables (107.3) (96.2)
Provisions (4.5) (5.1)
Current tax (3.1) (7.9)
Derivative financial instruments (2.5) (1.6)
(147.0) (111.3)
-------- -------- -------- --------
Non-current liabilities
Borrowings (121.0) (161.3)
Trade and other payables (4.0) (1.7)
Provisions (11.7) (16.3)
Deferred tax (58.5) (45.1)
Preference shares (0.1) (0.1)
Retirement benefit obligations (17.3) (17.7)
Derivative financial instruments - (0.3)
-------- -------- -------- --------
(212.6) (242.5)
-------- -------- -------- --------
Total liabilities (359.6) (353.8)
-------- -------- -------- --------
Net assets 413.4 290.6
-------- -------- -------- --------
Equity
Share capital 2.8 2.0
Share premium account 305.1 230.7
Special capital reserve 12.9 12.9
Revaluation reserve 1.1 1.2
Translation reserve (20.7) (32.3)
Retained earnings 121.8 85.7
-------- -------- -------- --------
423.0 300.2
Own shares (9.6) (9.6)
-------- -------- -------- --------
Equity attributable to equity
holders of the parent 413.4 290.6
-------- -------- -------- --------
Total equity 413.4 290.6
-------- -------- -------- --------
CONSOLIDATED CASH FLOW STATEMENT
for the year ended 31 October 2016
2016 2015
GBPm GBPm
Cash flows from operating activities
Cash generated from continuing underlying operations 76.4 35.4
Cash generated from discontinued underlying operations - -
------- -------
76.4 35.4
Acquisition and disposal related costs (0.3) (0.7)
Business restructuring and incident costs (2.8) (7.6)
Claim related costs (5.0) (0.1)
------- -------
68.3 27.0
Tax paid (3.1) (1.3)
------- -------
Net cash inflow from operating activities 65.2 25.7
------- -------
Cash flows from investing activities
Purchases of intangible assets (6.7) (8.9)
Purchases of property, plant and equipment (10.3) (8.2)
Acquisition of business (2.5) -
Proceeds on disposal of property, plant and equipment 0.1 -
Net cash outflow from investing activities (19.4) (17.1)
------- -------
Cash flows from financing activities
Net proceeds of share issue 75.4 -
Dividends paid - (7.9)
Finance expense paid (11.9) (11.8)
Accelerated interest paid (3.7) -
Loan note repayment costs (1.4) -
Capitalised facility fees paid (0.5) (1.8)
Repayments of borrowings (48.8) (0.3)
Repayments of obligations under finance leases (0.3) (0.9)
Net cash inflow/(outflow) from financing activities 8.8 (22.7)
------- -------
Increase/(decrease) in cash and cash equivalents 54.6 (14.1)
Cash and cash equivalents at beginning of the
year 7.6 21.8
Effect of foreign exchange rate changes 0.9 (0.1)
------- -------
Cash and cash equivalents at end of the year 63.1 7.6
------- -------
Notes
1. ACCOUNTS AND AUDITOR'S REPORT
The financial information set out above does not constitute the
Company's statutory accounts for the year ended 31 October 2016 or
31 October 2015 but is derived from those accounts. Statutory
accounts for 2015 have been delivered to the Registrar of
Companies, and those for 2016 will be delivered following the
Company's Annual General Meeting. The auditors have reported on
these accounts; their reports were unqualified, did not draw
attention to any matters by way of emphasis without qualifying
their report, and did not contain any statements required under
either section 498(2) or section 498(3) of the Companies Act
2006.
This announcement has been prepared on the basis of the
accounting policies set out in the Company's financial statements
for the year ended 31 October 2016.
Whilst the financial information included in this announcement
has been computed in accordance with International Financial
Reporting Standards ("IFRSs"), this announcement does not itself
contain sufficient information to comply with IFRSs. The Company
expects to post full financial statements that comply with IFRSs on
its website on 14 February 2017 (see note 11 below).
