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BUILDING
A STRONGER
BUSINESS
CHEMRING GROUP PLC
ANNUAL REPORT AND ACCOUNTS 2018
2018 performance
At a glance
Overview
1
2
3 Where we operate
4
7 We are Chemring
Chairman’s statement
2018 was a mix of financial and operational
progress, offset by the impact of the incident
at our UK Countermeasures site in August.
Since joining the Group six months ago, I have
been impressed by the technological spread that
Chemring has and the strength of our positions
in many of our markets. I have also been struck
by the depth of technical capability within our
workforce. I have and will continue to place
the greatest emphasis on safety. Protecting our
people, customers and communities has to be
at the heart of what we do.
Chemring is a technology-rich company with an
international footprint and a breadth of market
leading products and services. Our strategy is
to deliver profitable growth by operating in
markets where we have differentiators such
as intellectual property, niche technology,
expertise, and high barriers to entry. We have
enviable platforms for future growth and now
need to ensure that we deliver on our potential
and the market opportunities that arise.
Michael Ord
Group Chief Executive
Strategic report
8 Group Chief Executive’s review
10 Business model
12 Target markets
14 Our strategy
16 Key performance indicators
20 Focus on Countermeasures
22 Focus on Sensors
24 Focus on Energetics
26 Financial review
32 How we manage risk
34 Principal risks
42 Corporate responsibility review
Governance
48 Board of Directors
50 Directors’ report
54 Corporate governance report
62 Audit Committee report
66 Directors’ remuneration report
Financial statements
92 Consolidated income statement
93 Consolidated statement of
comprehensive income
94 Consolidated statement of changes
in equity
95 Consolidated balance sheet
96 Consolidated cash flow statement
97 Notes to the Group financial statements
128 Parent company balance sheet
129 Parent company statement
of comprehensive income
129 Parent company statement
of changes in equity
130 Notes to the parent company
financial statements
134 Accounting policies
144 Independent auditor’s report to the
members of Chemring Group PLC
Other information
150 Corporate information and website
To find out more visit
chemring.co.uk
Overview
2018 performance
Revenue
£297m
(-3%)
Order book
£394m
(+21%)
Underlying operating profit*
Statutory operating loss
£31m
(-2%)
£16m
(2017: £5m profit)
The decline in revenue,
which principally reflected the
impact of the incident at our
UK Countermeasures site, was
partially offset by growth in
US Countermeasures.
Building in all three continuing
sectors in line with strategy.
Targeted 2019 revenue
from continuing operations
approximately 70% covered
by orders in hand.
Reflects the impact of the incident
at our UK Countermeasures site
in August 2018, which offset a
stronger year in the US
Countermeasures business.
Reflects the transformation
of our Tennessee facility, the
strategic review of the Group’s
product portfolio leading to
an impairment charge of certain
products, and legal costs associated
with ongoing investigations.
Key points
JJ Underlying operating profit flat at £31m, reflecting the impact
of the incident at our UK Countermeasures site in August,
offsetting growth in US Countermeasures
JJ Strategic decision to exit commodity Energetics businesses,
which have been classified as discontinued and held for sale
resulting in impairment charges of £69m. Order book of
these businesses at year end of £68m (2017: £153m)
JJ Net debt flat year on year, reflecting good operational cash
generation, offset by the start of the investment in the
Tennessee facility and the impact of the incident at our
UK Countermeasures site. Net debt: underlying continuing
EBITDA of 1.64x and pension fund in IAS19 surplus
JJ Contract awards on US counter-IED, chemical and biological
detection Programs of Record
JJ Order book of the continuing business at year end of £394m
(2017: £325m), increase driven by growth in Energetics and US
Countermeasures. £242m currently due as revenue in FY19,
approximately 70% coverage of FY19 targeted revenue
JJ Board recommending a final dividend of 2.2p per ordinary share,
giving a total dividend of 3.3p per ordinary share (2017: 3.0p)
JJ Board’s expectations for 2019 performance remain unchanged,
again with a significant H2 weighting
Underlying operating profit (£m)*
Chemring Group
Countermeasures
2018
2017
Sensors
2018
2017
31.0
31.5
2018
2017
15.3
13.4
Energetics
2018
2017
12.1
14.4
11.8
14.1
* References to underlying operating profit and earnings per share throughout this strategic report are to underlying
measures from continuing operations; see note 3 for a reconciliation to the statutory loss after tax from both continuing
and discontinued operations of £105.8m (2017: £6.6m profit).
Progress
Building a stronger business approach
adopted to ensure solid foundations
are in place to deliver medium-term
growth opportunities.
Safety
As part of our commitment to continuous
improvement, we are establishing three core
values: safety, as paramount, excellence
and innovation.
2019 outlook
Countermeasures order book, US Programs
of Record wins and growth in niche Energetics
businesses’ order book all support improving
medium-term expectations.
Chemring Group PLC Annual Report and Accounts 2018
1
OverviewStrategic reportGovernanceFinancial statementsOther information Overview
At a glance
Chemring is a leading technology business designing, manufacturing,
supplying and supporting high technology detection systems,
countermeasures and energetic products and technology services
to over 50 countries around the world. Our enduring purpose
is to relentlessly innovate to protect our customers. Our purpose
underpins everything we do across our business segments of
Countermeasures, Sensors and Energetics.
Countermeasures
#1 global supplier with
more than 50% of
market share
Read more on pages 20–21
Sensors
World-leading
technologies and key
programme positions
Read more on pages 22–23
Energetics
Niche positions on
long-term programmes
Read more on pages 24–25
Revenue
Revenue
(2017: 11.5%)
(2017: £125m)
9.6%
£87m
£126m
Underlying
operating margin
Our countermeasures protect aircraft and
ships from guided missile attack by decoying
the threat away from the platform they are
protecting. Our businesses combine a deep
understanding of platform signatures, missile
seekers and chemical formulations to develop
Our systems and services protect people,
platforms and information by detecting threats
with a very high degree of confidence. Our
targets include explosive, chemical, biological,
radio and cyber threats, which are all becoming
more complex, driving a constant need to
engineer improved technological solutions
to meet customer needs.
new decoys against new threats. 43+
(2017: 14.7%) 43+
(2017: 15.6%) 43+
Our energetic products harness the ability
of energetic materials to very rapidly release
energy to perform any of a number of functions,
from propelling an aircraft ejection seat to
separating satellites in space. We invest in
the full range of technical disciplines needed
to safely design, develop, test and manufacture
our products at our dedicated Energetics sites.
Underlying
operating margin
Underlying
operating margin
14.0%
17.5%
£84m
(2017: £91m)
(2017: £91m)
Revenue
2
Chemring Group PLC Annual Report and Accounts 2018
29
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Where we operate
Our customers are National Defence and Security
agencies, and Defence prime contractors. Our home
markets in the UK, US, Australia and Norway represent
some of the most demanding users in the world,
with well-funded militaries and international
credibility, which helps achieve export sales.
Our strategy is to
deliver profitable
growth by operating
in markets where we
have differentiators.
The percentages below represent the proportion of the Group’s total
2018 revenue, (see note 1 on page 97).
US
46%
The US maintains the largest defence
budget in the world, and remains our
core market. Our position secured
on all targeted, key long-term US
programmes, particularly in the
Sensors segment, also enables us to
take advantage of growing budgets.
US revenue
£137.6m
(2017: £123.3m)
Investing for the future
In May 2018 the Board approved a US$50m
investment to upgrade our Countermeasures
facility in Tennessee. The project, which is
expected to take approximately three years
to complete, will result in an automated
capability with additional capacity reflecting
expected customer demand over the
medium term.
UK
28%
Europe
13%
Growing customer demand for our cyber and
information security solutions in national
security, defence and commercial sectors.
In Europe, our Norwegian business has
achieved record order intake delivered
through long-term supply agreements and
efforts to enhance capacity.
Asia Pacific
13%
Steady year-on-year growth in key regional
markets as defence spending increases
in response to increased threats and our
Australian business enables us to maintain,
support and evolve next-generation
capabilities for the Australian military.
Chemring Group PLC Annual Report and Accounts 2018
3
Chairman’s statement
The Group has
made progress on its
roadmap to deliver
long-term growth.
Carl-Peter Forster
Chairman
2018 was a year of contrasts. The tragic
incident at our UK Countermeasures
facility and the loss of one of our colleagues
overshadowed improved business performance
and the significant progress that the Group
made on the long-term growth programmes.
2018 performance
In 2018 the Group made progress on its
roadmap to deliver long-term growth and a
more sustainable business model, and in the
final quarter of the year made encouraging
progress on the targeted US programs in
counter-IED and chemical and biological
detection. However, on 10 August an incident
occurred in a flare mixing building at our UK
Countermeasures site in which two colleagues
were injured, one fatally. Production at the site
was immediately suspended and an investigation
launched into the cause of the incident.
The injured colleague continues to make
good progress and the Group is committed
to supporting him and his family throughout
his recovery, along with the family of our
colleague who lost his life in the incident.
The incident at our UK Countermeasures site
serves as a reminder that elements of our
manufacturing processes involve the use of
hazardous materials. We shall continue to
invest in safety and in automation in order to
remove personnel from exposure to hazard.
The Board is fully committed to the goal of
zero harm.
Following the closure of our UK Countermeasures
site, and in close collaboration with the regulatory
bodies, a phased restart of non-energetic
material production and the shipment of
finished goods inventory, was commenced.
The resulting impact of the incident on the
Group’s FY18 result was to reduce revenue
by £22m and underlying operating profit by
£17m. 2019 will be a year in which the site
focuses on gradually increased activity levels.
Elsewhere, the Group has made good progress
on its strategy to move away from commoditised
product lines to focus on higher margin and
more predictable revenue streams.
In light of this, the Board announced on
15 November 2018 that it had decided to
exit the commoditised Energetics business,
these businesses have therefore been treated
as discontinued activities and shown as held
for sale.
4
Chemring Group PLC Annual Report and Accounts 2018
Overview Revenue
£297m
(2017: £307m)
Dividend
3.3p
(2017: 3.0p)
Underlying operating profit
2018
2017
£31.0m
£31.5m
Two years ago, and following the rights issue
that strengthened the Group’s balance sheet,
we reported that ongoing execution against
the US Programs of Record within the
Sensors segment, combined with a slow but
steady ramp up of F-35 Joint Strike Fighter
countermeasure requirements, were key to
future growth. It was therefore pleasing to
see the progress made in the year against
these goals.
Given some of the items mentioned above
and a review of a number of balance sheet
items, all announced on 15 November 2018,
these FY18 results reflect non-underlying
items, primarily non-cash, of £131m. These
results provide disclosure on the various
items and necessitate the disclosure of adjusted,
continuing and discontinued figures which
makes the disclosure more extensive.
The Board believes these actions are
necessary and part of us building a stronger
business for the future.
The global countermeasures market is
recovering and we have seen an increase in
market activity throughout the year, most
notably from our US customers. Chemring’s
position within the market remains strong
and we have seen the F-35 programme
continue to evolve as the number of
platforms entering service continues to
grow. Importantly, our facility in Australia,
as a newly qualified second source provider
of F-35 countermeasures, is expected to
produce and deliver its first F-35
countermeasures in 2019.
In order to safeguard and expand the Group’s
market-leading position in the global
countermeasures market, May 2018 saw
the Board approve a $50m investment
project to upgrade and automate the
Group’s Tennessee facility. The project will
take approximately three years to complete,
and will result in an automated capability
with additional capacity reflecting expected
customer demand over the medium term.
Most importantly, it will mean that we have
fully automated production lines at all three
of our Countermeasures businesses in the
US, UK and Australia.
In the Sensors segment the Group has
secured its position on all the key US
Programs of Record it was targeting.
The Group secured a $14m development
contract and a three-year $93m indefinite
delivery/indefinite quantity (“IDIQ”) sole-source
contract on the US Army’s Husky Mounted
Detection System (“HMDS”) Program of Record.
We expect this program to run for the next
decade providing a recurring level of business
as the US Army moves to its objective of
producing and fielding a fleet of 369 HMDS
by mid-2021.
In biological detection the Joint Biological
Tactical Detection System (“JBTDS”) program
continues to progress through customer
testing, and this sole-source position was
enhanced with the award of a second
biological program, the Enhanced Maritime
Biological Detection System (“EMBD”), where
the customer is the US Navy. This program is
expected to be worth up to $100m over
5–10 years once in full rate production.
On the Next Generation Chemical Detector
program (now known as Aerosol and Vapor
Chemical Agent Detector – “AVCAD”)
Chemring was one of two contractors selected
to progress on this program. The AVCAD
program has a potential value of up to $838m
over the next ten years. These awards are
significant achievements and the culmination
of a number of years of research and
development activity. They provide improved
visibility of future earnings and are evidence
of the progress the Group is making on its
roadmap to focus on higher margin, niche
market positions where the Group is best
placed to generate future value.
Revenue from continuing operations in the
year declined by 3% to £297.4m (2017: £307.1m)
which principally reflected the revenue lost as a
result of the incident at our UK Countermeasures
site. Underlying operating profit fell 2% to
£31.0m (2017: £31.5m), which again reflected
the impact of the same incident. The closing
order book of £394m (2017: £325m) provides
good visibility of 2019 revenue, particularly in
the Countermeasures segment which saw strong
order intake, particularly in the US.
Statutory total loss for the year was £105.8m,
which comprised continuing (£40.8m) and
discontinued (£65.0m) operations. The
statutory loss includes a number of items
which the Board consider to be non-underlying.
Continuing non-underlying items total £60.0m,
thus the underlying continuing profit after tax
was £19.2m. Discontinued non-underlying
items totalled £71.2m, thus the underlying
discontinued profit after tax totalled £6.2m.
Full details of the non-underlying items are in
the financial review on page 31 and in notes 3
and 5, together with a reconciliation of
statutory IFRS to underlying numbers.
Chemring Group PLC Annual Report and Accounts 2018
5
OverviewStrategic reportGovernanceFinancial statementsOther information Chairman’s statement continued
Strategy
The Group’s strategy is to deliver profitable
growth by operating in markets where we
have differentiators such as intellectual property,
niche technology and high barriers to entry.
The Group is focused on ensuring we continue
to increase the depth of talent in key roles
and to this end a programme focusing on
identifying and developing Chemring’s Future
Leaders commenced in July.
In a number of our markets we are already
market leader, or one of the market leaders.
This is particularly so in Countermeasures
and to a growing extent in Sensors as a
result of our recent long-term contract wins.
A strategic review of the Group’s Energetics
portfolio was conducted during the year.
The Board concluded that the future focus
within the Energetics segment should be on
the Energetic Devices businesses. It therefore
made the decision to exit the Commodity
Energetics businesses located in Derby and
Florida, and these businesses are treated as
discontinued in these financial statements.
We will continually review the portfolio, to
ensure that we maintain sustainable niche
positions where technical and qualification
barriers to entry enable high margins.
In recent years, significant focus has been placed
on building a safe and resilient business that
is able to deliver margin progression through
continuous improvement in operational
performance and execution. We shall continue
to invest in both our infrastructure and
people in order to deliver this strategy.
Safety
Safety underpins all that we do and, as always,
remains an absolute priority for the Group.
The tragic incident at our UK Countermeasures
site was a reminder that much of what we do,
particularly in the Countermeasures segment,
involves processes that are dangerous. As a
Board we must therefore continue to drive
investment and improvement in this area,
reducing the risk of harm to our employees,
and automating our facilities wherever
possible. We will continue to foster a culture
of safety awareness across the Group and
will drive towards zero harm.
People
The Board has visited several sites throughout
the year, spending time at each with a number
of our employees. We are continually impressed
by the knowledge and expertise of our
workforce, and the commitment they show
in meeting the needs of our customers.
A number of key initiatives were launched
during the year.
6
Chemring Group PLC Annual Report and Accounts 2018
This nine month programme is working
with Future Leaders from every part of the
business to support them to develop key
leadership skills and a broad network of
support across the Group. This network
of emerging talent is an essential element
of a programme to ensure we deepen the
talent pool for the future business.
A renewed focus on supporting the graduate
and early careers population within the Group
has seen the formalisation of a Graduate Network
through the launch of an annual Graduate
Conference for graduates working and training
in the UK and Norwegian businesses, with a
replica event planned for April 2019 in the US.
Technical training in operations processes and
safety continues to have a high profile across
the Group and I am very pleased that the
Group has invested in resources to develop
this further, alongside broader management
and leadership skills in 2018.
On behalf of the Board I thank all employees for
their high level of commitment and enthusiasm.
Dividends
The Board is recommending a final dividend
in respect of the year ended 31 October 2018
of 2.2p (2017: 2.0p) per ordinary share.
With the interim dividend of 1.1p per share
(2017: 1.0p), this results in a total dividend
of 3.3p (2017: 3.0p) per ordinary share.
If approved, the final dividend will be paid on
18 April 2019 to shareholders on the register
on 5 April 2019.
In accordance with accounting standards, this
final dividend has not been recorded as a
liability as at 31 October 2018.
Board of directors
Michael Ord joined the Board on 1 June 2018,
and was appointed as Group Chief Executive
on 1 July 2018, following Michael Flowers’
retirement. Michael Ord joined Chemring from
BAE Systems, where he held a number of
senior roles across air, land and sea domains,
including Managing Director of the BAE Systems
Naval Ships business and Managing Director
of the BAE Systems F-35 Joint Strike Fighter
business. Michael Flowers stepped down from
the Board on 30 June 2018, and left the
Group on 31 October 2018.
On 8 August 2018, Daniel Dayan gave notice
of his intention to step down from the Board,
where he served as a non-executive director
and Chairman of the Group’s Remuneration
Committee. He formally stepped down from
the Board on 30 November 2018.
Andrew Davies, non-executive director of
Chemring, assumed the role of Chairman of
the Remuneration Committee on 8 August 2018.
Stephen King was appointed as a non-executive
director on 1 December 2018.
Current trading and outlook
Trading since the start of the current financial
year has been in line with expectations across
all businesses.
The current phased restart plan for the
UK Countermeasures site has operations
commencing in the second quarter and
revenue generated in the second half of the
2019 financial year. This remains subject to
internal and external health and safety approval
and as such remains a significant uncertainty.
While we continue to work towards a more
balanced delivery of revenue and profit, the
operational disruption at our Countermeasures
sites in Salisbury and Australia, the expected
profile of orders, revenue and margins in
2019, combined with routine seasonality
within the business, means that the Group
again expects its trading performance to be
significantly weighted towards the second half
of the financial year.
The order book of the continuing businesses
as at 31 October 2018 was £394m, of which
£242m is currently expected to be recognised
as revenue in 2019.
The Board’s expectations for the
Group’s 2019 performance from continuing
operations remain unchanged, based on the
assumption that insurance proceeds will
cover remediation and operating costs at
the UK Countermeasures site in the period
before production is re-established.
The Board is focused on restructuring,
simplifying and building a stronger business.
With high technology products and market
leading positions Chemring has the platforms
for long-term future growth.
Carl-Peter Forster
Chairman
17 January 2019
Overview We are Chemring
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The Group is focused
on ensuring we
continue to increase
the depth of talent
in key roles.
To find out more visit
www.chemring.co.uk/media/image-library/videos/
we-are-chemring
Chemring Group PLC Annual Report and Accounts 2018
7
Group Chief Executive’s review
I am confident in
delivering positive
returns for all our
stakeholders.
Michael Ord
Group Chief Executive
Delivering
performance
and growth
8
Chemring Group PLC Annual Report and Accounts 2018
In 2018, the Group made progress in
both underlying financial and operational
performance, and in improving the balance
and predictability of the business. In winning
key positions on long-term US Programs of
Record that will underpin future growth, the
Group now has a foundation from which to
build a stronger business. However, this
progress was overshadowed by the incident
at our UK Countermeasures site in August,
and the tragic loss of one of our colleagues.