2. ANALYSIS OF UNDERLYING REVENUE, OPERATING PROFIT AND PROFIT
BEFORE TAX
2016 2015
Revenue Profit Revenue Profit
GBPm GBPm GBPm GBPm
Countermeasures 138.3 12.8 125.8 17.5
Sensors & Electronics 96.9 11.4 99.1 9.3
Energetic Systems 241.9 31.7 152.4 15.1
477.1 55.9 377.3 41.9
Unallocated corporate costs - (7.4) - (7.5)
--------------------- ------------------- -------------------- -------
Underlying revenue 477.1 377.3
--------------------- --------------------
Underlying operating profit 48.5 34.4
Net finance expense (14.5) (14.6)
------------------- -------
Underlying profit before tax 34.0 19.8
------------------- -------
3. RECONCILIATION OF TOTAL OPERATING PROFIT TO UNDERLYING
OPERATING PROFIT
Underlying measures are used by the Board to monitor the
underlying performance of the Group. Underlying measures are stated
before costs relating to acquisitions and disposals, business
restructuring and incident costs, profit/loss on disposal of
businesses, items deemed to be of an exceptional nature, impairment
of goodwill and acquired intangibles, impairment of assets held for
sale, amortisation of acquired intangibles and gains/losses on the
movement in the fair value of derivative financial instruments.
Set out below is a reconciliation of total operating profit from
continuing operations to underlying operating profit from
continuing operations:
2016 2015
GBPm GBPm
Total operating profit from continuing operations 26.2 5.5
Add back:
Acquisition and disposal related costs 0.3 0.5
Business restructuring and incident costs 5.4 6.4
Claim related (credit)/costs (0.6) 8.5
Loan note repayment costs 1.4 -
Intangible amortisation arising from business
combinations 14.8 14.0
Loss/(gain) on the movement in the fair value
of derivative financial instruments 1.0 (0.5)
------ ------
Underlying operating profit from continuing
operations 48.5 34.4
------ ------
Further details on the non-underlying items are provided earlier
in this announcement.
4. 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.
Earnings per share are based on the average number of shares in
issue, excluding own shares held, of 261,386,484 (2015 as restated:
220,675,049) and the profit on continuing operations after tax of
GBP6.5 million (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 266,191,422 (2015 as
restated: 220,675,049) and the profit on continuing operations
after tax of GBP6.5 million (2015: GBP5.3 million loss).
No dilution has been recognised for the purposes of basic
earnings per share in 2015 due to there being a loss per share for
the year ended 31 October 2015. Dilution has, however, been
recognised in the calculation of underlying earnings per share for
the year ended 31 October 2016 and 31 October 2015, using a diluted
average number of shares in issue, excluding own shares held, of
266,191,422 (2015 as restated: 225,030,669).
The earnings and number of shares used in the calculations are
as follows:
2016 2015
Ordinary Earnings Ordinary Earnings
shares per shares per
Profit Number share Loss Number share
GBPm 000s Pence GBPm 000s Pence
Basic - continuing operations 6.5 261,386 2.5 (5.3) 193,298 (2.7)
Effect of rights issue - - - - 27,377 0.3
------------ --------- --------- ------------ --------- ---------
Restated earnings per
share 6.5 261,386 2.5 (5.3) 220,675 (2.4)
Additional shares issuable
other than at fair value
in respect of options
outstanding - 4,805 (0.1) - - -
------------ --------- --------- ------------ --------- ---------
Diluted - continuing operations 6.5 266,191 2.4 (5.3) 220,675 (2.4)
------------ --------- --------- ------------ --------- ---------
The number of shares in issue differs from the number held by
third parties as the Company holds some of its shares in
treasury.
Reconciliation from basic earnings per share to underlying
earnings per share
Underlying basic earnings are defined as earnings before
acquisition and disposal related costs, business restructuring and
incident costs, profit/loss on disposal of business, items deemed
to be of an exceptional nature, impairment of goodwill and acquired
intangibles, impairment of assets held for sale, intangible
amortisation arising from business combinations and gains/losses on
the movement in the fair value of derivative financial instruments,
net of related tax effects. The directors consider this measure of
earnings allows a more meaningful comparison of earnings
trends.