Introduction
I became Chief Executive on 1 July 2018 and
spent my first six months visiting all our
businesses and meeting as many colleagues
and customers as possible. I have been
impressed by the technological spread that
Chemring has and the strength of our positions
in many of our markets. Most of all I have
been struck by the depth of technical capability
within our workforce. I have placed the
greatest emphasis on safety, to ensure that
everyone goes home safely at the end of the
day. Protecting our people, customers and
communities has to be at the heart of what
we do.
Our values, which form the foundation of our
organisation, our strategy and which are
requisite to our success have been revised.
Safety – we place safety at the heart of
everything we do.
Excellence – we are focused on ensuring we
consistently meet high standards in all that
we do.
Innovation – we create world-class solutions
and develop world-class thinking.
Safety
Our goal is a zero harm environment, this is
not set as a statistical target, but as a moral
imperative that will be achieved through
establishing a Generative Safety Culture, with
three focus areas of People, Plant and Process.
In September 2018, we commissioned an
independent safety review of all our sites,
which assessed in-depth our culture, management
systems and practises. As a result of this
review, we have introduced a completely new
Health and Safety strategy and plan, in order
to ensure that we become a more proactive
organisation with an even greater focus on
prevention not cure; enabling us to better
identify in advance potential hazards and to
put in place mitigations in order to reduce the
probability of an incident occurring.
Strategic report This strategy will also deliver a more consistent
way of managing safety across our organisation,
particularly the control of major hazards.
Strategy and organisation
Chemring is a technology-rich company with
an international footprint and a breadth of
market leading products and services. It
occupies niche market positions and has
strong, long-term relationships with its
customers. These provide a strong platform
for future growth, however, we will only
achieve this success by complete commitment
to our purpose, which is to relentlessly
innovate to protect our customers. Our
strategy is to deliver profitable growth by
operating in markets where we have
differentiators such as intellectual property,
niche technology, expertise, high barriers to
entry, and by investing in innovation to meet
our customers’ needs.
Going forward, we will focus our efforts on
strategy, structure and our culture.
Strategy
The Board concluded that the Group would
exit the low margin commoditised Energetics
businesses located in Derby and Florida,
where contracts are often lumpy. On 15
November 2018 the Group announced its
intention to treat these businesses as
discontinued operations, and that within the
Energetics segment our future focus should
be on the niche specialist energetic materials
businesses in Chicago, Scotland and Norway,
where we have strong intellectual property
and high barriers to entry.
This strategic move will simplify the Group
and enable greater focus and investment.
It will improve the quality of the Group and
its earnings.
My review also concluded that in parts
Chemring still maintains a federated business
model with limited collaboration. As a
consequence of this there are a mix of
processes and standards across the Group.
The opportunity therefore exists to
restructure, simplify, and build a stronger
group that can capitalise on the significant
market prospects that exist.
Statutory total loss for the year was £105.8m,
which comprised continuing (£40.8m) and
discontinued (£65.0m) operations. The
statutory loss includes a number of items which
the Board consider to be non-underlying.
Continuing non-underlying items total £60.0m,
thus the underlying continuing profit after tax
was £19.2m. Discontinued non-underlying
items totalled £71.2m thus the underlying
discontinued profit after tax totalled £6.2m.
Full details of the non-underlying items are in
the financial review on page 31 and in notes
3 and 5, together with a reconciliation of
statutory IFRS to underlying numbers.
Structure
In future we will be organised under two
sectors – Sensors & Information, and
Countermeasures & Energetics. Future
disclosure will be of these two sectors, rather
than the current three segment approach.
The focus within each sector is clear:
In Sensors & Information we have world-
leading technologies and incumbent supplier
advantage, having secured positions on major
long-term US Programs of Record. We now
need to move successfully through technical
qualification to large scale manufacture in the
years ahead and to organise ourselves and
invest accordingly. We will also look beyond
these near-term programs and contracts and
develop our plans to exploit our incumbent
position for the longer term. We must utilise
our capabilities in adjacent markets and across
geographies by innovating and recognising our
customer’s needs before they do. The Board
believes that the Sensors & Information
sector offers the greatest opportunities for
significant sustainable growth and attractive
margin performance.
Following the proposed divestment of
the commodity Energetics business, in
Countermeasures & Energetics we will
also have world-leading technologies and
incumbent supplier advantage. We are the
number one global countermeasures supplier
and will invest to improve the quality and
safety of our operations and match rising
customer demand. We occupy niche
positions in specialist energetics, often on
long-term programmes, where long-term
supply agreements are in place. We will invest
to protect these positions and seek, over
time, to safely improve our operating margins.
Culture
We have strengthened the leadership team
both in the UK and the US. We have already
begun the move to standardise our processes
and standards. An Operational Framework,
that defines both what we should do at
Chemring, and how we should do it, has
recently been put in place. This Operational
Framework is the reference source to
all mandated policies across the Group.
It incorporates our values, our policies and
procedures, and provides the necessary
governance to enable us to operate in a safe,
consistent and accountable way.
The longer-term potential
We have already achieved a number of
significant milestones on the journey to build
a stronger business and will continue to focus
our efforts on re-structuring, simplifying and
strengthening the business in order to capitalise
on our significant market opportunities. After
success in building a stronger business our
longer-term focus will increasingly move to
further enhancing the Group’s growth
potential and delivery thereon.
I look forward to working with my colleagues
in 2019 to continue to build and execute our
strategy. In doing so I am confident in
delivering positive returns for all our
stakeholders.
Michael Ord
Group Chief Executive
17 January 2019
Our strategy
Target growing niches
Win market share
Grow our US business
Manage the portfolio
01
02
03
04
Read more on pages 10–15
Chemring Group PLC Annual Report and Accounts 2018
9
OverviewStrategic reportGovernanceFinancial statementsOther informationOverviewStrategic reportGovernanceFinancial statementsOther information Business model
We focus on providing innovative solutions that meet
our customer requirements efficiently and on time.
Our values
What we do
Safety
We place safety at the heart of everything we do.
JJ We operate safely and manage risk.
JJ We promote best safety practice across the business
and beyond.
JJ We ensure we minimise our impact on the environment.
Invest in people, processes
and products
Chemring is a technology business with over 2,000 employees
worldwide. We target investment to secure our future by
developing the capabilities of our people, maintaining safe
and efficient operations and developing next-generation
solutions to meet customers’ current and emerging threats.
Excellence
We are focused on ensuring we consistently meet
high standards in all that we do.
JJ An ethos of continuous improvement is core to our approach.
JJ We take actions to ensure that we maintain and deliver
operational excellence.
JJ We deliver on our promises.
Win orders
We operate in niche markets in the global defence and
security market. Our targeted investments ensure we are
competitively positioned to offer reliable, state-of-the-art
solutions to meet customers’ needs. In Countermeasures,
we are the world’s largest supplier, with our leading
technology and manufacturing position. In Sensors, we
maintain our technological leadership to meet ever more
demanding customer requirements. In Energetics, we win
based on the technical superiority of our products.
Innovation
We create world-class solutions and develop
world-class thinking.
JJ We inspire imaginative solutions.
JJ We work together to turn ideas into technologies and solutions.
JJ We value collaboration and sharing experience.
Deliver solutions
We focus on providing innovative solutions that meet our
customer requirements efficiently and on time. In addition
to our capital and technology investments, we also invest
in continuous improvement, which is key to minimise
cycle time from order to delivery.
10
Chemring Group PLC Annual Report and Accounts 2018
Strategic report O
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Outcomes
Cash flow
We aim to convert 100% of underlying EBITDA to underlying cash
flow over the medium term, accepting timing differences will arise
at individual period ends.
In 2018, the conversion ratio (continuing and discontinued) was
95%, reflecting a working capital investment in Countermeasures
supporting growth in the US and the impact of the incident at
our UK Countermeasures site in August.
Investment
Our investment in property, plant and equipment in the year
totalled £21.1m. In addition, we invested £43.8m in product
development, of which £36.2m was customer funded.
Looking forward, we have announced the significant investment
in the transformation of our Tennessee Countermeasures site
and excluding significant investments such as these, aim that
investment at least matches depreciation and amortisation
each year.
Dividends
For the year ended 31 October 2018, our dividend will be 3.3p per
share, an increase of 10% on the prior year, subject to the approval
of the final dividend at the Annual General Meeting.
Chemring Group PLC Annual Report and Accounts 2018
11
OverviewStrategic reportGovernanceFinancial statementsOther information
Target markets
Chemring is an international technology
company. Our home markets are the
US, UK and Australia.
% of Chemring’s global sales (2014-2018)
46+
JJMiddle East 4%
JJAsia Pacific 6%
JJUS 46%
JJUK 25%
JJEurope 12%
JJAustralia 6%
JJRest of the world 1%
12
Chemring Group PLC Annual Report and Accounts 2018
The US is the world’s largest defence
market and our US businesses are
well positioned to benefit from this
growing defence budget.
The FY19 National Defense Authorization
Act was passed in August 2018. The base
budget of $617bn for FY19 “begins recovery
from over $400bn of lost capability” arising
from past Bipartisan Budget Acts in 2011,
2013 and 2018*. The President’s Budget
Request also projects steady growth of 4%
per year out to 2021 to sustain personnel
increases in all four services, major equipment
programmes such as the F-35 and investments
in technology innovation.
Our US businesses are well positioned to
benefit from this increase in budgeted spend:
JJ F-35 fleet ramp-up will drive a stock
build for its new countermeasures to
deliver full operational capability for
the aircraft.
JJ HMDS is a Program of Record with a
planned fleet of 369 systems.
JJ Procurement spend for Chemical and
Biological Situational Awareness is set
to more than double from FY18 levels.
In addition, several of the identified
technology innovation initiatives align with
Chemring’s Group-wide capabilities in
Electronic Warfare, Autonomy, Cyber,
Artificial Intelligence and Space.
The UK is Europe’s largest defence
market. Chemring sells directly to
the MOD and security agencies,
as well as to prime contractors.
Expenditure levelled in 2015 but recovery has
been slow, with budgets squeezed by major
programme commitments and the cost of the
fight against Daesh.
This pressure on defence spending is likely to
remain for the foreseeable future, despite
planned increases of 2% to 2021. For
Chemring, the MOD accounts for less than
5% of Group revenues, but it is a partner for
developing and qualifying new products.
Strategic report25
+
12
+
6
+
6
+
4
+
1
T
In the security domain, Chemring is a key
provider of capability to our clients, and with
a growing concern about many national and
international threats, our customers are
continuing to increase demand for our services.
Australia is Chemring’s third home
market, and it aims to grow its
defence spend to 2% of GDP by 2021.
Australia has a well-equipped military, which
draws on both US and UK products as well
as highly capable local suppliers. Its current
budget of AUD 34.6bn is a 1.4% uplift on the
previous year, and this is likely to continue as
the Commonwealth aims to meet its 2% of
GDP target by 2021.
Chemring Australia provides the Commonwealth
with an on-shore capability in countermeasures
manufacture, building on manufacturing
know-how shared across the Group. It is
positioned to benefit from the global F-35
programme as it gears up to share with our
Countermeasures business in the US the
production of countermeasures for F-35
operators around the world.
Europe combines modern,
well-equipped forces with
budget constrained new NATO
members on its Eastern borders.
European defence spending is generally flat,
although recent announcements by France
and Germany signal some increase in spend in
these large markets, which currently fall well
short of NATO’s 2% of GDP target. Although
Chemring competes with highly capable rivals
and national champions in Europe, we have
succeeded in selling countermeasures,
Electronic Warfare ("EW") and Improvised
Explosive Devices ("IED") detectors to
customers including Germany, France, Italy
and Spain. In addition, we supply energetic
materials and components to several leading
prime contractors across the region.
The outlook for the market remains subdued,
although there are some niche opportunities
as new NATO members seek to upgrade
their capabilities.
* Source: US Defense Budget Briefing presentation
February 2018.
Our US businesses
are well positioned
to benefit from
this growing
defence budget.
Chemring Group PLC Annual Report and Accounts 2018
13
OverviewStrategic reportGovernanceFinancial statementsOther informationOverviewStrategic reportGovernanceFinancial statementsOther information Our strategy
Our strategy is to deliver profitable growth by focusing on
niche markets where we can be the world leader, and grow
faster than the wider defence market.
01
Target growing niches
02
Win market share
Global defence budgets are growing at 2–3% per year, but
military investment in specific capabilities varies more widely.
New capabilities to meet new perceived threats, such as electronic
warfare and cyber are growing. Others, such as countermeasures,
are subject to catch-up funding; and others are declining as military
needs are changing. Our strategy is to target growing niches
within the defence and security markets, based on our detailed
understanding of customers’ new and emerging needs and targeted
investment in innovation, largely in the Sensors segment.
In addition to targeting innovation-driven growth niches, we also
aim to win market share by focusing on meeting customer needs,
cost effectively and on time.
The largest part of our current investment is in the
Countermeasures sector to transform our North American
manufacturing operations to capitalise on the surge in demand
driven by the growing F-35 fleets.
Strategy in action
Strategy in action
In the US, we are capitalising on our successful investment in
next-generation chemical and biological detection technologies
where we have won the AVCAD and JBTDS Programs of Record.
In the UK, we are developing next-generation Land Electronic Warfare
and Electronic Countermeasures to detect and defeat threats in the
Cyber Electronic activity (“CEMA”) domain; and in our national
security business, we are increasing our capacity, growing our
capability and expanding our footprint to grow with the increasing
market demand.
The US
The investment in the US manufacturing operations for our
Countermeasures sector will improve safety through remote
operations, improve quality though automation and deliver
extrusion capacity required for next-generation flare production.
Norway
The other target for investment is in Chemring Nobel’s explosives
facility in Norway to improve productivity and capacity to capitalise
on growing demand for its high quality products.
Risks
Risks
Our principal risks are documented on pages 34 to 41.
Our principal risks are documented on pages 34 to 41.
KPI
Order book
£394m
(2017: £325m)
KPI
Order intake
£360m
(2017: £337m)
14
Chemring Group PLC Annual Report and Accounts 2018
Strategic report 03
Grow our US business
04
Manage the portfolio
Our US businesses deliver more than half the Group’s revenue,
and their recent successes in the F-35 countermeasures and sensors
Programs of Record affirm their excellent access and insight into
the US military needs, including classified programmes.
We will leverage this access to launch our non-US capabilities
into the largest market in the world.
The Group’s portfolio comprises a technologically mature
Energetics sector which delivers cash to fund capital investment in
Countermeasures and technology investment in Sensors.
Strategy in action
Strategy in action
In Countermeasures we are sharing conventional, spectral and
kinematic flare products and processes with our US operations and
are promoting the benefits of these capabilities to the US customer.
In Sensors, the next-generation HMDS will incorporate a
Roke-developed wire detector for which the technology has been
transferred into our US operations, and we will extend this to
include our developments in land-based CEMA and Electronic
Countermeasure (“ECM”) products.
As our pyrotechnics, ammunition and trading businesses complete
large export contracts, we have reviewed the Group’s portfolio
and decided to exit the commoditised Energetics businesses.
This will simplify the Group and enable greater focus on our
growing differentiated Sensors and Countermeasures positions,
where we have recently made significant progress.
Risks
Risks
Our principal risks are documented on pages 34 to 41.
Our principal risks are documented on pages 34 to 41.
KPI
Revenue
£297m
(2017: £307m)
KPI
Underlying operating margin
10.4%
(2017: 10.3%)
Chemring Group PLC Annual Report and Accounts 2018
15
OverviewStrategic reportGovernanceFinancial statementsOther informationOverviewStrategic reportGovernanceFinancial statementsOther information
Key performance indicators
The Group’s strategy is underpinned
by focusing on a number of key
performance indicators (“KPIs”).
The KPIs that the Board and senior
management utilise to assess Group
performance are set out below.
These KPIs enable progress to be monitored on the implementation
of the Group’s strategy, levels of investment, operational performance
and business development. They also give an early insight into how
well the principal risks and uncertainties are being managed. Similar
indicators are used to review performance by each of the Group’s
businesses, albeit that the exact nature of these varies between
business units to reflect the differing nature of their operations.
All financial KPIs refer to continuing operations and therefore
exclude businesses classified as discontinued and held for sale.
Leading indicators1
Lost time incidents
2,068
(2017: 2,264)
1. Near misses reported and actioned.
11
(2017: 14)
2018
2017
11
14
Injuries from energetic incidents2
Lost time incident rate3
6
(2017: 0)
2.
Injuries arising including two injuries (one fatal)
from the CCM UK incident.
0.38
(2017: 0.59)
2018
2017
0.38
0.59
3. LTI: number of lost time incidents
per 100 employees.
Order intake
Group
£360m
(2017: £337m)
Order book
Group
£394m
(2017: £325m)
Countermeasures
Countermeasures
2018
2017
Sensors
2018
2017
Energetics
2018
2017
£127m
£144m
£109m
£95m
2018
2017
Sensors
2018
2017
Energetics
£124m
£98m
2018
2017
£183m
£179m
£75m
£136m
£53m
£93m
Safety
Many of Chemring’s manufacturing activities
involve the use of hazardous substances and
energetic materials, and safety metrics are a
fundamental part of the key performance
indicators used to manage the business. All
incidents and near misses are reported and
investigated, in order to share findings and
corrective actions throughout the Group.
The Group’s key lagging indicators are the
number of incidents that result in lost time,
and the number of energetic incidents that
cause injury. In addition, the Group has a
number of leading indicators, principally the
level of near misses. The active reporting of
near misses by employees is encouraged in
order to highlight potential risk issues and
enable these to be considered and addressed
on a timely basis. Each of these is reviewed
and resolved, gradually reducing risk.
Orders
The Group uses a number of KPIs relating to
orders. These comprise order intake, order
book and the level of forecast revenue for
the current financial year covered by orders
on hand.
The closing order book for continuing
operations at 31 October 2018 of £394m
represents an increase of 21% on the prior
year, principally reflecting the strong order
intake in the US Countermeasures business and
in the Sensors sector. As at 31 October 2018,
of the orders on hand of £394m, £242m
were expected to be fulfilled in the year
ending 31 October 2019.
Read more on pages 20–25
16
Chemring Group PLC Annual Report and Accounts 2018
Strategic report Revenue
Revenue provides a measure of business
activity and growth, enabling customer
behaviour trends to be identified and acted
upon. In the case of business units that have
experienced operational and production
issues, revenue levels indicate their ability to
deliver throughput and fulfil customer orders.
Revenue
Group
£297m
(2017: £307m)
Group revenue
2018
2017
£297m
£307m
Underlying operating profit
Group
£31.0m
(2017: £31.5m)
Underlying operating margin
Group
10.4%
(2017: 10.3%)
Underlying operating
profit and margin
Underlying operating profit provides a consistent
year-on-year measure of the trading performance
of the Group’s operations. The continuing
underlying operating profit decreased by 2%
during the year, reflecting the impact of the
Salisbury incident in August 2018.
Underlying operating margin is based on
underlying operating profit and provides an
assessment of the profitability of the business.
A focus on operating margin allows the
impact of changes in revenue and cost base
to be monitored, enabling comparisons to
be made of management performance and
trading effectiveness. The changes in margin
of each sector reflect the market conditions,
volume changes and performance improvement
actions, as set out in this strategic report. The
changes in margin also reflect the impact of
movements in revenue, offset by the benefit
of cost-saving measures.
See note 3 to the financial statements for
reconciliation to the statutory loss after
tax from both continuing and
discontinued operations.