2016 2015
Ordinary Earnings Ordinary Earnings
shares per (Loss)/ shares per
Profit Number share profit Number share
GBPm 000s Pence GBPm 000s Pence
Basic - continuing operations 6.5 261,386 2.5 (5.3) 193,298 (2.7)
Non-underlying items 20.4 261,386 7.8 21.0 193,298 10.8
------- --------- --------- --------- --------- ---------
Underlying as previously
stated 26.9 261,386 10.3 15.7 193,298 8.1
Effect of rights issue - - - - 27,377 (1.0)
------- --------- --------- --------- --------- ---------
Underlying - continuing
operations 26.9 261,386 10.3 15.7 220,675 7.1
------- --------- --------- --------- --------- ---------
5. CASH GENERATED FROM UNDERLYING OPERATIONS
2016 2015
GBPm GBPm
Operating profit from continuing operations 26.2 5.5
Operating profit from discontinued operations 4.7 4.9
-------- --------
30.9 10.4
Amortisation of development costs 6.8 6.2
Intangible amortisation arising from business
combinations 14.8 14.0
Amortisation of patents and licences 0.1 0.2
Loss on disposal of non-current assets 0.2 0.3
Depreciation of property, plant and equipment 18.4 16.3
Loss/(gain) on the movement in the fair value
of derivative financial instruments 1.0 (0.5)
Share-based payment expense 1.0 1.2
Employer contributions to retirement benefit
obligations (5.0) (5.0)
-------- --------
Operating cash flows before movements in working
capital 68.2 43.1
Decrease/(increase) in inventories 13.6 (19.1)
Increase in trade and other receivables (5.8) (3.1)
(Decrease)/increase in trade and other payables (1.1) 9.3
Decrease in provisions (0.3) (5.3)
-------- --------
74.6 24.9
Add back non-underlying items:
Acquisition and disposal related credits (4.4) (4.4)
Business restructuring and incident costs 5.4 6.4
Claim related (credit)/costs (0.6) 8.5
Loan note repayment costs 1.4 -
Cash generated from underlying operations 76.4 35.4
-------- --------
Cash conversion of underlying operating profit is defined as
cash generated from underlying operations, less purchases of
intangible assets and property, plant and equipment and proceeds
on disposal of property, plant and equipment, as a proportion
of underlying operating profit.
6. RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
2016 2015
GBPm GBPm
Increase/(decrease) in cash and cash equivalents
during the year 54.6 (14.1)
Decrease in debt and lease financing due to cash
flows 49.6 3.0
-------- --------
Decrease/(increase) in net debt resulting from
cash flows 104.2 (11.1)
Effect of foreign exchange rate changes (34.7) (5.5)
Amortisation of debt finance costs (2.8) (2.1)
-------- --------
Movement in net debt 66.7 (18.7)
Net debt at beginning of the year (154.3) (135.6)
-------- --------
Net debt at end of the year (87.6) (154.3)
-------- --------
7. ANALYSIS OF NET DEBT
As at Exchange As at
1 Nov Cash Non-cash rate 31 Oct
2015 flows changes effects 2016
GBPm GBPm GBPm GBPm GBPm
Cash at bank and in hand 7.6 54.6 - 0.9 63.1
Debt due within one year - - (29.5) - (29.5)
Debt due after one year (161.3) 49.2 26.7 (35.6) (121.0)
Finance leases (0.5) 0.4 - - (0.1)
Preference shares (0.1) - - - (0.1)
----------- ------------- ------------- ------------- -----------
(154.3) 104.2 (2.8) (34.7) (87.6)
----------- ------------- ------------- ------------- -----------
8. DIVID
The final dividend of 1.3p per ordinary share will be paid on 18
May 2017 to all shareholders registered at the close of business on
28 April 2017. The ex-dividend date will be 27 April 2017. The
total dividend for the year will therefore be 1.3p (2015 as
restated: 2.1p). The final dividend is subject to approval by the
shareholders at the Annual General Meeting and, accordingly, has
not been included as a liability in the financial statements for
the year ended 31 October 2016.
9. RELATED PARTY TRANSACTIONS
Transactions between the Company and its subsidiaries, which are
related parties, have been eliminated on consolidation and are not
disclosed. The directors of the Company had no material
transactions with the Company during the year, other than in
connection with their service agreements.
10. EVENTS AFTER THE BALANCE SHEET DATE
On 21 November 2016, the Group repaid $36.0 million of
outstanding loan notes out of existing cash resources.
On 13 December 2016, the Group announced the appointment of
Andrew Lewis as Group Finance Director. He was previously Group
Finance Director of Avon Rubber p.l.c. Andrew joined Chemring on 9
January 2017 and will join the Board of Chemring on 19 January
2017, following the publication of the Group's final results for
the year ended 31 October 2016.
11. 2016 ANNUAL REPORT AND ACCOUNTS
The annual report and accounts for the year ended 31 October
2016 will be posted to shareholders on 14 February 2017, and a copy
will be posted on the Company's website, www.chemring.co.uk, later
that day. They will also be available from that date at the
registered office, Roke Manor, Old Salisbury Lane, Romsey,
Hampshire, SO51 0ZN.
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. Weak culture and individual behaviours may lead to
bypassing of rules and procedures, and unsafe acts involving
energetic operations. 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, and 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.
A Group Safety Policy Manual was introduced during the year,
which sets out the best practice standards expected of all of the
Group's businesses. The internal audit programme will assess
compliance against these standards in 2017.