Read more on pages 20–25
Countermeasures
2018
2017
Sensors
2018
2017
Energetics
2018
2017
Countermeasures
2018
2017
Sensors
2018
2017
Energetics
2018
2017
Countermeasures
2018
2017
Sensors
2018
2017
Energetics
2018
2017
£126m
£125m
£87m
£91m
£84m
£91m
£12.1m
£14.4m
£15.3m
£13.4m
£11.8m
£14.1m
9.6%
14.7%
11.5%
17.5%
14.0%
15.6%
Chemring Group PLC Annual Report and Accounts 2018
17
OverviewStrategic reportGovernanceFinancial statementsOther information Key performance indicators continued
Working capital
Group
£83.7m
(2017: £89.0m)
Inventory
Group
£71.4m
(2017: £78.0m)
Countermeasures
Countermeasures
2018
2017
Sensors
2018
2017
Energetics
2018
2017
£22.0m
£30.7m
£28.8m
£27.6m
2018
2017
Sensors
2018
2017
Energetics
£33.5m
£35.2m
£16.9m
£16.7m
£32.9m
£30.7m
2018
2017
£21.0m
£26.1m
Continuing underlying earnings
per share
Change from previous year
Up 17%
(2017: up 18%)
6.9p
(2017: 5.9p)
2018
2017
6.9p
5.9p
2018
2017
+17%
+18%
Working capital
and inventory
Working capital is defined as inventories,
trade and other receivables, and trade and
other payables, excluding non-underlying
accruals and payroll-related payables.
This excludes assets held for sale and
comparatives have been restated for KPIs.
The primary focus for improvement within
working capital is inventory.
Optimum inventory levels drive both effective
staff utilisation and cost efficiency. Excess inventory
results in second order costs such as increased
storage and inventory management costs, the
write off of ageing or obsolete inventory, and
disposal costs, which can be significant for
energetic materials.
Read more on page 28
Continuing underlying
earnings per share
Underlying earnings per share is a key
measure for the Group, reflecting the
combined trading performance together
with the impact of its funding structure and
taxation. The increase in the year reflects the
impact of the Salisbury incident and
lower interest and tax costs.
18
Chemring Group PLC Annual Report and Accounts 2018
Strategic report Net debt to continuing underlying EBITDA
The ratio of underlying EBITDA to the Group’s debt levels is a clear indicator of the leverage
borne by the Group. The ratio is a specified financial covenant within the Group’s revolving
credit facility. We have calculated this ratio using continuing underlying EBITDA. The Group’s
aim over the medium term is to maintain the ratio of net debt to continuing underlying
EBITDA to an average level of less than 1.50x.
Net debt:
continuing underlying EBITDA
1.64x
(2017: 1.46x)
2018
2017
1.64x
1.46x
Continuing underlying operating cash flow
Operating cash flow provides a measure of the cash generated by the Group’s trading.
It represents the cash that is generated to fund capital expenditure, interest payments, tax
and dividends. Given the Group’s relatively short-cycle manufacturing operations and with a
focus on working capital being improved through greater efficiency, operating cash conversion
should closely follow operating profit, although the Group recognises that the timing of certain
contracts and subsequent payment can have a timing effect from year to year. The Group’s
underlying continuing operating cash flow was £44.7m during the year, reflecting an 89%
conversion of underlying EBITDA.
Continuing underlying operating
cash flow
£44.7m
(2017: £41.6m)
2018
2017
£44.7m
£41.6m
Operational performance
Operational performance is measured using a series of indicators that include efficiency, labour utilisation and customer order performance.
These performance indicators are considered at business unit level, as the varying nature of the Group’s operations mean that it is not appropriate
to consolidate this data. Improving operational performance is key to securing strong customer relationships and maximising returns from
production activities. Closely monitored measures include gross margin percentages by business, on-time delivery of customer orders, overall
manufacturing utilisation and product development spend.
Chemring Group PLC Annual Report and Accounts 2018
19
OverviewStrategic reportGovernanceFinancial statementsOther information Focus on Countermeasures
Chemring is the world leader in the design,
development and manufacture of advanced
expendable countermeasures and countermeasure
suites for protecting air, sea and land platforms
against the growing threat of guided missiles.
The Group has a broad product range including
conventional flares, advanced flares, special
material decoys, chaff and naval countermeasures.
Strategy
The Countermeasures sector strategy
continues to be one of strengthening our
world-leading position through continuously
improving our technological and operational
base whilst working closely with our
customers in the development of new
solutions to meet emerging threats.
Investment in the sector will principally
be directed towards automation and the
enhancement of current facilities and
capabilities. We also see great opportunity
through partnering with our customer
base on future technological developments.
Markets
The countermeasures market is starting to
show some positive signs with an increase in
solicitation, bid activity and orders received
throughout the year, particularly within the
US. The broader global countermeasures
market remains more robust with improving
levels of activity in the UK and the rest of
the world.
Performance
The incident at our UK Countermeasures
site in August 2018 has affected our 2018
reported results, reducing revenue by
approximately £22m and underlying operating
profit by approximately £17m.
Countermeasures revenue increased by 1%
to £126.0m (2017: £125.3m) and the segment
reported an underlying operating profit of
£12.1m (2017: £14.4m), down 16%. This decline
was driven by the Salisbury incident (see above)
and to a much lesser extent a softer year in
Australia and masked the improvement
achieved in the US business. Underlying
operating margin fell to 9.6% from 11.5%.
On a constant currency basis, revenue
would have increased by 4% to £130.7m
and underlying operating profit would have
fallen 12% to £12.7m.
The statutory operating loss for the year was
£4.2m (2017: £10.4m profit), the year being
impacted by £16.3 of non-underlying items in
respect of restructuring, deferred consideration
of acquisitions and the amortisation of
acquired intangibles.
Order intake in the year has been strong
with significant orders for both air and naval
countermeasures received from UK MOD,
international and US customers in particular.
The Group’s new special material decoy
continues to progress and there is evidence
of growth in market share.
The year saw significant development on the
F-35 program, with our $12m Low Rate Initial
Production (“LRIP”) 6 contract for the F-35
operational flares now completed. The $15m
LRIP 7 contract was awarded and delivery
commenced in the year. The contract for
LRIP 8 is expected to be awarded later
in the year and will be delivered from our
Tennessee facility. Our Australian facility is
currently bidding an F-35 contract directly
with the US Navy, the outcome of which
is expected in the first half of 2019.
Opportunities and outlook
After a number of years of weakness in
the countermeasures markets that followed
the end of the Iraq and Afghanistan conflicts,
the outlook for the segment is increasingly
positive. Segment focus remains on maintaining
and growing the Group’s market-leading
position, in particular on key platforms such
as the F-35 as it begins to enter service in
increasing numbers, and in the important
special material decoy market as older
programmes decline in volume.
During the year, the Board approved
a project to invest in the Tennessee facility.
The project, which is expected to take
approximately three years to complete,
will result in an automated capability with
additional capacity reflecting expected
customer demand over the medium term.
The majority of the investment will be
capital, but some demolition, remediation
work, asset and inventory write offs have
been expensed in 2018 as non-underlying
costs. This investment, which is expected to
safeguard and expand the Group’s position
in the Global countermeasures market, will
provide the Tennessee site with a fully
automated production line. This is not
expected to affect the site’s ability to deliver
product in 2019. The original budget was
approximately $50m and this is under review
as plans are refined and issues addressed as
work commences. This will contribute to
higher Group capital expenditure over the
next two years. Group capital expenditure
in 2019 is expected to be in the range
of £40m–£50m.
20
Chemring Group PLC Annual Report and Accounts 2018
Strategic report Our Australian facility will close in H1 2019
to be fitted and qualified for F-35 production.
As such we expect little contribution from
Australia in 2019, but it should exit the year
with an F-35 qualified production facility.
The phased restart of our UK Countermeasures
site is in progress. We are working with the
appropriate regulatory authorities to agree
a phased restart plan across the different
activities on site. As such, 2019 is planned to
be a year where the site progressively gets
back to being fully operational. As a result
revenue and underlying operating profit
contribution is still expected to be lower
than expected before the incident took place.
For 2019 our current assumption is that the
site will contribute approximately £30m of
revenue and break even after accounting for
insurance recoveries and remediation costs.
Further investment in automation at the
Salisbury site is being evaluated.
Countermeasures’ order book at 31 October
2018 was £182.8m (2017: £178.6m) and at
constant currency the order book would be
1% higher than at 31 October 2017. Of the
31 October 2018 order book, approximately
£116m is currently expected to be delivered
in 2019, of which £92m can be delivered from
our US and Australian facilities.
With a solid order book in place, 2019
trading performance for Countermeasures
is expected to be positive, albeit with a
significant bias towards the second half
as Salisbury progressively restarts and
Australia is refitted and qualified.
Where we operate
Key facts
Chemring Countermeasures USA
Consists of Alloy Surfaces, based in
Philadelphia, and Kilgore Flares, based in
Tennessee. Alloy Surfaces is a leading
developer of special material decoys for
the US Navy, Marine Corps, Army and
Air Force, with exports to the UK and
Australia. Kilgore Flares operates a high
volume manufacturing facility making
conventional and advanced flares,
including flares for the F-22 and F-35.
Chemring Countermeasures UK
Manufactures advanced expendable
countermeasures for air and sea
platforms. Its aircraft products include
conventional and advanced flares
and chaff. Its naval products include
infra-red and radio frequency decoys
and the CENTURION trainable
naval decoy launcher.
Chemring Australia
Develops and manufactures aircraft
countermeasures, pyrotechnics,
and counter-IED and electronic
warfare solutions.
Revenue
£126.0m
(+1%)
Underlying operating profit
£12.1m
(2017: £14.4m)
Order book
£182.8m
(2017: £178.6m)
Underlying operating margin
9.6%
(2017: 11.5%)
Opportunities:
JJ F-35 Joint Strike Fighter
JJ Chemring Australia as F-35
second source
JJ Capturing international market
share through greater collaboration
JJ Further automation and new
product introduction
Strengthening our
world-leading position
through continuously
improving our
technological and
operational base.
Chemring Group PLC Annual Report and Accounts 2018
21
OverviewStrategic reportGovernanceFinancial statementsOther information Focus on Sensors
Chemring’s Sensors products include world-leading
systems for detecting improvised explosive devices
(“IEDs”), chemical and biological agents, and core
technologies for detecting, intercepting and jamming
electronic communications. The Group is also a
leading contract research and development supplier,
trusted by government and industrial partners
worldwide to solve the most technically challenging
security-critical issues.
Strategy
The Sensors sector remains Chemring’s
principal area of focus for long-term growth,
reflecting customer demand and opportunities
in this area. The Group continues to invest in
order to grow its Sensors business by developing
and exploiting technologies for its niche markets
in IED defeat, chemical and biological threat
detection, and land-based electronic warfare.
The Group’s specialist contract research
and development business operates in the
growing cyber-security market, and investing
in recruiting, developing and retaining our people,
together with expanding our geographical
and customer coverage, is key to profitable
growth in this area.
Markets
Customer budgets for Roke’s security services
are rising, as are ongoing development efforts
in support of US Programs of Record in the
counter-IED, chemical and biological detection
markets. Contract awards for new Sensors
products have been achieved during the year
under a number of US Programs of Record.
The increasing threat to information security,
together with the proliferation of autonomous
systems and artificial intelligence, is seeing
customer budgets for Roke’s services continue
to improve. Continued investment in capability
in this area is ongoing to optimise the
opportunity for Chemring.
Performance
Sensors revenue decreased by 4% to £87.3m
(2017: £91.2m) reflecting a good year at Roke,
the continued focus of the US business on
the research and development phases of
the counter-IED, chemical and biological
detection Programs of Record and a weaker
year in the Electronic Warfare (“EW”) market
as the timing of customer orders was delayed.
The segment reported an underlying
operating profit of £15.3m (2017: £13.4m).
Underlying operating margins increased
to 17.5% (2017: 14.7%). Order intake was
£109.2m, a 15% increase on the prior year.
On a constant currency basis, revenue would
have fallen 3% to £88.8m and underlying
operating profit would have increased by
16% to £15.5m.
The statutory operating profit for the year
was £5.2m (2017: £1.0m), the year being impacted
by £10.1m of non-underlying items in respect
of the impairment of development costs and
the amortisation of acquired intangibles.
Key developments in the year were customer
decisions on major US Programs of Record.
The US DoD’s counter-IED program, through
Chemring’s HMDS program, gave rise to two
significant milestones. The award of both a $14m
development contract and a 3-year $93m
indefinite delivery, indefinite quantity (“IDIQ”)
sole-source contract, with an initial delivery
order of $23m, were in line with our expectations
22
Chemring Group PLC Annual Report and Accounts 2018
of the program which has moved to one
of spiral development, with concurrent
development, trialing, and manufacturing to
be undertaken. We expect this program to
run for the next decade providing a recurring
level of business as the US Army moves to its
objective of producing and fielding a fleet of
369 HMDS by mid-2021. The new fleet will
be comprised of both refurbished and new
HMDS and this activity will run alongside
technology upgrade programs.
The Joint Biological Tactical Detection System
(“JBTDS”) program moved into the Biological
Point System Assessment phase in March 2018.
The DoD will undertake testing of our product
for the next 12–18 months, after which we
expect a production decision.
We bid and won a second biological program,
the Enhanced Maritime Biological Detection
System (“EMBD”), where the customer is
the US Navy. This was a competitive bid and
our initial contract award for Engineering
Manufacturing Development (“EMD”) and
LRIP was in the form of a $24m IDIQ, with
an initial delivery order of $14m. The program
is expected to be worth up to $100m over
5–10 years once in full rate production.
The Next Generation Chemical Detector
Program saw two of the three phases make
contract decisions. Chemring won an award
under “NGCD” 1 (now known as Aerosol and
Vapor Chemical Agent Detector – “AVCAD”).
This award is in the form of an IDIQ contract.
The initial EMD and LRIP phase is expected
to be worth approximately $16m in the period
to 2022. Following this the customer is expected
to have a requirement of approximately $800m.
Chemring is one of two contractors selected
for this program.
The cyber-security market, in which Roke is
a leading participant, was buoyant in the year.
Roke’s focus on investing in its people ensures
it has the right mix of skills to meet market
requirements and has supported its success
and revenue growth in the year.
During the year Chemring disposed of its
3d-Radar business, but retained the rights
to use the technology in the military market.
Opportunities and outlook
The focus for Sensors continues to be on
expanding the Group’s product, service and
capability offerings in the areas of tactical
electronic warfare and cyber-security, and
securing positions on the US DoD Programs
of Record.
Strategic report Where we operate
Key facts
Chemring Sensors & Electronic
Systems (“CSES”)
Based in Virginia and North Carolina,
CSES develops and manufactures ground
penetrating radar, IED detection systems,
and chemical and biological threat
detection systems.
Roke
A technology company that provides
electronics research, development and
engineering services, and cyber-security
solutions for UK Government agencies
and prime contractors.
Chemring Technology Solutions
The Group’s centre of excellence in land
EW, and also develops and manufactures
IED detection and neutralisation systems,
including vehicle-mounted and hand-held
sensors, disruptors and initiation systems.
After a year of significant bid activity in the
US, focus now turns to the execution phase
for the contracts we have been successful on.
Mobilisation has started, with some initial
deliveries made in 2018, but the focus of
2019 will be ensuring the Virginia and North
Carolina facilities are mobilised and resourced
to deliver the AVCAD, EMBD, JBTDS and
HMDS contracts.
Supporting the UK Government across
National Security and Defence, and
non-governmental industries in high value
manufacturing and infrastructure, Roke
will continue to focus on their customers’
missions: to enable them to deliver
competitive advantage, defend their
people, assets and secrets, and defeat their
adversaries. With a focus on emerging
technologies in connectivity, cyber,
automation and data analytics, Roke will
deliver research, design, engineering and
advisory services using its high quality people
and capabilities. Concurrently, Roke is seeking
to expand its capabilities into commercial and
international markets.
The order book for Sensors at 31 October 2018
was £75.4m (2017: £53.2m).
2019 trading performance for Sensors is
expected to show an improvement on 2018,
driven primarily by initial deliveries under
the HMDS awards.
Sensors remains
Chemring’s principal
area of long-term
growth.
Revenue
£87.3m
(-4%)
Underlying operating profit
£15.3m
(2017: £13.4m)
Order book
£75.4m
(2017: £53.2m)
Underlying operating margin
17.5%
(2017: 14.7%)
Opportunities:
JJ Next-generation counter-IED
Program of Record
JJ Long-term chemical and biological
detection Programs of Record
JJ International electronic
warfare customers
JJ Expanding Roke’s innovation
and engineering services into
adjacent markets
Chemring Group PLC Annual Report and Accounts 2018
23
OverviewStrategic reportGovernanceFinancial statementsOther information Focus on Energetics
Chemring’s energetic sub-systems include safety-critical
components of missiles, aircraft and space launch
systems. Operators and prime contractors depend
on Chemring’s very high reliability, single-use devices
to perform key functions.
Strategy
The Group will secure the position of its
energetic sub-systems components on
next-generation platforms for missile and
space programmes in the US and Europe,
through excellent delivery performance on
current programmes and strong customer
and partner interaction.
Markets
Within Energetics, the Group is seeing a
medium-term trend of increased demand for
specialist products, particularly for applications
in the space, missile, aerospace and high
explosive materials markets, balanced by
a decline in the more commodity-based
pyrotechnics and ammunition markets.
Following a strategic review of the Group’s
portfolio, the Board decided to exit the
commodity Energetics businesses.
Performance – continuing operations
Revenue for Energetics decreased by 7%
to £84.1m (2017: £90.6m), while underlying
operating profit decreased by 16% to £11.8m
(2017: £14.1m), giving an underlying operating
margin of 14.0% (2017: 15.6%). The planned
closure of the Torrance facility and integration
into a modernised Chicago facility has caused
some operational disruption, which has
delayed some revenues to 2019.
On a constant currency basis, revenue would
have fallen 5% to £86.0m and underlying
operating profit would have fallen 15%
to £12.0m.
The statutory profit for the year was £7.0m
(2017: £3.5m), the year being impacted by
£4.8m of non-underlying items in respect
of the amortisation of acquired intangibles.
Chemring’s high explosive manufacturing
business in Norway has again achieved
record order intake levels with significant
effort being undertaken to enhance capacity.
This investment is supported by a strategy of
engaging customers in long-term agreements
for supply, which has proved successful
with a number of customers moving to
this arrangement to secure their continuity
of supply.
Performance – discontinued operations
Revenue for the discontinued Energetics business
decreased by 42% to £138.6m (2017: £240.4m),
while underlying operating profit decreased
by 67% to £8.0m (2017: £23.9m), reflecting the
decline in 40mm ammunition and non-standard
ammunition ("NSA") revenue in 2018.
The expected decline in performance was
due to the completion of the large 40mm
ammunition contracts with customers in the
Middle East. The final shipment under this
contract was completed early in the year;
therefore 40mm ammunition only contributed
£11.2m (2017: £64.2m) to revenue in the year.
Sales of procured NSA product fell in the
year. Due to the externally sourced nature of
the products involved, margins on NSA sales
are significantly lower than for manufactured
product. Supply of NSA products to the
US Government contributed £81.9m
(2017: £97.6m) to revenue in the year.
24
Chemring Group PLC Annual Report and Accounts 2018
Opportunities and outlook
The Group’s niche propellant and devices
businesses in Scotland and Chicago are
increasingly securing long-term contracts
with customers supporting greater short
and medium-term visibility and providing
a framework for long-term planning and
investment decisions. Similarly, demand
for high quality high explosives has enabled
Chemring Nobel in Norway to work
proactively with its customer base on
long-term contracting models, providing
much improved visibility.
The order book for the continuing Energetics
businesses at 31 October 2018 was £135.5m
(2017: £93.4m). 2019 trading performance
for the continuing Energetics businesses is
expected to show an improvement on 2018,
driven primarily by the completion of the site
consolidation at our facility in Chicago.
The order book for the discontinued
Energetics businesses at 31 October 2018
was £68.2m (2017: £152.8m) and included
£nil in respect of 40mm ammunition and
£27.1m in respect of NSA.
Strategic report Where we operate
Key facts
Chemring Energetic Devices
A leading US supplier of pyrotechnic and
electro-mechanical systems for missiles, space
and safety applications, based in Chicago.
Products include satellite and space launch
vehicle separation systems, initiators and
low-shock satellite separation systems, and a
range of pyromechanisms for aircrew egress.
Chemring Energetic Devices also supplies
sub-systems for missiles.
Chemring Energetics UK
Based in Scotland, Chemring Energetics UK
is a leading supplier of detonators, actuators,
rocket motors, high explosive charges,
canopy cutting cords and pyromechanisms
for aircrew egress, and demolition stores.
Chemring Nobel
Chemring Nobel, located in Norway, is a
leading supplier of high explosive charges,
high explosives and energetic binders to the
defence, security, oil and gas industries.
Revenue
£84.1m
(-7%)
Underlying operating profit
£11.8m
(2017: £14.1m)
Order book
£135.5m
(2017: £93.4m)
Underlying operating margin
14.0%
(2017: 15.6%)
Opportunities:
JJ Growth in niche devices businesses
JJ Long-term partnering agreements
JJ Increased demand for niche high
explosives in Norway
Our Energetics
businesses provide
niche market positions
supported by strong
intellectual property.
Chemring Group PLC Annual Report and Accounts 2018
25
OverviewStrategic reportGovernanceFinancial statementsOther information Financial review
The Group is well
placed financially
to support the
implementation phase
of building a stronger
business.
Andrew Lewis
Group Finance Director
26
Chemring Group PLC Annual Report and Accounts 2018
In 2018 we have secured a number of
opportunities. In Countermeasures order
intake has been strong; in Sensors we have
seen success in US Programs of Record.
Our focus has been on “Building a stronger
business” to ensure the Group has solid
foundations from which to deliver these
medium-term growth opportunities.
As expected, revenue in the now discontinued
Energetics businesses decreased following the
delivery of material export contracts in 2017.
Until the incident at Salisbury in August 2018
the strategy of partially replacing that revenue
with higher margin Countermeasures and
Sensors business was being executed as
planned. The Salisbury incident has affected
the outturn of the 2018 year by £17m at an
underlying operating profit level.
Setting aside the financial impact of the
incident, we are encouraged that the 2018
financial results demonstrate the improving
balance of the business as it becomes less
reliant on Energetics export orders for which
the timing is difficult to predict. The order
book in Countermeasures and Program of
Record contract awards in the US provide
improving visibility for the Group. Our focus
is to “Build a stronger business” to ensure we
are able to deliver these opportunities over
the medium term. This will require investment
in the infrastructure of the Group, the first
significant project being the investment in the
Tennessee site announced during the year,
due to be completed in 2020.
Group financial performance
The underlying operating profit from
continuing operations of £31.0m (2017: £31.5m)
resulted in an underlying operating margin of
10.4% (2017: 10.3%). The flat margin primarily
reflects the financial impact of the Salisbury
incident which offset a richer margin mix from
a combination of operational improvement
and the operational gearing in the US
Countermeasures business.
Foreign exchange translation has had a limited
impact on year-on-year comparison. On a
continuing constant currency basis, restating
the current year at the FY17 average exchange
rate, revenue would have been £305.5m
and underlying operating profit would have
been £31.9m.
Strategic report Total finance expense fell significantly to £6.1m
(2017: £11.3m). This was driven by the repayment
of expensive private placement loan notes in
November 2017 and the focus on reducing
intra-period working capital volatility, which
is demonstrated in the weekly net debt
graph below.
This left an underlying profit before tax from
continuing operations of £24.9m (2017: £20.2m).
The effective tax rate on the underlying profit
before tax from continuing operations was
22.9% (2017: 18.3%). The underlying earnings
from continuing operations per share was
6.9p (2017: 5.9p).
Statutory operating loss from continuing
operations was £15.9m (2017: £4.6m profit)
and after statutory finance expenses of £6.1m
(2017: £11.3m), statutory loss before tax from
continuing operations was £22.0m (2017: £6.7m),
giving statutory loss per share from continuing
operations of 14.6p (2017: 1.5p). The statutory
loss from discontinued operations was £65.0m
(2017: £10.9m profit), giving a statutory loss of
£105.8m (2017: £6.6m profit) from continuing
and discontinued operations. A reconciliation
of underlying to statutory profit measures is
provided in note 3. The non-underlying costs
relate to the amortisation of acquired intangibles,
deferred consideration on acquisitions, legal
costs associated with the ongoing investigations,
the write off of assets and demolition costs
at the Tennessee site, the costs associated
with the change of Chief Executive and the
revaluation of deferred tax assets in the US
following the new tax legislation enacted in
December 2017. In addition, following a
strategic product portfolio review the Group
has recognised an impairment charge of
£7.4m in respect of certain products where
capitalised development costs are no longer
considered fully recoverable.
Underlying operating profit from
continuing operations
£31.0m
(2017: £31.5m)
Net debt
£81.8m
(2017: £80.0m)
Revenue from discontinued operations fell
to £138.6m (2017: £240.4m) and underlying
operating profit fell to £8.0m (2017: £23.9m)
primarily as a result of the lower levels of activity
on 40mm and NSA product lines. A review
of the carrying value of the businesses held
for sale resulted in an impairment of £69.3m
(2017: £9.8m). This is based on the current
market conditions in the military and law
enforcement commodity ammunition and
pyrotechnics market.
Finance expenses
Following the repayment of £51.4m of private
placement loan notes in November 2017, the
total finance expense fell to £6.1m (2017: £11.3m).
Total finance expenses included interest costs
of £4.7m (2017: £8.5m), amortisation of debt
finance costs of £1.3m (2017: £2.4m) and
other non-cash finance expenses associated
with the defined benefit pension scheme of
£0.1m (2017: £0.4m).
reducing the rate of our deferred tax asset,
and changes the rules regarding US interest
tax deduction limitations. In addition, the rate
is impacted by the geographic mix of profits,
changes to the amounts of deferred tax
assets considered recoverable in respect of
both tax losses and prior year adjustments.
The continuing underlying tax charge totalled
£5.7m (2017: £3.7m) on a continuing underlying
profit before tax of £24.9m (2017: £20.2m).
The effective tax rate on underlying profit
before tax for the year is a charge of 22.9%
(2017: 18.3%).
The US Tax Cuts and Jobs Act (“TCJA”) was
substantively enacted on 22 December 2017.
The TCJA provides for a reduction in the main
rate of US federal corporate income tax from
35% to 21% for the period after 1 January 2018,
thus first affecting Chemring for part of its
2018 financial year, however, the impact on
the deferred tax asset has been recognised in
full during 2018.
Tax
The continuing statutory tax charge totalled
£18.8m (2017: £2.4m credit) on a continuing
statutory loss before tax of £22.0m (2017: £6.7m).
The increase in the continuing effective rate
of tax on the results of the Group is primarily
due to recently enacted US tax legislation
that reduces the US corporate tax rate, thus
The impact on Chemring has been two-fold:
the reduction in the main rate of US federal
corporate income tax has resulted in a write
off of deferred tax of £8.6m associated with
tax losses and interest restrictions, offset by
a £3.9m credit on the revaluation of the
deferred tax liabilities associated with
US-related acquired intangibles.
Weekly net debt
230
210
190
170
m
£
150
130
110
90
70
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sept
Oct
FY 2018
FY 2017
FY 2016
Chemring Group PLC Annual Report and Accounts 2018
27
OverviewStrategic reportGovernanceFinancial statementsOther information Financial review continued
Tax continued
This has resulted in a net write off of £4.7m
in respect of the rate change. In addition, the
introduction of restrictions on the availability
of interest deductions has resulted in a write
off of deferred tax of £12.7m. The total impact
of £17.4m has been treated as a non-underlying
item in 2018 (see note 3).
In November 2017, the Group repaid £5.3m
and $61.2m of outstanding loan notes out
of existing cash resources and debt facilities.
The remaining loan notes of $83.6m are
repayable in November 2019 and this
payment is expected to be funded from
our new revolving credit facility which runs
to October 2022.
The discontinued underlying tax charge was
£1.8m (2017: £4.4m) on an underlying profit
before tax of £8.0m (2017: £23.9m).
Earnings per share
Underlying earnings per share from continuing
operations were 6.9p (2017: 5.9p) and diluted
underlying earnings from continuing operations
per share were 6.7p (2017: 5.8p).
Total underlying basic earnings per share were
9.1p (2017: 12.9p) and the statutory basic loss
per share was 37.8p (2017: 2.4p earnings).
Group financial position
Net debt and cash flow
The Group’s net debt at 31 October 2018
was £81.8m (2017: £80.0m), representing a
net debt: underlying EBITDA (continuing)
ratio of 1.64x (2017: 1.46x). The financial
condition of the Group has improved in a
number of aspects during the year. Debt
repayments were made which reduces future
interest costs, working capital practices were
improved to reduce intra-period volatility,
capitalised development costs have reduced,
amortisation now exceeds capitalisation and
the pension scheme has moved into surplus
on an IAS 19 basis of £7.5m (2017: £0.6m deficit).
The Group is working to achieve further
improvements over the medium term.
Underlying operating activities generated
cash of £56.9m (2017: £47.1m), split between
continuing £44.7m (2017: £41.6m) and
discontinued £12.2m (2017: £5.5m). The
Salisbury incident adversely impacted operating
cash flow by c.£10m. Continuing cash conversion
was 89% of continuing underlying EBITDA
showing focus on working capital improvements
is delivering in other areas of the business.
Working capital
Working capital relating to the continuing
businesses was £83.7m (2017: £89.0m),
a decrease of £5.3m. Working capital as
a percentage of continuing revenue has
improved 0.9% to 28.1% (2017: 29.0%).
Inventory decreased as improved inventory
management across the continuing businesses
was offset by the impact of the incident at our
UK Countermeasures site where inventory at
year-end exceeded our plan as a result of the
site closure and subsequent inability
to complete and fulfil planned orders in the
year for which materials had been procured.
Trade receivables decreased by £3m and trade
payables decreased by £4m as a result of the
timing of activity in the final quarter of
the year.
Debt facilities
The Group’s principal debt facilities comprised
$83.6m of private placement loan notes, a
£90.0m revolving credit facility and a $10.0m
overdraft facility. The revolving credit facility
was established in October 2018, is with a
syndicate of four banks and has a four-year
initial term with options to extend by a
further two years. The Group had £68.1m
(2017: £106.0m) of undrawn borrowing
facilities at the year end. 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.
The Group was in compliance with the
covenants throughout the year.
Retirement benefit obligations
The surplus on the Group’s defined benefit
pension schemes was £7.5m (2017: £0.6m
deficit), measured in accordance with
IAS 19 (Revised) Employee Benefits.
The surplus 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 2018 has been prepared and updated
to 31 October 2018, using the projected unit
credit method. This valuation showed a
surplus of £7.5m (2017: £0.6m deficit). The
improvement reflects the funding structure
agreed with the trustees, under which
contributions of £7.9m were paid in 2018,
together with the effect of changes in
actuarial assumptions.
The 6 April 2018 triennial valuation shows
a technical provisions deficit of £5.8m, which
represents a funding level of 93.4% of liabilities.
The Group has agreed with the Trustee that
deficit recovery payments totalling £6.25m,
which were the contributions due to be
made in the period to 30 June 2019 under
the previous deficit recovery plan, would be
made prior to 31 December 2018. Of this,
£0.4m has been paid in the 2019 financial
year. After this, no further deficit recovery
payments will be required and the Group will
be released from the bank guarantee and
letters of credit totalling £7.2m to the Scheme
in respect of future contributions. The next
actuarial valuation is due as at 6 April 2021
after which the future funding requirements
will be reassessed.
Contingent liabilities
The Group is, from time to time, party to
legal proceedings and claims, and is involved
in correspondence relating to potential claims,
which arise in the ordinary course of business.
In addition the following matters, as previously
disclosed in last year’s annual report and
subsequent announcements, remain open
at year end:
A dispute between Alloy Surfaces Company,
Inc. and the US Army, in relation to disputed
pricing of a certain historic contract fulfilled
28
Chemring Group PLC Annual Report and Accounts 2018
Strategic report by Alloy Surfaces Company, Inc., proceeded
to a hearing in front of the US Armed
Services Board of Contract Appeals
(“ASBCA”) in April 2017.
ASBCA is expected to take approximately
two years to issue its decision in relation to
this matter. The range of possible outcomes is
between £nil to £12.0m. A provision of £1.0m
(2017: £1.1m) exists to cover estimated legal
costs for the Group with regards to this issue.
Since 2013, the Group has benefited from the
UK’s Controlled Foreign Company (“CFC”)
Finance Company exemption. The European
Commission has launched an investigation
into whether the UK’s CFC Finance Company
exemption breaches state aid rules. No timescale
has been set for the review and this could
take several years to conclude. If, at the end
of the investigation, the regime is considered
to be in contravention of the State Aid
provisions, the UK Government will be
required to seek repayment of the lost tax
from the relevant taxpayers. Given the early
stage of the investigation, it is too early to
determine whether a tax liability is probable.
The range of possible outcomes is between
£nil and £15m, plus interest.
The Serious Fraud Office (“SFO”) is currently
undertaking a formal investigation into concerns
about bribery, corruption and money laundering
involving intermediaries who previously
represented one of the Group’s UK-based
subsidiaries, Chemring Technology Solutions
Limited (“CTSL”) and its predecessor companies.
The investigation commenced following a
voluntary report made by CTSL relating to
two specific historic contracts, the first of
which was awarded prior to the
Group’s ownership of the business concerned
and the second in 2011, neither of which are
considered to be material in the context of the
Group. It is too early to predict the outcome
of the SFO’s investigation and therefore the
timings and amounts of the outcome cannot
be estimated reliably. The Group continues to
co-operate fully with the SFO in its investigation,
and will provide a further update as and
when appropriate.
On 10 August 2018 an incident occurred at
the Group’s Countermeasures site in Salisbury.
This resulted in one employee fatality and
one employee requiring hospital treatment
for his injuries. The Group responded
immediately to support employees and their
families and maintains appropriate employers’
liability insurance. The Group continues to
fully support the Health and Safety Executive
(“HSE”) as they undertake their investigation.
Whilst provisions have been recorded for
costs that have been identified, it is possible
that additional uninsured costs and, depending
on the outcome of the HSE investigation,
financial penalties may be incurred in the future.
The Group has a £2.5m deductible per
claim under its material damage and business
interruption insurance policy, subject to a
maximum aggregate deductible of £3.5m
in any one year.
Capital expenditure
The Group continues to invest in the
infrastructure of its facilities, with particular
focus on enhancing safety and operational
performance. In the year £21.1m (2017: £12.4m)
was spent on property, plant and equipment.
Research and development
R&D expenditure was £43.8m (2017: £51.8m).
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. An analysis of
R&D expenditure is set out below:
Customer-funded R&D
Internally funded R&D
– expensed to the
income statement
– capitalised
2018
£m
36.2
4.6
3.0
Total R&D expenditure
43.8
2017
£m
41.1
6.8
3.9
51.8
Amortisation of development and patent
costs was £3.7m (2017: £7.0m), with the
decrease reflecting a number of capitalised
product developments that have been
impaired following the appointment of a new
Chief Executive who conducted a strategic
review of the Group’s product portfolio, to
rationalise future resources on areas where
we have a niche position and competitive
advantage. An increase in amortisation of
development and patent costs is anticipated
for 2019 as additional Sensors projects
complete their development phase.
Chemring Group PLC Annual Report and Accounts 2018
29
OverviewStrategic reportGovernanceFinancial statementsOther information Financial review continued
Our APMs and KPIs are aligned to our
strategy and together are used to measure
the performance of our business and form
the basis of the performance measures
for remuneration.
Adjusted results exclude certain items because
if included, these items could distort the
understanding of our performance for the
year and the comparability between the periods.
Management considers non-underlying items
to be:
Dividend per share
3.3p
(2017: 3.0p)
Underlying earnings per share
6.9p
(2017: 5.9p)
JJ amortisation of acquired intangibles;
Net debt/underlying EBITDA
JJ discontinued operations;
JJ exceptional items, for example relating to
acquisitions and disposals, restructuring
costs, impairment charges and legal costs;
JJ gains or losses on the movement in the
fair value of derivative financial
instruments; and
JJ the tax impact of all of the above.
Our use of APMs is consistent with the prior
year and we provide comparatives alongside
all current year figures.
The term underlying is not defined under
IFRS and may not be comparable with
similarly titled measures used by other
companies. All profit and earnings per share
figures in this strategic report relate to
underlying business performance (as defined
above) unless otherwise stated.
1.64x
(2017: 1.46x)
2018 underlying operating profit
by segment
JJCountermeasures £12.1m
JJSensors £15.3m
JJEnergetics £11.8m
31+
34+
JJCountermeasures £14.4m
JJSensors £13.4m
JJEnergetics £14.1m
2017 underlying operating profit
by segment
Alternative Performance Measures
(“APMs”)
In the analysis of the Group’s financial
performance and position, operating results
and cash flows, APMs are presented to
provide readers with additional information.
The principal APMs presented are underlying
measures of earnings including underlying
operating profit, underlying profit before
tax, underlying profit after tax, underlying
EBITDA, underlying earnings per share, and
underlying operating cash flow. In addition,
EBITDA, net debt, and constant currency
revenues are presented which are also
considered to be non-IFRS measures. These
measures are consistent with information
regularly reviewed by management to run
the business, including for planning, budgeting
and reporting purposes and for its internal
assessment of the operational performance
of individual businesses.
The focus of the Annual Report is on the
results of the continuing operations as the
Board believes the shareholders are most
interested in the performance and the
potential of this part of the Group. An
analysis of the results of the discontinued
operations is provided in note 5 with
commentary on performance on page 103.
The Group manages its finance costs and tax
on a central or regional basis and therefore
the Board believes the use of underlying operating
profit or EBITDA is the best way of monitoring
the performance of operating businesses.
The strategic report includes both statutory
and adjusted measures, the latter of which, in
management’s view, reflects the underlying
performance of the business and provides a
more meaningful comparison of how the
business is managed and measured on a
day-to-day basis.
30
Chemring Group PLC Annual Report and Accounts 2018
Strategic report32
+
34
+
M
39
+
30
+
M
A reconciliation of underlying measures to statutory measures is provided below:
Group – continuing operations:
EBITDA (£m)
Operating profit/(loss) (£m)
Profit/(loss) before tax (£m)
Tax (charge)/credit (£m)
Profit/(loss) after tax (£m)
Basic earnings/(loss) per share (pence)
Diluted earnings/(loss) per share (pence)
Group – discontinued operations:
Profit/(loss) after tax (£m)
Sectors – continuing operations:
Countermeasures EBITDA (£m)
Countermeasures operating profit/(loss) (£m)
Sensors EBITDA (£m)
Sensors operating profit (£m)
Energetics EBITDA (£m)
Energetics operating profit (£m)
Further details are provided in note 3.
The adjustments to continuing
operations comprise:
JJ amortisation of acquired intangibles
of £11.6m (2017: £12.1m);
JJ exceptional items of £4.1m (2017: £2.1m)
relating to acquisition and
disposal-related costs;
JJ exceptional items of £8.1m (2017: £14.0m)
relating to business restructuring costs,
the majority of which relates to the
Tennessee site transformation;
JJ exceptional items of £12.8m (2017: £0.4m)
relating to legal costs in relation to ongoing
investigations;
JJ exceptional items of £7.4m (2017: £nil)
relating to the impairment of product
development costs;
JJ exceptional items of £1.7m (2017: £nil)
relating to the costs associated with the
change of Chief Executive;
2018
Underlying
Non-
underlying
Statutory
Underlying
2017
Non-
underlying
Statutory
50.0
31.0
24.9
(5.7)
19.2
6.9
6.7
(27.2)
(46.9)
(46.9)
(13.1)
(60.0)
(21.5)
(21.3)
22.8
(15.9)
(22.0)
(18.8)
(40.8)
(14.6)
(14.6)
6.2
(71.2)
(65.0)
23.6
12.1
18.5
15.3
16.0
11.8
(10.8)
(16.3)
(0.7)
(10.1)
—
(4.8)
12.8
(4.2)
17.8
5.2
16.0
7.0
54.9
31.5
20.2
(3.7)
16.5
5.9
5.8
19.5
27.5
14.4
19.3
13.4
18.3
14.1
(13.8)
(26.9)
(26.9)
6.1
(20.8)
(7.4)
(7.3)
(8.6)
(2.6)
(4.0)
(5.7)
(12.4)
(5.6)
(10.6)
41.1
4.6
(6.7)
2.4
(4.3)
(1.5)
(1.5)
10.9
24.9
10.4
13.6
1.0
12.7
3.5
JJ tax credit on the above of £1.0m
(2017: £3.3m).