The Group's Safety Leadership Programme continues to be
rolled-out across the Group, helping to improve culture and
behaviours.
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.
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.
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 is a requirement to remediate or
provide resource restoration.
The Group could incur substantial costs, including remediation
costs, resource restoration costs, fines and penalties, or be
exposed to third party property damage or personal injury claims,
as a result of liabilities associated with past practices or
violations of environmental laws or non-compliance with
environmental permits.
All of the Group's businesses are certified to the environmental
management system ISO14001, which requires the setting of
environmental goals and objectives focused on local aspects and
impacts.
The Group has monitoring programmes at certain sites, for which
appropriate financial provision has been made. In certain
circumstances, the Group procures environmental liability
insurance, subject to applicable insurance conditions.
-- Possible defence budget cuts - Defence spending depends on a
complex mix of political considerations, budgetary constraints and
the requirements of the armed forces to address specific threats
and perform certain missions. Defence spending may therefore be
subject to significant fluctuations from year to year. Given the
large budget deficits and the prevailing economic conditions in
many NATO countries, there may be continued downward pressure on
defence budgets.
The Group's financial performance may be adversely impacted by
lower defence spending by its major customers. Short-term trading
and cash constraints may impact on the Group's ability to invest in
longer-term technologies and capabilities.
In recognition of the issues affecting the Group's traditional
NATO markets, business development activities have been focused
more on non-NATO markets in recent years, 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, and during the year a local presence was
established in the UAE.
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, may 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. A Group-wide
customer relationship management system has also been established.
The businesses continue to pursue long-term, multi-year contracts
with their major customers wherever possible.
The Group has undertaken various restructuring projects over the
last year, aimed at restoring the profitability of those Group
businesses which have suffered most from order delays.
Site optimisation plans continue to be refined to ensure that
the Group utilises its manufacturing facilities as efficiently as
possible, within the constraints imposed by export control
legislation and customer requirements.
-- Contract-related risks - The Group's government contracts may
be terminated at any time and may contain other unfavourable
provisions. The Group may need to commit resources in advance of
contracts becoming fully-effective, to ensure prompt fulfilment of
orders or to enable conditions precedent to be met.
The Group may suffer financial loss if its contracts are
terminated by customers, or a termination arising out of the
Group's default may have an adverse effect on its ability to
re-compete for future contracts and orders.
The Group negotiates with customers to ensure that the most
favourable contractual terms are agreed. Areas of significant
judgment or enhanced risk require the review and approval of the
executive directors. The Group endeavours to negotiate stage
payments with its customers wherever possible, in order to minimise
exposure to significant cash outflows on contracts which may be
terminated at short notice.
-- Political risks - The Group is active in several countries
that are suffering from political, social and economic instability.
In addition, there is a significant risk of political unrest and
changes in the political structure in certain non-NATO countries to
which the Group currently sells.
The Group's business in certain countries may be adversely
affected in a way that is material to the Group's financial
position and the results of its operations.
Political changes could impact future defence expenditure
strategy and the Group's ability to export products to certain
countries. During periods of unrest, delays in obtaining export
licences can result in delayed revenue.
The Group's businesses strive to maintain relationships at all
levels within the political structure of certain key countries, in
order to ensure that they are aware of and can react to proposed
changes, if and when they occur.
Wherever possible, the businesses implement financing
arrangements, such as letters of credit and advance payments, for
contracts with high risk customers, which are intended to mitigate
the impact of a deterioration in the customer's financial position,
and in certain circumstances they may also procure political risks
insurance.
The Group continues to explore opportunities for collaboration
on the establishment of local manufacturing operations in certain
countries, which may remove some of the uncertainty regarding
export of products.
-- Management resource - The Group requires competent management
to lead it through the next stage of its development. In
challenging markets and difficult times, there is an increased risk
of loss of key personnel. As the shape of the Group's business also
changes, with an increased focus in areas such as cyber, there is a
need to ensure that the businesses build and retain 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. Failure to recruit sufficient
suitably-qualified personnel in key areas of the business may
result in the Group failing to achieve its future growth
aspirations.
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.
The Group has established an Operational Excellence Programme,
with one of the objectives being to improve the Group's
"right-first-time" and on-time delivery performance.
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 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; 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
impact 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 the 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 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. The
Group's internal audit activities have been extended to include a
review of compliance with 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 can emanate from a wide variety of sources and could target
various 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 threat assessment has been completed, and an action plan to
counter the Group's identified major threats has been
initiated.
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 20 of the group financial
statements within the 2016 Annual Report and Accounts.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR UWSARBSAAAUR
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