Auditor
As outlined in the 2017 Annual Report and
Accounts, the Group undertook a tender
process for the selection and appointment of
a new external auditor to replace Deloitte LLP,
who had provided external audit services to
the Group for more than fifteen years. The
Board of Chemring appointed KPMG LLP as
the Group’s external auditor on 23 March 2018
and a resolution to reappoint KPMG LLP will
be put to the shareholders at the 2019
Annual General Meeting.
Andrew Lewis
Group Finance Director
17 January 2019
JJ exceptional items of £0.8m (2017: £nil)
associated with the GMP pension
equalisation court ruling;
JJ loss on the movement in the fair value of
derivative financial instruments of £0.4m
(2017: £1.7m gain); and
JJ impact of US Tax Cuts and Jobs Act and
tax credit on adjustments £13.1m
(2017: £6.1m credit).
The discontinued operations profit after
tax comprises:
JJ operating profit of £8.0m (2017: £23.9m);
JJ exceptional items of £69.3m (2017: £9.8m)
relating to the impairment of the carrying
value of discontinued businesses now held
for sale to their expected realisable values
less costs to sell;
JJ amortisation of acquired intangibles
of £2.7m (2017: £2.9m);
JJ release of provisions in respect
of previously disposed businesses
of £nil (2017: £3.0m credit); and
Chemring Group PLC Annual Report and Accounts 2018
31
OverviewStrategic reportGovernanceFinancial statementsOther information How we manage risk
Risk management organisation structure
The Board
Overall responsibility for risk management
Audit Committee
Reviews the effectiveness of the Group’s systems
of internal control
Risk Management Committee
Monitors and reviews the Group’s risk register
Business Management
Maintains business risk registers and provides input to the
Risk Management Committee
The Board
The Board is responsible for determining
the nature and extent of risks it is willing to
accept in delivering the Group’s strategy and
running the Group’s operations, and ensuring
that risks are effectively managed across
the Group.
registers on a regular basis. The current
members of the Risk Management
Committee are:
JJ Michael Ord (Group Chief Executive);
JJ Sarah Ellard (Group Legal Director &
Company Secretary);
The Board reviews the Group risk register on
a regular basis, and considers whether the
Risk Management Committee has appropriately
identified the principal risks to which the
Group is exposed.
The Audit Committee
The Audit Committee is responsible for
reviewing in detail the effectiveness of the
Group’s systems of internal control, including
financial, operational and compliance controls,
and its risk management systems.
The Risk Management Committee
The Risk Management Committee is
responsible for identifying the principal risks to
which the Group is exposed, monitoring key
mitigation plans and maintaining the Group
risk register. The Risk Management
Committee also reviews the business unit risk
JJ Andrew Lewis (Group Finance Director);
JJ Clancy Murphy (Chief People Officer); and
JJ Mark Taylor (Group Health & Safety Director).
Risk management policy
and framework
The Group’s Risk Management Policy sets out
the Group’s approach to risk management,
including its risk appetite; the framework for
assessing, managing and monitoring risk within
the business; and the key roles and responsibilities
for the oversight and implementation of the
Group’s risk management systems and controls.
The Group’s risk management framework
draws fundamentally from the “Three Lines
of Defence Methodology”, with the “First Line”
being day-to-day management of risk and
maintenance of effective control procedures
at individual businesses. The “Second Line”
comprises various risk management and
control functions established at the corporate
management level, which are designed
to enhance and monitor the First Line.
The “Third Line” comprises the Group’s
internal audit function, utilising an external
firm of auditors, who report directly to
the Audit Committee.
The management of each business is responsible
for the identification, management and
reporting of local risks, in accordance with
the Group’s risk management framework.
The management of each business is also
responsible for the maintenance of business
risk registers and the implementation of
mitigation plans.
Each business is required to maintain a risk
register identifying their key risks. The risk
registers include an analysis of the likelihood
and impact of each risk – before and after
mitigation actions are taken to manage the
risk, together with details of the mitigation
plans and progress against them. Each risk is
allocated an owner, who has responsibility for
managing the risk.
The business risk registers are updated locally
on a quarterly basis, and are reviewed in detail
by the Group Chief Executive, the Group
Finance Director and other members of the
Executive Committee at quarterly business
review meetings with each of the businesses.
The Risk Management Committee also reviews
the business risk registers on a regular basis
and, utilising the input from the businesses,
the Risk Management Committee identifies
those principal risks which are material to the
Group as a whole. The Risk Management
Committee also considers corporate-level
risks. These risks are collated on the Group
risk register, together with details of the
applicable mitigation plans and risk owners.
The current Group risk register comprises
various risks including health, safety, security
and environmental risks, strategic risks,
operational risks, financial risks, legal and
compliance risks, people risks and reputational
risks. Details of the principal risks are set out
on pages 34 to 41.
32
Chemring Group PLC Annual Report and Accounts 2018
Strategic report Internal control and risk
management systems
In addition to reviewing the Group risk register
on a regular basis, the Board is also required
to carry out an annual review of the effectiveness
of the Group’s systems of internal control
and risk management systems in compliance
with provision C.2.3 of the UK Corporate
Governance Code (the “Code”). In the year
under review, the Board considered the
following key features of the Group’s risk
management systems and control procedures
which operated during the year:
JJ the Board assesses the key risks associated
with achievement of the Group’s business
objectives as part of the annual strategic
planning process and on a continuing
basis thereafter;
JJ the performance of each business against
budget is reviewed on a monthly basis at
both the operational management level
and by the Board;
JJ the Group Chief Executive, the Group
Finance Director and other members of
the Executive Committee attend quarterly
business review meetings with each of
the businesses. In the case of the US
businesses, formal Board meetings are
also held quarterly, and these are attended
by the Group Chief Executive, the Group
Finance Director and external independent
non-executive directors appointed in the
US. The US non-executive directors
are required to provide guidance and
monitor governance in the US businesses
throughout the year. An external
independent non-executive director
is also appointed to the Board of the
Group’s Norwegian subsidiary;
JJ each business is required to comply with
the Group’s accounting policy manual,
which sets out formal procedures for
incurring certain types of expenditure
and making contractual commitments.
Compliance with the accounting policy
manual is audited by the internal auditors,
who report regularly to the Audit Committee
on their findings;
JJ the Board retains primary responsibility
JJ systems of internal control and risk
management compliant with the Code
and the Turnbull Guidance were in place
throughout the year and have remained
in place up to the date of approval of
these financial statements; and
JJ the Group’s internal control and risk
management systems are regularly reviewed
by the Board, and broadly comply with
the Guidance on Risk Management, Internal
Control and Related Financial and Business
Reporting published by the Financial
Reporting Council.
The Board acknowledges, however, that the
internal control systems can only provide
reasonable, not absolute, assurance against
material mismanagement or loss of the
Group’s assets. The Board will therefore
continue to take steps to embed internal
control and risk management further into
the operations of the Group, and to deal
with any areas of improvement which
come to the attention of management
and the Board.
for acquisitions and disposals, and financing
arrangements for the Group. Treasury
management, IT strategy, insurance and
significant legal matters are dealt with
centrally from the Group head office, and
the Board receives regular reports on each
of these items. Reviews of the Group’s
pensions, insurance and physical risk
management arrangements are carried out
by external advisers on a periodic basis;
JJ the Group Health & Safety Director,
supported by business-specific health
and safety management committees,
co-ordinates and controls the activities
of each business in relation to health, safety,
security and environmental matters, which
are a key focus for the Board in view of
the nature of the Group’s operations.
The Group Chief Executive is the Board
member nominated with specific
responsibility for health and safety;
JJ the Group maintains a Bribery Act
Compliance Manual incorporating
its anti-corruption policies and
procedures; and
JJ the Board has established a broad internal
audit function utilising the services of
PwC. In addition to reviewing financial
controls, the internal auditors review a
wide range of non-financial processes and
procedures, which provides additional
assurance to the Board on the adequacy
of the Group’s internal controls. The internal
auditors report to the Audit Committee
on a quarterly basis, and progress on
identified improvement actions is
monitored and tracked.
The Board confirms that it has reviewed the
effectiveness of the Group’s systems of
internal control and risk management which
were in place during the financial year ended
31 October 2018, and it confirms that:
JJ there is an ongoing process for identifying,
evaluating and managing the principal risks
faced by the Company and the Group;
Chemring Group PLC Annual Report and Accounts 2018
33
OverviewStrategic reportGovernanceFinancial statementsOther information Principal risks
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 2017 Annual Report and Accounts and
the 2018 Interim Report.
The principal risks to which the Group is
exposed are set out below, together with
details of their potential impact; the likelihood
of occurrence (on a scale of one to three,
with one being the most likely); an indication
of whether the trend in the risk exposure is
increasing, decreasing or broadly unchanged;
and the mitigation actions taken to manage
the risk.
Principal risks are identified by the Risk
Management Committee based on the
likelihood of occurrence and the potential
impact on the Group as a whole.
All the principal risks to which the Group is
exposed are linked to the Group’s strategy.
Details of the Group’s strategy is contained
on pages 14–15.
Health, safety, security and environment risks
Likelihood of
occurrence
2
Health and safety
Risk description
JJ The Group’s operations involve
energetic materials that by their
nature have inherent safety risks.
JJ A process safety event involving
energetic material could occur
due to the ineffective management
of process safety barriers.
JJ Weak safety culture and
individual behaviours may lead to
a breach of rules and procedures.
Potential impacts
Mitigation actions
Trend
JJ Incidents may occur
which could result in
harm to employees, the
temporary shutdown of
facilities or other
disruption to manufacturing
processes.
JJ The Group may be
exposed to financial loss,
regulatory action, and
potential liabilities for
workplace injuries and
fatalities.
JJ 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 safety as a core value, and that our
businesses provide a zero harm environment
where all employees and visitors feel and are
absolutely safe.
JJ An independent review of safety culture has
been completed across the Group and the
findings will form a key part of a multi-year
improvement programme which will establish
a Generative Safety Culture within all of
our businesses.
JJ An updated HSE Policy has been issued throughout
the business, reinforcing the accountability of
leadership for safety, together with a new HSE
Strategy and HSE Management System
Framework Standard. These will focus on the
three key areas of People, Plant and Process,
with a particular focus on major accident
hazard management.
JJ The Group continues to invest in state-of-the-art
process safety systems and equipment.
34
Chemring Group PLC Annual Report and Accounts 2018
Strategic report
Trend
Increase
No change
Decrease
Environmental laws and regulations
Risk description
Likelihood of
occurrence
Potential impacts
Mitigation actions
Trend
JJ All of the Group’s businesses are certified
to the environmental management system
ISO 14001, which requires the setting
of environmental goals and objectives focused
on local aspects and impacts.
JJ 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.
JJ The Group’s operations and
3
JJ 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.
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.
JJ At certain sites that the Group
owns or operates, or formerly
owned or operated, there is
known or potential contamination
for which there is, or may be, a
requirement to remediate or
provide resource restoration.
Strategic risks
Possible defence budget cuts
Risk description
Likelihood of
occurrence
JJ Defence spending depends on a
3
complex mix of political
considerations, budgetary
constraints and the requirements
of the armed forces to address
specific threats and perform
certain missions. Overall defence
spending may therefore be
subject to significant fluctuations
from year to year and there may
also be downward pressure on
defence budgets in certain key
programme areas.
Potential impacts
Mitigation actions
Trend
JJ The Group’s financial
performance may be
adversely impacted by
lower defence spending
by its major customers,
either generally or in
relation to certain
programmes.
JJ Short-term trading and
cash constraints may
impact on the Group’s
ability to invest in
longer-term technologies
and capabilities.
JJ The Group continually assesses whether its
planned organic growth strategies and product
developments align with government priorities
for future funding. Efforts are being focused, in
particular, on the US Programs of Record and
on next-generation technologies. We are also
focusing on the development of our commercial
products and services.
JJ Actions continue to be taken to restructure and
“rightsize” the businesses, and reduce overheads,
to ensure the businesses are sustainable and
profitable, even in difficult market conditions.
Chemring Group PLC Annual Report and Accounts 2018
35
OverviewStrategic reportGovernanceFinancial statementsOther information
Principal risks continued
Strategic risks continued
Timing and value of orders
Risk description
Likelihood of
occurrence
JJ The Group’s profits and cash
2
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.
Potential impacts
Mitigation actions
Trend
JJ An unmitigated delay in
the receipt of orders or
cancellation of existing
contracts could affect the
Group’s earnings and
achievement of its budget
in any given financial year.
JJ 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.
JJ Maximising order intake remains a key objective
for the businesses, which are now well-positioned
to benefit from the recovery of the US
defence budget.
JJ The businesses continue to pursue long-term,
multi-year contracts with their major
customers wherever possible.
JJ Global business development capabilities have
been established in the Countermeasures and
Sensors segments, and will ensure better alignment
of routes to market across all of our businesses.
Political risks
Risk description
Likelihood of
occurrence
Potential impacts
Mitigation actions
Trend
JJ The Group is active in several
2
countries that are suffering from
political, social and
economic instability.
JJ 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.
JJ 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.
JJ Political changes could
impact future defence
expenditure strategy and
the Group’s ability to
export products to
certain countries.
JJ 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.
JJ 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.
36
Chemring Group PLC Annual Report and Accounts 2018
Strategic report
Trend
Increase
No change
Decrease
Contract-related risks
Risk description
Likelihood of
occurrence
Potential impacts
Mitigation actions
Trend
JJ The Group’s government
3
JJ The Group may suffer
contracts may be terminated at
any time and may contain other
unfavourable provisions.
JJ 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.
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.
JJ Unfavourable commercial
contract terms may
adversely impact the
Group’s working capital
position, particularly if
the receipt of payments
by the Group is delayed.
JJ The Group negotiates with customers to ensure
the most favourable contractual terms are agreed.
Areas of significant judgement or enhanced risk
require the review and approval of the
executive directors.
JJ The Group has instigated a commercial and contract
risk management training programme, with a
view to improving future contracting practices.
JJ 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.
Technology risks
Risk description
Likelihood of
occurrence
Potential impacts
Mitigation actions
Trend
JJ The Group may fail to maintain
2
JJ Failure to obtain production
its position on key future
programmes due to issues
with capability development,
technology transfer or
cost-effective manufacture.
JJ 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.
contracts on major
development programmes
may significantly impact the
future performance and
value of individual businesses.
JJ 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.
JJ Close relationships are maintained with customers
on all key future programmes, to ensure product
and capability development aligns with
customer requirements.
JJ A New Product Development Policy and
procedures have been adopted, which align
the approach to future technology investment
across the Group and ensure that resources are
applied appropriately across the businesses in
support of the five-year plan.
JJ Working groups have been established to
drive and co-ordinate the Group’s technology
growth in certain key areas such as
Countermeasures and Sensors.
Chemring Group PLC Annual Report and Accounts 2018
37
OverviewStrategic reportGovernanceFinancial statementsOther information Principal risks continued
Strategic risks continued
Brexit
Risk description
Likelihood of
occurrence
Potential impacts
Mitigation actions
Trend
JJ The Group could be adversely
2
JJ An adverse Brexit
JJ Our businesses continue to review their
business continuity plans to ensure the impact
of Brexit, the full extent of which remains
subject to a high level of uncertainty at this
stage, is mitigated as far as possible.
outcome could impact
the Group’s relationships
with its customers and
suppliers in the EU, as a
result of potential
changes to sales tariffs
and restrictions on the
movement of goods.
JJ Our UK businesses may
also be impacted by
restrictions on the
movement of people and
the potential loss of EU
national workers, and may
face regulatory uncertainties
with regards to certain
EU legislation.
Likelihood of
occurrence
3
Potential impacts
Mitigation actions
Trend
JJ The Group may fail to
comply with financing
covenants and be unable
to meet debt
repayments, leading to
withdrawal of funding or
additional costs of
maintaining funding.
JJ The Group has committed banking facilities in
place to October 2022 with options to extend
duration and quantum.
JJ Actual and forecast financing covenants are
monitored on a regular basis.
JJ A capital approval process is in place, requiring
Board approval for significant projects.
JJ Operational results may
JJ A hedging policy is applied for significant foreign
be impacted by
unexpected financial
losses or increased costs.
transactions.
JJ Advance payments and letters of credit are
required from customers with a heightened
payment risk.
JJ Close dialogue is maintained with the trustees
of the pension scheme on investment and
funding matters.
impacted by the UK’s exit from the
EU, particularly in the event that
the UK Government fails to approve
the negotiated exit arrangement.
Financial risks
Risk description
JJ The Group is exposed to a range
of financial risks. These risks may
be externally driven, such as an
unexpected movement in foreign
exchange rates, or may be specific
to the Group. Specific financial
risks could arise out of a disruption
to operations; failure to deliver
strategic objectives, including planned
investment; or customer-related
events, including default on the
payment of outstanding debts.
The Group may also face an
increased funding requirement
for its legacy UK defined benefit
pension scheme.
JJ Further 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.
38
Chemring Group PLC Annual Report and Accounts 2018
Strategic report
Trend
Increase
No change
Decrease
Operational risks
Manufacturing
Risk description
JJ The Group’s manufacturing
activities may be exposed to
business continuity risks, arising
from plant failures, supplier
interruptions or quality issues.
JJ Planned new facility
developments may be delayed as
a result of operational issues.
Likelihood of
occurrence
Potential impacts
Mitigation actions
Trend
2
JJ Interruptions to
JJ One of the key objectives of the Operational
production and sales
could result in financial
loss, reputational damage
and loss of future business.
JJ A delay in completing
new manufacturing facilities,
such as those planned in
Tennessee, could constrain
capacity and limit future
business growth.
Excellence Programme is to improve the Group’s
“right-first-time” and on-time delivery performance.
JJ 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.
JJ All of the Group’s businesses are required to
prepare business continuity plans.
JJ The Group insures certain business interruption
risks where appropriate.
JJ Detailed plans are developed for all restructuring
and consolidation projects. Additional dedicated
resource is being employed to oversee key
investment projects, and progress will be closely
monitored by the Group Executive Committee.
Likelihood of
occurrence
2
People risks
Risk description
JJ There is a risk that the market for
talent in our key areas of expertise
becomes more challenging. Allied
to this there is a risk of loss of
key personnel.
JJ As the shape of the Group’s
business changes and with an
increased focus in technology, the
Group may fail to build and retain
an appropriate skill base to enable
us to compete successfully in new
markets and product areas.
JJ Employees may not be
fully-engaged with the Chemring
journey, our purpose, products,
customers and values.
Potential impacts
Mitigation actions
Trend
JJ A development framework is being implemented
across the Group, focusing on developing
management and leadership skills.
JJ Our incentive arrangements are being refreshed
to focus on driving collaboration and creating a
Group focus at senior level.
JJ Development of our Group and business unit
core strategy is being enhanced to enable
review of capability requirements.
JJ Embedding the Chemring values is now a key
area of focus and the development of a culture
framework will support the evolution of a new
Chemring culture.
JJ 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.
JJ If key personnel are not
incentivised appropriately
to remain within the
Group, its operations
may suffer from loss of
management expertise
and knowledge.
JJ Failure to build and retain
key skills will lead to a
reduction in the ability to
innovate or to win and
deliver new contracts.
Chemring Group PLC Annual Report and Accounts 2018
39
OverviewStrategic reportGovernanceFinancial statementsOther information
Principal risks continued
Legal and compliance risks
Compliance and corruption risks
Risk description
Likelihood of
occurrence
JJ The Group operates in over fifty
3
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 and
regulatory obligations.
JJ The nature of the Group’s
operations could also expose it
to government and regulatory
investigations relating to safety
and the environment, import-export
controls, money laundering, false
accounting, and corruption
or bribery.
JJ The Group requires a significant
number of permits, licences and
approvals to operate its business,
which may be subject to
non-renewal or revocation.
Potential impacts
Mitigation actions
Trend
JJ Non-compliance could
result in administrative,
civil or criminal liabilities,
and could expose the
Group to fines, penalties,
suspension or debarment,
and reputational damage.
JJ Loss of key operating
permits and approvals
could result in temporary or
permanent site closures,
and loss of business.
JJ 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.
JJ 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.
JJ The Group has adopted a new Operational
Framework, which mandates compliance with a
number of new policies and enhanced procedures
covering a wide range of legal and regulatory
requirements. The Operational Framework also
incorporates an assurance certification to be
completed by every business on a half-yearly
basis in future.
JJ The Group has adopted a Bribery Act
Compliance Manual, incorporating all of its
anti-bribery policies and procedures.
Product liability and other customer claims
Risk description
Likelihood of
occurrence
Potential impacts
Mitigation actions
Trend
JJ 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.
JJ 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.
JJ The Group may be subject to
3
JJ Substantial claims could
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.
The Group may also be required
to undertake a product recall in
certain circumstances.
JJ As many of the Group’s products
are single-use devices, it is often
impossible to conduct functional
testing without destroying the
product, and this increases the
risk of possible product failure,
either in use or during customers’
own sample-based functional tests.
harm the Group’s business
and its financial position.
JJ In addition, any accident,
product failure, incident
or liability, even if fully
insured, could negatively
affect the Group’s
reputation among
customers and the public,
thereby making it more
difficult for the Group to
compete effectively.
JJ Material breaches in the
performance of
contractual obligations
may also lead to contract
termination and the calling
of performance bonds.
40
Chemring Group PLC Annual Report and Accounts 2018
Strategic report Trend
Increase
No change
Decrease
Reputational risks
Cyber-related risks
Risk description
Likelihood of
occurrence
Potential impacts
Mitigation actions
Trend
JJ Cyber-security and related risks
2
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.
JJ 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.
JJ 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.
JJ A threat assessment has been completed, and
an action plan to counter the Group’s identified
major threats has been implemented.
JJ The Group adopts a number of cyber-security
defence measures, encompassing, as appropriate
to the nature of the threat and 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.
JJ All of the Group’s UK businesses have achieved
the “Cyber Essentials” accreditation as a
minimum standard, and the US businesses have
either achieved, or are working towards,
compliance with the US DFARS standard.
JJ A review of the Group’s IT and security systems
is included within the internal audit programme.
Product-related risks
Risk description
Likelihood of
occurrence
JJ There is a risk that the Group
3
suffers negative publicity through
the sale of its defence and
security products to customers
who use the products
inappropriately or illegally.
Potential impacts
Mitigation actions
Trend
JJ The Group may be
exposed to adverse
media coverage and
reputational damage.
JJ The majority of the Group’s products are
subject to stringent export control
requirements, which also require end-user
certificates as part of the approval process.
JJ The Group has adopted a Policy on the Sale of
Goods and Services which sets out which
products the Group will supply, and those it will
not, and to which customers.
Chemring Group PLC Annual Report and Accounts 2018
41
OverviewStrategic reportGovernanceFinancial statementsOther information Corporate responsibility review
The Group acknowledges its
obligation to ensure the responsible
operation of its business at all times,
and is fully committed to sound and
ethical business conduct.
The Group’s approach
The Board has overall responsibility for establishing and maintaining
the Group’s policies in this area, and the Group Chief Executive is
accountable to the Board for ensuring that the Group’s businesses
adhere to these policies.
The Board recognises that the long-term success of the Group will be
enhanced by a positive interaction with all of its stakeholders, and has
determined that the Group’s corporate responsibility initiatives should
be focused on the following key areas:
JJ health and safety;
JJ employee support and development;
JJ environmental protection; and
JJ ethical business conduct.
The Board intends that the Group’s corporate responsibility approach
will be fully embedded within its business units, and the senior management
bonus plan incorporates specific objectives in the above areas.
Further details of the Group’s approach are set out below.
In the workplace
Health and safety
Policy and practices
The Board recognises that the highest levels of safety are required
in order to protect employees, product users and the general public.
The Board believes that all incidents and injuries are preventable, and
that all employees have the right to expect to return home safely at
the end of every working day.
The Group Chief Executive has overall responsibility for health, safety
and environmental matters across the Group. The Group Health and
Safety Director reports directly to the Group Chief Executive, and
is responsible for the effective administration and implementation
of the Group’s health, safety and environment strategy. The Group
Health & Safety Director is a member of the Executive Committee
and reports on the performance of all businesses against agreed
targets and objectives. The Group Chief Executive reports monthly
to the Board on all key health and safety issues.
The Board requires that all businesses systematically manage their
health and safety hazards, set objectives and monitor progress by
regular measurement, audit and review. Each managing director is
responsible for the management of health and safety within their
business, and for providing adequate resources to satisfy the Board’s
requirements. All managing directors have health and safety related
objectives incorporated within their annual bonus plan.
Managers and supervisors in the Group’s businesses are required to
enforce procedures, and to provide leadership and commitment to
promote and embrace a positive health and safety culture. The Board
emphasises the importance of individual responsibility for health and
safety at all levels of the organisation, and expects employees to
report potential hazards, to be involved in implementing solutions,
and to adhere to rules and procedures.
A key element in the continual improvement of health and safety
management is sharing best practice and lessons learnt from incidents
across the Group’s businesses and the wider industry. Accidents,
incidents and near misses are investigated, with actions generated
to prevent recurrence.
Within the Group’s Operational Excellence Programme, activities have
been identified that specifically relate to health and safety, including
further work on culture development, communication mechanisms,
competence management and wellbeing.
It is with great regret that the Board must report a fatality at our UK
Countermeasures site. The incident has been subject to an extensive
investigation, the results of which have led to changes in operations across
the business.
Strategy
Our goal is zero harm, this is not set as a statistical target, but as a
moral imperative that will be achieved through establishing a Generative
Safety Culture, with three focus areas of People, Plant and Process.
42
Chemring Group PLC Annual Report and Accounts 2018
Strategic report People
The Group continues to focus on behaviour and the delivery of its
safety leadership programme. In line with this the Group is introducing
a behavioural framework that reinforces individual accountability for
safety applicable to directors, managers, front line staff and our
contract partners. Safety is not just about proactive management of
our physical risks, but those things which can impact the mental health
and wellbeing of our colleagues; as such, we are introducing a healthy
worker programme across the Group to ensure that wellbeing of our
people is protected.
Lost time incidents
The number of lost time incidents is one of the key performance
indicators monitored by the Group. The Group collects and reports
lost time incident rates using the US Occupational Safety and Health
Administration rules.
In 2018, the lost time incident rate reduced from 0.59 in 2017 to
0.38 in 2018 (this includes a fatal incident).
The Group’s historical lost time incident rate (number of lost time
incidents per 100 employees per year) is as follows:
Plant
The Group continues to invest in engineering solutions to remove
people from hazards. This includes the automation of operations,
increasing the number of processes that are conducted remotely and
further developing protection systems. The integrity of plant
operation is not just concerned with the reliability of the system, but
also the reliability of how people operate the system; as such, in the
next three years a behavioural programme will be rolled out across
the Group to enhance the reliability and safety of our operations.
Process
The nature of our business has inherent major hazards, especially in
relation to the handling of energetic materials. As such the Group has
conducted a full review of people’s exposure to energetic materials
that has led to the elimination of tasks and improved safe working
methods. Moving forward this will be expanded to cover all major
risks with an assurance process that stress tests the active monitoring
and management of our process barriers.
Historically, assurance activity has been conducted internally to assess
compliance of our business units against Group expectations as set
out in the Group Safety Policy Manual. Following the events at our UK
Countermeasures site a planned independent safety review conducted
by ERM, commissioned by the Group Health & Safety Director, was
brought forward. The review provided an external benchmark against
other high hazard industries. The findings and recommendations,
against best practice, have been captured and incorporated into the
new Group HSE Strategic Plan that will identify weak signals and drive
a proactive approach to the prevention of incidents, tackling the cause
not the symptom.
2018
0.38
2017
0.59
2016
0.35
2015
0.57
2014
0.43
The lost time incident rate includes the fatal incident at Chemring
Countermeasures UK.
Employees
The Board recognises the valuable contribution that the Group’s
employees continue to make to its success, and aims to provide a
working environment that reflects and rewards this.
At 31 October 2018 the Group had 2,559 (2017: 2,651) employees
based in four countries.
Diversity
A breakdown by gender of the number of persons who are directors
of the Company, senior managers and other employees is set out below,
together with an analysis of ethnic diversity.
The Board currently has one female member. There is an active
commitment to increase this to 25% female representation in the near
future. The Board recognises the importance of promoting diversity
across the Group, both in terms of gender and other diversity metrics.
Senior managers are generally directors and functional heads within
head office and subsidiary companies.
Directors
1
Senior managers
17
All employees
803
Ethnic diversity
523
JJFemale
JJMale
JJNon-white
JJWhite
6
54
1,756
2,036
Chemring Group PLC Annual Report and Accounts 2018
43
OverviewStrategic reportGovernanceFinancial statementsOther information Corporate responsibility review continued
In the workplace continued
Employees continued
Employment practices
The Group’s policy is to provide equal opportunities for all employees,
irrespective of race, nationality, gender, sexual orientation, marital
status, religion or political belief, disability or age. The Group is committed
to meeting, at a minimum, the labour rights and legislation requirements
in each country in which it operates and, in practice, often exceeds
these. The Group’s employment practices policies are introduced at
newly acquired businesses at the earliest opportunity after they join
the Group.
Human rights
The Group does not have a stand-alone human rights policy but its
practices and policies adhere to internationally recognised human
rights principles.
A statement on the Group’s compliance with the Modern Slavery Act
2015 can be found on the Group’s website at www.chemring.co.uk.
Development and training
The Group continues to address training and development requirements
for employees at all levels within the organisation. All businesses
consider training needs for their employees at a local level, in order
to ensure that they have the right skill base to deliver their five-year
plan. The Board also reviews future management requirements and
succession plans on an ongoing basis.
The inaugural Emerging Leaders Programme was launched in 2018.
22 high potential future leaders from around the Group were
identified and commenced a multi-faceted programme in August 2018.
The programme includes learning modules, one-to-one coaching, live
business projects run by senior level sponsors and group work on
specific work challenges.
Across the Group there are increasing numbers of early careers joiners,
both direct from school or following degree-level study. In the UK,
Roke continues to increase the number of undergraduate hires,
placements and internships onto programmes which have received
external recognition. An Annual Graduate Conference was established
in 2018 bringing together all current graduates from the UK and Norway.
A similar conference will be established for US graduates in 2019.
Benefits
The Group aims to provide all employees with an attractive and
competitive benefits package. US employees receive health care and
selected other benefits.
The Board is keen to encourage employees to join share schemes
in order that they can share in the future success of the Group,
and savings-related share plans are therefore offered to employees
where appropriate.
Communications
The Group pursues a policy of employee communication through
meetings (including team briefings and works councils) and in-house
magazines by which employees are made aware of the progress of the
Group and the businesses in which they work. The businesses also engage
with their employees through representative bodies and trade unions.
A Group magazine, “Chemring-i”, is published on a bi-annual basis and
is distributed to all employees.
In the environment
Policy and practices
All of the Group’s businesses are certified to the environmental
management system ISO 14001, which requires the setting of
environmental goals and objectives focused on local aspects and
impacts. In addition, expectations are set for energy usage, waste
generation and water utilisation, and performance is monitored
across the Group.
Land quality
The Chemring Energetic Devices facility in Chicago, US, is located
on a site which has “superfund” status under the US contaminated
land regime. The business continues to work with consultants and
the regulatory authorities to ensure that its legal obligations in relation
to this matter are fully satisfied.
The Group carries a £3.2m (2017: £3.1m) provision in respect of
environmental liabilities, which the Board considers to be adequate
(see note 22 of the Group financial statements).
Incidents
There were no significant environmental incidents in the year.
Performance
Greenhouse gas emissions
The Group is required to report on all of the emission sources of
entities that fall within its consolidated financial statements, as specified
under the Companies Act 2006 (Strategic Report and Directors’
Report) Regulations 2013. The Group does not have responsibility
for any emission sources of entities which are not included in its
consolidated financial statements.
Absolute values have been converted to carbon dioxide equivalents
using the UK Government Conversion Factors for Company Reporting
2017. The reporting period covered aligns with the Group’s financial
year ended 31 October 2018. The Group is not required to report on
its Scope 3 emissions.
44
Chemring Group PLC Annual Report and Accounts 2018
Strategic report Scope 1 emissions
Combustion of fuel in any premises, machinery or equipment operated, owned or controlled by the Group
Gas
Heating oil
Liquid petroleum gas
Fuels consumed by company-owned and leased vehicles, excluding business travel and employee commuting
Diesel
Liquid petroleum gas
Petroleum
The operation or control of any manufacturing process by the Group
On-site waste incineration
Total Scope 1 emissions
Quantity
(Mwh)
34,400
8,461
1,394
Conversion
factor
0.184
0.268
0.214
CO2e
(tonnes)
6,330
2,268
298
Quantity
(tonnes)
Conversion
factor
CO2e
(tonnes)
47
112
87
3.132
2.937
3.002
147
329
261
CO2e
(tonnes)
1,278
10,911
With reference to the six Kyoto substances, the Group does not emit hydrofluorocarbons, perfluorocarbons or sulphur hexafluoride. Values for
carbon dioxide, methane and nitrous oxides are included in the above figures.
Scope 2 emissions
Electricity:
Australia
Norway
UK
US
Total Scope 2 emissions
The Group uses revenue for intensity measurement, which it considers to be the most reliable comparator.
Total emissions (tonnes CO2)
Group revenue (£m) continuing and discontinued operations
Total CO2 tonnes per £m of revenue
Quantity
(Mwh)
Conversion
factor
1,051
44,248
15,297
32,796
0.750
0.008
0.279
0.435
2018
30,589
436.0
70
CO2e
(tonnes)
788
354
4,268
14,266
19,678
2017
32,543
547.5
59
The UK businesses participate in the CRC Energy Efficiency Scheme, with the exception of Chemring Energetics UK, which operates under a
Climate Change Agreement.
Chemring Group PLC Annual Report and Accounts 2018
45
OverviewStrategic reportGovernanceFinancial statementsOther information Corporate responsibility review continued
In the environment continued
Performance continued
Waste
Recycled, non-hazardous
Recycled, hazardous
Not recycled, non-hazardous
Not recycled, hazardous
Total
Water
2018
(tonnes)
2017
(tonnes)
2016
(tonnes)
2015
(tonnes)
2014
(tonnes)
700
393
716
478
2,287
2018
m3
945
652
1,343
321
3,261
2017
m3
956
64
782
942
968
287
748
696
731
262
659
401
2,744
2,699
2,053
2016
m3
2015
m3
2014
m3
Total water consumption
802,776
663,917
682,185
721,401
924,889
In the community
Helping others
The Board recognises that each of the Group’s businesses has an
important role to play in its local community.
The Board operates a community investment policy, which confirms
its commitment to support selected charitable causes with a focus on
the military and armed services, and those linked to the local communities
in which the Group’s businesses operate. Each business has its own
locally held charity budget, and at a Group level, charitable donations
are considered on a monthly basis by the Executive Committee. The
Group continues to sponsor the British Army’s Parachute Regiment
display team, the Red Devils.
In addition to making cash donations, the Group also encourages and
supports employees who undertake voluntary work in the local
community, where appropriate. During the year, employees donated
their time and services on a wide range of projects, several of which
had an educational bias.
The Group is involved with a number of educational initiatives and has
relationships with several universities, whereby funding is provided for
students’ research activities.
Local impact
With regards to the impact of the Group’s manufacturing activities on
the local community, at locations where operations may inconvenience
neighbours through product proofing, the businesses liaise with local
residents to minimise any impact. The Group is also cognisant of the
potential impact of its operations on the local environment, and is
addressing this through its environmental strategy.
46
Chemring Group PLC Annual Report and Accounts 2018
Strategic report In the marketplace
Policy on the Sale of Goods and Services
The Board has adopted a Policy on the Sale of Goods and Services,
which provides guidance to all stakeholders on the products and services
that the Group will supply, to which customers and to which countries,
and sets out a clear definition of what the businesses will not supply.
All Group businesses are required to comply with this policy, which
addresses both legal and reputational considerations with regards to
certain products. The policy is reviewed and updated on a regular basis.
Ethics and business conduct
The Group has adopted a Global Code of Business Principles, which
requires its employees, its businesses and all third parties who act on
the Group’s behalf to comply with the Group’s standards of acceptable
business conduct and applicable laws and regulations in all of the
countries in which the Group operates.
Anti-bribery and corruption
The Group’s Bribery Act Compliance Manual incorporates all of its
anti-corruption policies and procedures, including the following:
JJ requirements for bribery risk assessments to be carried out as part
of normal operating procedures;
JJ Group-wide policies and procedures on the appointment of all
sales partners and other third party advisers, stipulating due
diligence and contractual requirements, approval levels, and
monitoring and review processes;
JJ policies and procedures relating to third party service providers
and suppliers;
JJ regular training for management and employees working within
commercial, sales and marketing, finance and human resource
functions; and
JJ policies and procedures on the giving and receiving of gifts and hospitality.
The Group’s US businesses have an ethical compliance programme to
satisfy US Government requirements for ethical training for employees,
compliance audits, a confidential reporting line for employees, and
related investigation procedures.
The Group has a whistleblowing policy and procedures in place which
enable all employees to raise concerns, in confidence, about
possible improprieties.
These arrangements reflect the requirements of the UK Bribery Act 2010.
Strategic report
Cautionary statement
This report 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 is under no obligation to revise or update any forward-looking
statement contained within the Annual Report and Accounts, regardless
of whether those statements are affected as a result of new information,
future events or otherwise, save as required by law and regulations.
The strategic report on pages 8 to 47 has been approved by the
Board of directors and signed on its behalf by:
Michael Ord
Group Chief Executive
17 January 2019
Chemring Group PLC Annual Report and Accounts 2018
47
OverviewStrategic reportGovernanceFinancial statementsOther information
Board of Directors
Chairman
Executive directors
Carl-Peter Forster N R
Non-Executive Chairman
Michael Ord
Group Chief Executive
Andrew Lewis
Group Finance Director
Board length of service
(as at 17 January 2019):
2 years, 8 months
Board length of service
(as at 17 January 2019):
0 years, 7 months
Board length of service
(as at 17 January 2019):
2 years
Length of service with
the Group (as at 17 January 2019):
2 years, 8 months
Length of service with
the Group (as at 17 January 2019):
0 years, 7 months
Length of service with
the Group (as at 17 January 2019):
2 years
Experience:
JJ Board experience at Chairman
and Chief Executive level
Experience:
JJ Extensive senior management
Experience:
JJ Extensive international
experience in the defence sector
experience in the defence sector
JJ Extensive international
experience within the industrial
goods and engineering sectors
JJ International experience in both
service and manufacturing
industries
JJ Board experience at Finance
Director level
JJ Chartered Accountant
Sarah Ellard
Group Legal Director
& Company Secretary
Board length of service
(as at 17 January 2019):
7 years, 4 months
Length of service with
the Group (as at 17 January 2019):
24 years, 11 months
Experience:
JJ Legal, compliance and governance
expertise
JJ Chartered Secretary
Andrew Lewis joined the Group on
9 January 2017 and was appointed
to the Board as Group Finance
Director on 19 January 2017.
Sarah Ellard was appointed as Group
Legal Director on 7 October 2011,
having been Group Company
Secretary since 1998.
Prior to joining the Group, Sarah trained
and worked at Ernst & Young LLP. She
is a Fellow of the Institute of Chartered
Secretaries and Administrators.
Andrew spent eight years as Group
Finance Director of Avon Rubber
p.l.c., where he also performed the
Interim CEO role during 2015,
following the retirement of the
previous CEO.
Prior to joining Avon, Andrew
was Group Financial Controller of
Rotork plc and before that he was a
Director at PricewaterhouseCoopers
in Bristol and New Zealand.
JJ Expertise in operational
excellence and lean manufacturing
Carl-Peter Forster joined the Group
as an independent non-executive
director and Chairman-designate
on 1 May 2016, and was appointed
Chairman of the Board on 1 July 2016.
Carl-Peter formerly held senior
leadership positions in some of the
world’s largest automotive
manufacturers, including BMW,
General Motors and Tata Motors
(including Jaguar Land Rover).
Carl-Peter is currently the Senior
Independent Director at IMI plc and
a non-executive director of Cosworth
Ltd, and was previously a non-executive
director of Rexam PLC and
Rolls-Royce plc. He is also Chairman
of The London Electric Vehicle
Company Ltd, and Friedola Tech
GmbH, a member of the Board of
Volvo Cars Corporation, a member
of the Board of Geely Automobile
Holdings and a member of the
Advisory Boards of Rock Tech
Lithium, Inc. and PwC.
Michael Ord was appointed to the Board
on 1 June 2018, and appointed as
Group Chief Executive on 1 July 2018.
Michael formerly held a number of
senior management roles with BAE
Systems including Managing Director
of their Naval Ships and F-35 Joint
Strike Fighter businesses. Prior to his
1996 move to industry Michael had a
successful career in the Royal Navy
serving for twelve years in a number
of engineering management roles.
An Aeronautical Systems Engineering
graduate and a Chartered Engineer,
Michael has also completed
post-graduate management studies at
Manchester Business School and is a
graduate of Harvard Business School’s
Advanced Management Programme.
He is a trustee of The Education &
Training Foundation, and a member
of the Royal Aeronautical Society.
48
Chemring Group PLC Annual Report and Accounts 2018
Governance Non-executive directors
Andrew Davies A N R
Non-Executive Director
Stephen King A N R
Non-Executive Director
Board length of service
(as at 17 January 2019):
2 years, 8 months
Board length of service
(as at 17 January 2019):
0 years, 2 months
Nigel Young A N R
Senior Independent
Non-Executive Director
Board length of service
(as at 17 January 2019):
5 years, 9 months
Committee membership
A Audit Committee
N Nomination Committee
R Remuneration Committee
Denote Chairman
Length of service with
the Group (as at 17 January 2019):
2 years, 8 months
Length of service with
the Group (as at 17 January 2019):
0 years, 2 months
Length of service with
the Group (as at 17 January 2019):
6 years, 5 months
Experience:
JJ Board experience at Chief
Executive level
JJ Extensive knowledge of the
Experience:
JJ Executive and non-executive
Experience:
JJ Previously Interim Chief Financial
board experience in public and
private companies
Officer of the Group from
August 2012 to January 2013
international defence industry
JJ Chartered Accountant
JJ Finance experience from previous
Andrew Davies was appointed as an
independent non-executive director
on 17 May 2016 and was appointed
as Chairman of the Remuneration
Committee on 8 August 2018.
Andrew has a wealth of relevant
sector experience, having served
in senior operational and strategic
roles at executive committee level
at BAE Systems plc for more than
fourteen years. He was formerly
Chief Executive of Wates Group Ltd.
CFO positions
JJ Chartered Accountant
Nigel Young became a non-executive
director and Chairman of the Audit
Committee on 1 May 2013, following
his appointment as Interim Chief
Financial Officer in August 2012. He
was appointed as Senior Independent
Director in March 2016.
Nigel’s previous appointments include
Finance Director of ALVIS PLC,
First Technology PLC, Babcock
International Group PLC and
Morgan Advanced Materials Plc.
Nigel has also undertaken a number
of interim finance roles, including
one at McBride Plc. He is currently a
non-executive director and Chairman
of P2i Limited, a provider of liquid
repellent nanotechnology, and is
a trustee and Board member of
Orbis UK, a leading global eye charity.
Stephen King was appointed as an
independent non-executive director
on 1 December 2018. He is the
Senior Independent Director and
Chairman of the Audit Committee
at TT Electronics plc, and is a
non-executive director of BBA
Aviation plc, and Bristow Group Inc.
Stephen has a wealth of senior level
experience within the industrial,
engineering and manufacturing
sectors, including a number of
executive and non-executive roles.
Stephen recently retired as Group
Finance Director of Caledonia
Investments plc. He was previously a
non-executive director and Chairman
of the Audit Committee at The Weir
Group plc.
Stephen was Finance Director at
De La Rue plc from 2003 to 2009,
and prior to that at Midlands
Electricity plc. A Chartered
Accountant, Stephen has also held
senior financial positions at Lucas
Industries plc and Seeboard plc,
and was a non-executive director
of Camelot plc.
Chemring Group PLC Annual Report and Accounts 2018
49
OverviewStrategic reportGovernanceFinancial statementsOther information Governance
Directors’ report
The directors present their annual report, together with the audited
financial statements of the Group and the Company, for the year
ended 31 October 2018.
The following sections of the annual report are incorporated into the
directors’ report by reference:
JJ strategic report on pages 8 to 47;
JJ corporate governance report on pages 54 to 61;
JJ Audit Committee report on pages 62 to 65;
JJ directors’ remuneration report on pages 66 to 91;
JJ directors’ responsibilities statement on page 53; and
JJ notes to the Group financial statements as detailed in this section.
Business review
The strategic report on pages 8 to 47 provides a review of the Group’s
business development, performance and position during and at the
end of the financial year, its strategy and likely future developments,
key performance indicators, and a description of the principal risks
and uncertainties facing the business. Further information regarding
financial risk management policies and financial instruments is given
in note 20 to the Group financial statements.
There have been no significant events since the balance sheet date.
Results and dividends
The loss attributable to the Group’s shareholders for the year was
£105.8m (2017: £6.6m profit).
The directors are recommending the payment of a final dividend
of 2.2p per ordinary share which, together with the interim dividend
of 1.1p per share paid in September 2018, gives a total for the year
of 3.3p (2017: 3.0p). The final dividend is subject to approval by
shareholders at the Annual General Meeting on 21 March 2019
and has not therefore been included as a liability in these
financial statements.
Directors and their interests
The current directors are shown on pages 48 and 49.
Michael Flowers stepped down as Group Chief Executive on 30 June 2018
and Michael Ord was appointed as Group Chief Executive on 1 July 2018.
Daniel Dayan stepped down as a non-executive director on
30 November 2018 and Stephen King was appointed as a
non-executive director on 1 December 2018.
In accordance with the Company’s Articles of Association, all directors
are required to submit themselves for re-election at every Annual
General Meeting. All directors will therefore be seeking re-election
at the Annual General Meeting on 21 March 2019.
Details of the service contracts entered into between the Company
and the executive directors are set out in the directors’ remuneration
report on page 74. The non-executive directors do not have service
contracts with the Company.
The Company has made qualifying third party indemnity provisions
for the benefit of its directors, which were in effect throughout the
year and remain in force at the date of this report. The directors have
the benefit of a directors’ and officers’ liability insurance policy.
Other than in relation to their service contracts, none of the directors
is or was beneficially interested in any significant contract to which the
Group was a party during the year ended 31 October 2018.
Information required in relation to directors’ shareholdings is set out
in the directors’ remuneration report on page 85.
Employees and employee consultation
Details of the Group’s employment policies and employee
consultation practices are set out in the corporate responsibility
review on pages 43 and 44.
Political donations
No political donations were made during the year (2017: £nil).
Contractual arrangements
The Group contracts with a wide range of customers, comprising
governments, armed forces, prime contractors and OEMs across the
globe. The US Department of Defense is the largest single customer,
and procures the Group’s products under a significant number of
separate contracts placed with individual Group businesses.
The Group’s businesses utilise many suppliers across the world, and
arrangements are in place to ensure that businesses are not totally
reliant on single suppliers for key raw materials or components.
Research and development
The Group’s research and development expenditure for the year is
detailed in the financial review on page 29.
Change of control
Individual Group businesses have contractual arrangements with
third parties, entered into in the normal course of business, which may
be amended or may terminate on a change of control of the relevant
business, or in certain circumstances, following a takeover of the Group.
The most significant agreements entered into by the Group which
contain provisions granting the counterparties certain rights in the
event of a change of control of the Company are the revolving credit
facility agreements entered into with the Group’s banks, and the loan
note agreements, pursuant to which the Company issued notes under
a series of private placements. These agreements provide that, in the
event of a change of a control, the Company must repay all outstanding
borrowings, together with accrued interest and other sums owing
under each agreement.
Share capital and shareholder rights
General
The Company’s share capital consists of ordinary shares of 1p each
and preference shares of £1 each, which are fully paid up and quoted
on the main market of the London Stock Exchange. Full details of the
movements in the issued share capital of the Company during the
financial year are provided in note 24 to the Group financial statements.
50
Chemring Group PLC Annual Report and Accounts 2018
Details of the rights attaching to shares are set out in the Articles of
Association (the “Articles”). All holders of ordinary shares are entitled
to attend, speak and vote at any general meeting of the Company, and
to appoint a proxy or proxies to exercise these rights. At a general
meeting, every shareholder present in person, by proxy or (in the case
of a corporate member) by corporate representative has one vote on
a show of hands, and on a poll has one vote for every share held. The
Notice of Annual General Meeting specifies deadlines for exercising
voting rights and appointing a proxy or proxies to vote in respect of
the resolutions to be passed at the Annual General Meeting.
There are no restrictions on the transfer of ordinary shares in the
capital of the Company, other than certain restrictions which may
from time to time be imposed by law. In accordance with the Market
Abuse Regulation, certain employees are required to seek the
approval of the Company to deal in its shares.
The cumulative preference shares carry an entitlement to a dividend
at the rate of 7p per share per annum, payable in equal instalments on
30 April and 31 October each year. Holders of the preference shares
have the right on a winding-up to receive, in priority to any other classes
of shares, the sum of £1 per share together with any arrears of dividends.
The Company is not aware of any agreements between shareholders
that may result in restrictions on the transfer of securities and/or
voting rights.
The Company’s Articles may only be amended by special resolution
at a general meeting of shareholders.
Issue of shares
Under the provisions of section 551 of the Companies Act 2006
(the “Act”), the Board is prevented from exercising its powers under
the Articles to allot shares without an authority contained either in
the Articles or in a resolution of the shareholders passed in general
meeting. The authority, when given, can last for a maximum period of
five years, but the Board proposes that renewal should be sought at
each Annual General Meeting. An ordinary resolution, seeking such
authority, will be proposed at the forthcoming Annual General Meeting.
Section 561 of the Act requires that an allotment of shares for cash may
not be made unless the shares are first offered to existing shareholders
on a pre-emptive basis in accordance with the terms of the Act.
In accordance with general practice, to ensure that small issues of
shares can be made without the necessity of convening a general
meeting, the Board proposes that advantage be taken of the provisions
of section 571 of the Act not to apply the Act’s pre-emptive requirements.
Accordingly, a special resolution will be proposed at the forthcoming
Annual General Meeting which, if passed, will have the effect of granting
the directors the power to allot not more than 5% of the issued ordinary
share capital at the date of the Annual General Meeting free of the
requirements of section 561 of the Act. No issue of these shares will
be made which would effectively alter the control of the Company
without the prior approval of the shareholders in general meeting.
Purchase of own shares
The Company did not purchase any of its ordinary shares (2017: nil)
during the year. At 31 October 2018, the Company held a total of
1,788,710 1p ordinary shares in treasury (representing 0.6% of the
ordinary shares in issue on 31 October 2018).
A special resolution will be proposed at the forthcoming Annual
General Meeting to renew the Company’s authority to purchase its
own shares in the market up to a limit of 10% of its issued ordinary
share capital. The maximum and minimum prices will be stated in the
resolution at the date of the Annual General Meeting. The directors
believe that it is advantageous for the Company to have this flexibility
to make market purchases of its own shares. The directors of the
Company may consider holding repurchased shares pursuant to the
authority conferred by this resolution as treasury shares. This will give
the Company the ability to reissue treasury shares quickly and cost
effectively, and will provide the Company with additional flexibility in
the management of its capital base. Any issues of treasury shares for
the purposes of the Company’s employee share schemes will be made
within the 10% anti-dilution limit set by The Investment Association.
The directors will only exercise this authority if they are satisfied that
a purchase would result in an increase in expected earnings per share
and would be in the interests of shareholders generally.
Substantial shareholdings
At 16 January 2019, the following substantial holdings in the ordinary
share capital of the Company had been notified to the Company in
accordance with Chapter 5 of the Disclosure and Transparency Rules
of the Financial Conduct Authority. It should be noted that these
holdings may have changed since the Company was notified; however,
notification of any change is not required until the next notifiable
threshold is crossed.
Name
Invesco Limited
Schroders Plc
Sterling Strategic Value Fund S.A., Sicav-Raif
Old Mutual Asset Managers
FIL Limited
Thameside MBC re Greater Manchester Pension Fund
J O Hambro Capital Management Limited
Jupiter Asset Management Limited
Majedie Asset Management Limited
J P Morgan Chase & Co
Neptune Investment Management Limited
Prudential Plc
Investec Asset Management Limited
Ameriprise Financial, Inc.
AXA S.A. and its group of companies
Standard Life Investments Limited
BT Pension Scheme Trustees Limited as Trustee of
the BT Pension Scheme
% interest
8.1
7.2
5.3
5.1
5.1
5.0
5.0
Below 5.0
4.9
4.9
4.8
4.8
4.8
4.8
4.8
4.6
3.8
Chemring Group PLC Annual Report and Accounts 2018
51
OverviewStrategic reportGovernanceFinancial statementsOther information Directors’ report continued
Employee share schemes and plans
Approach to share ownership
The Group actively encourages its employees to share in the
future success of the Group, and therefore operates share-based
arrangements to provide incentives and rewards to employees.
The Group operated four share-based incentive plans during the
year, as set out below. Further details of awards and vesting are
provided in note 28 to the Group financial statements.
The Chemring Group 2008 and 2018 UK Sharesave Plans
(collectively the “UK Sharesave Plan”)
The UK Sharesave Plan is open to all eligible UK employees.
Employees may choose between three and five-year savings periods,
at the end of which the employee can choose to exercise the option
or seek the return of their savings. A grant of options was made on
30 July 2018.
The Chemring Group Performance Share Plan (the “PSP”)
The PSP expired on 22 March 2016 but was previously the primary
long-term incentive plan for executive directors and senior employees.
Discretionary awards were granted under the PSP over a fixed number
of shares by reference to salary, with awards ordinarily vesting, subject
to meeting performance criteria, on the third anniversary of the grant
date. Awards remain outstanding under the PSP but no further
awards can be made under the plan.
The Chemring Group Performance Share Plan 2016
(the “2016 PSP”)
The 2016 PSP is the primary long-term incentive plan for executive
directors and senior employees. Discretionary awards are granted
under the PSP over a fixed number of shares by reference to salary,
with awards ordinarily vesting, subject to meeting performance
criteria, on the third anniversary of the grant date. Awards were
granted under the plan on 19 January 2018 and 26 June 2018.
The Chemring Group Restricted Share Plan (the “RSP”)
The RSP provides for the discretionary grant of deferred share awards
to selected key employees. Executive directors are not eligible to
participate. Awards typically vest on the second or third anniversary
of the grant date, subject to meeting continuous service criteria. Awards
under the RSP may only be satisfied with market-purchased shares.
Going concern
Details of the conclusions arrived at by the directors in preparing the
financial statements on a going concern basis are set out in the
corporate governance report on page 61.
Additional information, as required
by Listing Rules Requirement 9.8.4
The annual report is required to contain certain information under
Listing Rules Requirement 9.8.4. Where this information has not been
cross-referenced within the Group financial statements, it can be
found in the following sections:
JJ capitalised interest (see note 13);
JJ long-term incentive schemes (see directors’ remuneration report);
JJ allocation of equity securities for cash (see note 24);
JJ contracts of significance (see note 34);
JJ election of independent directors (see corporate governance report);
JJ contractual arrangements (see directors’ report);
JJ details of independent directors (see corporate governance
report); and
JJ substantial shareholders (see directors’ report).
No profit forecasts are issued by the Group and no directors have
waived any current or future emoluments. Other than in relation to
ordinary shares held in treasury, no shareholders have waived or
agreed to waive dividends.
None of the shareholders is considered to be a Controlling
Shareholder (as defined in Listing Rules 6.1.2.A) and the Group
complies with the independence provisions of the Listing Rules.
Provision of information to the auditor
Each director at the date of this report confirms that, so far as they
are each aware, there is no relevant audit information of which the
Company’s auditor is unaware, and each director has taken all the
steps that he or she ought to have taken as a director to make himself
or herself aware of any relevant audit information and to establish that
the Company’s auditor is aware of that information.
This confirmation is given and should be interpreted in accordance
with the provisions of section 418 of the Companies Act 2006.
Auditor
As detailed in the Audit Committee report, KPMG were appointed as
the Group’s external auditor during the year, in place of Deloitte.
Resolutions will be proposed at the forthcoming Annual General
Meeting to reappoint KPMG and to authorise the directors to
determine the external auditor’s remuneration.
Annual General Meeting
The resolutions to be proposed at the Annual General Meeting to be
held on 21 March 2019, together with explanatory notes, appear in
the separate Notice of Annual General Meeting sent to all shareholders.
52
Chemring Group PLC Annual Report and Accounts 2018
Governance Statement of directors’ responsibilities
in respect of the annual report and accounts
The directors are responsible for preparing the annual report and
the Group and parent company financial statements in accordance
with applicable law and regulations.
Company law requires the directors to prepare Group and parent
company financial statements for each financial year. Under that law
they are required to prepare the Group financial statements in
accordance with International Financial Reporting Standards
as adopted by the European Union IFRSs as adopted by the EU
and applicable law and have elected to prepare the parent company
financial statements in accordance with UK accounting standards
including FRS 101 Reduced Disclosure Framework.
Under company law the directors must not approve the financial
statements unless they are satisfied that they give a true and fair view
of the state of affairs of the Group and parent company and of their
profit or loss for that period. In preparing each of the Group and
parent company financial statements, the directors are required to:
JJ select suitable accounting policies and then apply them consistently;
JJ make judgements and estimates that are reasonable, relevant and reliable;
Responsibility statement of the
directors in respect of the annual financial report
We confirm that to the best of our knowledge:
JJ the financial statements, prepared in accordance with the
applicable set of accounting standards, 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; and
JJ the strategic report and directors’ report includes a fair review of
the development and performance of the business and the position
of the issuer and the undertakings included in the consolidation
taken as a whole, together with a description of the principal risks
and uncertainties that they face.
We consider the annual report and accounts, taken as a whole, is fair,
balanced and understandable and provides the information necessary
for shareholders to assess the Group’s position and performance,
business model and strategy.
The directors’ report and responsibility statement was approved by the
Board of directors on 17 January 2019 and is signed on its behalf by:
JJ for the Group financial statements, state whether they have been
prepared in accordance with IFRSs as adopted by the EU;
Michael Ord
Group Chief Executive
Sarah Ellard
Group Legal Director
JJ for the parent company financial statements, state whether
applicable UK accounting standards have been followed;
JJ assess the Group and parent company’s ability to continue as a
going concern, disclosing, as applicable, matters related to going
concern; and
JJ use the going concern basis of accounting unless they either intend
to liquidate the Group or the parent company or to cease
operations, or have no realistic alternative but to do so.
The directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the parent company’s
transactions and disclose with reasonable accuracy at any time the
financial position of the parent company and enable them to ensure
that its financial statements comply with the Companies Act 2006.
They are responsible for such internal control as they determine is
necessary to enable the preparation of financial statements that are
free from material misstatement, whether due to fraud or error, and
have general responsibility for taking such steps as are reasonably
open to them to safeguard the assets of the Group and to prevent
and detect fraud and other irregularities.
Under applicable law and regulations, the directors are also
responsible for preparing a strategic report, directors’ report,
directors’ remuneration report and corporate governance statement
that complies with that law and those regulations.
The directors are responsible for the maintenance and integrity of
the corporate and financial information included on the company’s
website. Legislation in the UK governing the preparation and
dissemination of financial statements may differ from legislation
in other jurisdictions.
Chemring Group PLC Annual Report and Accounts 2018
53
OverviewStrategic reportGovernanceFinancial statementsOther information Corporate governance report
We continued to strengthen our relationship and interactions with the
Group’s US Board during the year. The US Board is a requirement of
our Special Security Agreement (“SSA”) with the US Government and
includes three independent directors approved by the US Government.
The SSA imposes certain restrictions on the degree of control and
influence we can exert over our US businesses and it is imperative
that we maintain a strong relationship with the US Board, in order to
ensure we are fulfilling our own corporate governance requirements.
The membership of the US Board was refreshed during the year, and
the appointment of a full-time President to oversee the US businesses
and who also sits on the Executive Committee is proving very beneficial
from both an operational and governance perspective.
We welcomed two new members to the Board during 2018,
with the appointment of Michael Ord as Group Chief Executive in
July 2018 and the appointment of Stephen King as a new independent
non-executive director in December 2018. Details of the appointment
processes for both directors are set out later in this report. New Board
members bring fresh perspective and diverse experience, and we look
forward to their further contribution to the Board as the Group
moves forward. We are currently engaged in a search for another
non-executive director who will complement the existing skills and
experience of the Board and we hope to announce an appointment
in the near future.
Compliance statement
In the year under review, the Company was required to apply
the main and supporting principles of good governance set out
in the UK Corporate Governance Code issued in April 2016 by
the Financial Reporting Council (the “Code”). The detailed
report below sets out how the Company applied these
principles in practice.
The Company was in compliance with the provisions of the
Code throughout the year ended 31 October 2018.
Carl-Peter Forster
Chairman
17 January 2019
The Board is committed to upholding high standards of corporate
governance, protecting and growing shareholder value, and
engaging in a fair and transparent manner with all of the Group’s
stakeholders. The Board takes responsibility for promoting the
long-term sustainable success of the Group, and directs its
purpose, values and strategy. The Board also provides overall
financial and organisational control, and ensures that the Group’s
businesses have appropriate and effective internal control and
risk management systems.
The consultation on the new UK Corporate Governance Code in
the early part of the year and its eventual publication in July 2018
inevitably led to corporate governance being high on the Board’s
agenda during 2018. The new Code is applicable to accounting
periods commencing on or after 1 January 2019, which means that
the Company will not be required to comply with its new provisions
until 1 November 2019, but the Board has already considered and
started to address the actions that will need to be taken to achieve
compliance in the coming year.
However, corporate governance is not just a matter for the Board and
in the latter part of the year we instigated the development of a new
Operational Framework, which will sit alongside our Global Code of
Business Principles and will provide the requisite structure by which
the Group will operate going forward. The Operational Framework,
which was formally implemented on 1 January 2019, incorporates
a range of both existing and new policies and procedures required
to be adopted by our businesses, which will provide an enhanced
governance structure to enable us to operate in a safe, consistent and
accountable way. An important aspect of this enhanced governance
structure will require all businesses to provide an Operational
Assurance Statement on a half-yearly basis detailing their compliance
with the Operational Framework. This will provide additional
assurance to the Board that our internal systems and controls are
operating effectively, and will become an important focus of our
internal audit activities in the future.
54
Chemring Group PLC Annual Report and Accounts 2018
Governance The Board
Composition of the Board and independence
The Board currently comprises three executive directors and four
non-executive directors (including the Chairman). The biographical
details of individual directors, including details of their other business
commitments, are set out on pages 48 and 49.
The roles of Chairman, Chief Executive and Senior Independent
Director are separate and clearly defined, in accordance with the
requirements of the Code, with the division of responsibilities set
out in writing and agreed by the Board.
The Board considers all of the current non-executive directors
to be independent in judgement and character, and considered
Carl-Peter Forster to be independent on his appointment as Chairman.
Nigel Young was employed as the Group’s Interim Chief Financial
Officer for a period of six months from August 2012, prior to his
appointment as a non-executive director, but the Board does not
consider that this short period of employment impacted his independence,
and his contribution to the Board continues to be impartial and objective.
Mr Young was appointed as Senior Independent Director in March 2016.
The Board considers that the current balance of executive and
non-executive influence on the Board is appropriate for the Company,
taking into account its size and status, and serves to ensure that no
single director or small group of directors dominate the Board’s
deliberations and decision making.
Matters reserved for approval of the Board
The Board has a formal schedule of matters reserved to it for consideration and approval, including:
Strategy and management
JJ Approval of the Group’s five-year plan and annual budget
JJ Approval of acquisitions, disposals and major capital expenditure
JJ Approval of changes to the Group’s capital structure
Financial matters and internal controls
JJ Oversight of the Group’s systems of financial control and risk management
JJ Determination of the nature and extent of the principal risks the Group should take in order
to achieve its long-term strategic objectives
JJ Approval of financial statements and results announcements
JJ Recommendation and declaration of dividends
Corporate governance
JJ Approval of the Group’s Operational Framework, and associated policies and procedures
JJ Receiving reports on the views of the Group’s stakeholders
JJ Undertaking performance reviews of the Board and its committees
Chemring Group PLC Annual Report and Accounts 2018
55
OverviewStrategic reportGovernanceFinancial statementsOther information Corporate governance report continued
Board responsibilities
The key responsibilities of the Board members are as follows:
Chairman
JJ Responsible for the leadership of the Board and ensuring its overall effectiveness in directing
the Group
JJ Ensures that the Board is kept properly informed and is consulted in a timely manner on all
decisions reserved to it
JJ Promotes a culture of openness and debate, and facilitates constructive relations between the
executive and non-executive directors
JJ Ensures that the training and development needs of directors are identified
JJ Ensures that the performance of the Board is evaluated on a regular basis
JJ Engages regularly with major shareholders in order to understand their views on the Group’s
governance and performance against its agreed strategy, and acts as a conduit to ensure that
the views of shareholders are well understood by the Board as a whole
Group Chief Executive
JJ Responsible for the leadership and day-to-day management of the business
JJ Develops strategy for Board approval and ensures that the agreed strategy is
implemented successfully
JJ Presents the annual budget and five-year plan to the Board for approval and delivers
agreed objectives
JJ Identifies new business opportunities, and potential acquisitions and disposals
JJ Manages the Group’s risk profile, including the management of health and safety
JJ Ensures that the Board is fully informed of all key matters
Non-executive directors
JJ Participate in the development of strategic objectives, provide constructive challenge and
monitor the performance of executive management in achieving the agreed objectives
JJ Monitor the Group’s financial performance
JJ Consider the integrity of the Group’s financial information, and whether the financial controls
and risk management systems are robust and defensible
JJ Determine the appropriate remuneration policy for the executive directors
JJ Meet periodically with the Group’s senior management and visit operations
JJ Meet regularly without the executive directors being present
Senior Independent Director
JJ Provides support to the Chairman and acts as a trusted sounding board
JJ Reviews the Chairman’s performance with the other non-executive directors
JJ Available to meet shareholders if they have concerns which cannot be resolved through
the normal channels
Company Secretary
JJ Secretary to the Board and its Committees
JJ Under the direction of the Chairman, responsible for maintaining good information flows
within the Board and its Committees
JJ Develops Board and Committee agendas, and collates and distributes papers
JJ Assists with the induction of new directors
JJ Keeps directors informed about changes to their duties and responsibilities
JJ Provides advice on legal, regulatory and corporate governance matters
JJ Available to all directors
56
Chemring Group PLC Annual Report and Accounts 2018
Governance Operation of the Board
Board meetings and attendance
The Board meets at least eight times a year. The Board receives reports from the Group Chief Executive, the Group Finance Director,
the Group Legal Director and the Group Health & Safety Director as standing agenda items at every scheduled Board meeting. Members
of the senior leadership team, representatives of the US Board and external advisers attend Board meetings by invitation, as appropriate.
The following table shows the attendance of directors, who served during the year, at meetings of the Board, the Audit Committee,
the Nomination Committee and the Remuneration Committee:
Board member
Carl-Peter Forster
Andrew Davies
Daniel Dayan
Sarah Ellard
Michael Flowers
Michael Ord
Andrew Lewis
Nigel Young
Board
(8 scheduled
meetings and
5 ad hoc meetings)
13(13)
13(13)
13(13)
13(13)
8(8)
6(6)
13(13)
13(13)
Audit Committee
(4 scheduled
meetings)
—
4(4)
4(4)
—
—
—
—
4(4)
Nomination
Committee
(3 scheduled
meetings)
3(3)
3(3)
3(3)
—
—
—
—
2(3)
Remuneration
Committee
(2 scheduled
meetings and
3 ad hoc meetings)
5(5)
5(5)
5(5)
—
—
—
—
5(5)
The maximum number of meetings which each director could have attended is shown in brackets.
In addition to the scheduled meetings, five ad hoc Board meetings and three ad hoc Remuneration Committee meetings were convened to deal
with matters arising between scheduled meetings.
During the year, the Chairman met regularly with the non-executive directors without the executives being present.
Chemring Group PLC Annual Report and Accounts 2018
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OverviewStrategic reportGovernanceFinancial statementsOther information Corporate governance report continued
Board activity throughout the year
In addition to its routine scheduled business, the Board also undertook the following activities during the year:
November 2017
December 2017
January 2018
JJ Review of updates to the Group strategy
JJ Training on the Criminal Finances Act 2017
JJ Report from the Audit Committee
JJ Consideration of the Group’s health and
safety plan
JJ Consideration of potential acquisition
opportunity
JJ Review of bid defence strategy
and the General Data Protection
Regulation
JJ Review of Board performance evaluation
JJ Approval of preliminary announcement
and annual results
JJ Briefing on the proposed new UK
Corporate Governance Code
March 2018
April 2018
June 2018
JJ Review of Group tax strategy
JJ Appointment of new Group
JJ Appointment of new external auditor
Chief Executive
JJ Board visit to Chemring
Countermeasures UK
JJ Board visit to Chemring Sensors
JJ Approval of interim results
& Electronic Systems
JJ Consideration of updated Group strategy
JJ Joint meeting with the US Board
and five-year plan
JJ Presentations on the US Programs
of Record and Kilgore capital
investment plans
JJ Review of potential acquisition
opportunities
JJ Review of the refinancing strategy
JJ Review of organisational development and
succession planning
July 2018
August 2018
September 2018
JJ Board visit to Chemring Energetics UK
JJ Review of incident at Chemring
JJ Initial strategic review of Energetics
JJ Approval of updated Group tax strategy
JJ Review of proposed product development
JJ Consideration of the new UK Corporate
Governance Code
Countermeasures UK
business
JJ Approval of 2019 budget
Board effectiveness
Appointments to the Board
External search consultancies are generally appointed to assist with
the recruitment of new directors.
The Zygos Partnership (now part of Russell Reynolds Associates)
were appointed during the year to assist with the search for a new
Group Chief Executive following Michael Flowers’ retirement. A brief
was prepared for The Zygos Partnership by the Nomination Committee,
reflecting the skills and experience considered necessary for the
successful appointee to lead the Group through the next stage of
its development. The Nomination Committee interviewed a selection
of candidates, following which Michael Ord was identified as the
preferred candidate and was invited to meet the other Board members.
Mr Ord was appointed to the Board on 1 June 2018 and took up the
Group Chief Executive position on 1 July 2018.
Russell Reynolds Associates were also engaged to undertake the
search for a new non-executive director, following the announcement
by Daniel Dayan in August 2018 that he would be stepping down
from the Board. The Nomination Committee considered and met
with a number of potential candidates, following which three short-listed
candidates were invited to meet all other members of the Board.
Stephen King was appointed as a new non-executive director on
1 December 2018 as a result of this process.
Russell Reynolds Associates are currently engaged in the search for an
additional non-executive director but have no other relationship with
the Group.
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Chemring Group PLC Annual Report and Accounts 2018
Governance Diversity
The Board supports the principles set out in Lord Davies’ Review into
Women on Boards published in February 2011, and the Board also
recognises the importance of promoting diversity across the Group.
The Board currently includes one female member, and remains
committed to a minimum target of at least 25% female representation
on the Board, amongst senior management and across the Group in
general. In this regard, the Board is focusing on the requirement for
increased diversity on the Board in its current search for a new
non-executive director for the Group.
The Company has procedures in place to deal with situations where
directors may have any such conflicts, which require the Board to:
JJ consider each conflict situation separately on its particular facts;
JJ consider the conflict situation in conjunction with the rest of their
duties under the 2006 Act;
JJ keep records and Board minutes as to authorisations granted by
directors and the scope of any approvals given; and
JJ regularly review conflict authorisation.
Re-election of directors
In accordance with the Company’s Articles of Association, all directors
are required to submit themselves for re-election at each Annual
General Meeting.
Performance evaluation
The Board engaged in an externally-facilitated review of its
performance in late 2017, utilising the services of Lintstock Limited.
The evaluation considered topics under the following headings:
The papers accompanying the Notice of Annual General Meeting include
a statement from the Chairman confirming that the performance of
each non-executive director seeking re-election at the meeting
continues to be effective and that each director continues to
demonstrate commitment to their role.
Induction
An internal induction programme on the Group’s operations, and its
strategic and business plans, is provided for newly-appointed directors.
Directors are invited to meet key members of the senior management
team at the earliest opportunity, and site visits are arranged to
facilitate their understanding of the Group’s operations.
The Company Secretary also provides detailed information on the
operation of the Board and its committees, directors’ legal duties,
and responsibilities on appointment.
Training and development
The Company meets the cost of appropriate external training for directors,
the requirement for which is kept under review by the Chairman.
Directors are continually updated on the Group’s businesses and the
matters affecting the markets in which they operate. The Company
Secretary updates the Board on a regular basis with regards to regulatory
changes affecting the directors and the Group’s operations generally,
and briefings are provided by the Group’s advisers on key developments
in areas such as financial reporting and executive remuneration practice.
Independent advice
All directors are entitled to take independent professional advice in
furtherance of their duties at the Company’s expense, should the need
arise. No director had reason to seek such advice during the year.
Conflicts of interest
All directors have a duty under the Companies Act 2006 (the “2006
Act”) to avoid a situation in which he or she has or can have a direct
or indirect interest that conflicts or may possibly conflict with the
interests of the Company. The Company’s Articles of Association
include provisions for dealing with directors’ conflicts of interest in
accordance with the 2006 Act.
JJ Board composition and expertise;
JJ Board dynamics;
JJ management and focus of meetings;
JJ Board support;
JJ strategic and operational oversight;
JJ risk management and internal control;
JJ succession planning and people management; and
JJ priorities for change.
The evaluation generated a number of recommendations, which are
being addressed on an ongoing basis.
The Chairman and non-executive directors also reviewed the individual
performance of the executive directors as part of the annual
remuneration review.
Board committees
The terms of reference of the Audit Committee, the Nomination
Committee and the Remuneration Committee are published on the
Company’s website (www.chemring.co.uk/investors/corporate-governance)
and copies are available on request from the Company Secretary.
Audit Committee
The Audit Committee comprises three independent non-executive
directors. At the date of this report, the Audit Committee members
were Nigel Young (Chairman), Andrew Davies and Stephen King.
Nigel Young acted as Interim Chief Financial Officer for the Group
between August 2012 and January 2013, and was formerly the finance
director of several public companies. The remaining members of the
Committee have previously served as executive directors of substantial
companies, and have extensive business and financial management
experience. In addition, Mr King serves as Chair of the Audit Committee
at another public company. The Board therefore considers that each
member of the Audit Committee has the requisite recent and relevant
financial experience to satisfy the requirements of the Code.
The Audit Committee convened for four scheduled meetings during
the year.
The Audit Committee report is set out on pages 62 to 65.
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OverviewStrategic reportGovernanceFinancial statementsOther information Corporate governance report continued
Board committees continued
Remuneration Committee
The Remuneration Committee comprises four independent
non-executive directors. At the date of this report, the Remuneration
Committee members were Andrew Davies (Chairman),
Carl-Peter Forster, Stephen King and Nigel Young.
Two scheduled Remuneration Committee meetings were held during
the year, together with three ad hoc meetings. Further details on
the Remuneration Committee and its activities, and the Company’s
policies on directors’ remuneration are set out in the directors’
remuneration report on pages 66 to 91.
Nomination Committee
The Nomination Committee comprises four independent non-executive
directors. At the date of this report, the Nomination Committee
members were Carl-Peter Forster (Chairman), Andrew Davies,
Stephen King and Nigel Young. Mr Forster is Chairman of the
Nomination Committee but, in accordance with the Committee’s
terms of reference, is not permitted to chair meetings when the
Committee is dealing with the appointment of his successor.
The Nomination Committee held three scheduled meetings during
the year.
Executive Committee
The Executive Committee is responsible for the executive day-to-day
running of the Group, submission to the Board of strategic plans and
budgets for the Group’s operations, and monitoring the trading
performance of the Group as a whole.
The current members of the Executive Committee are:
JJ Michael Ord (Group Chief Executive)
JJ Stuart Cameron (Managing Director – Chemring Energetics)
JJ David Cole (Managing Director – Roke)
JJ Bill Currer (President – CHG Group, Inc.)
JJ Sarah Ellard (Group Legal Director & Company Secretary)
JJ Andy Hogben (Managing Director – Chemring Countermeasures UK)
JJ Ian Johns (Group Manufacturing Director)
JJ Andrew Lewis (Group Finance Director)
JJ Clancy Murphy (Chief People Officer)
JJ Rupert Pittman (Group Director of Corporate Affairs)
JJ Mark Taylor (Group Health & Safety Director)
Michael Ord chairs the Executive Committee, which meets monthly.
Key responsibilities delegated to the Executive Committee by the Board
JJ Implementation of the Group’s strategies and policies as
determined by the Board.
JJ Monitoring of operational and financial results against budget.
JJ Allocation of resources across the Group within the overall plan
approved by the Board.
JJ Approval of R&D and capital expenditure within limits imposed by
the Board.
JJ Developing and implementing risk management systems.
Relations with shareholders and other providers of capital
Shareholder engagement
The Company maintains an active dialogue with institutional shareholders
through regular briefing meetings and formal presentations following
the release of interim and annual results. Meetings are usually attended
by the Group Chief Executive and the Group Finance Director, although
the Chairman and the Senior Independent Director also meet with
shareholders to discuss specific matters. The other non-executive
directors are also offered the opportunity to meet with major
shareholders and attend meetings if so requested by shareholders.
Communication with private investors is achieved largely through the
medium of the interim results statement and the annual report.
The Company’s website (www.chemring.co.uk) provides financial,
business and governance information on the Group.
The directors are provided with reports and other written briefings
from the Company’s brokers, and are regularly informed by the
Company Secretary about changes to significant shareholdings.
It is the Company’s policy that all directors should attend and make
themselves available to take questions from shareholders or address
any concerns at the Annual General Meeting. At other times of the
year, the directors can be contacted via the Company’s head office.
Annual General Meeting
All substantial issues, including the adoption of the annual report
and financial statements, are proposed on separate resolutions at the
Annual General Meeting. In line with best practice guidelines, voting at
the Annual General Meeting is conducted by way of a poll. This allows
all votes to be counted, not just those of shareholders who attend the
meeting. Poll results are published on the Company’s website as soon
as practicable following the conclusion of the meeting. The Notice of
the Annual General Meeting is sent to shareholders at least twenty
working days before the meeting.
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Chemring Group PLC Annual Report and Accounts 2018
Governance Engagement with other providers of capital
In addition to issuing shares, the Company also finances its activities
through external bank loans and by the issue of loan notes. The Board
recognises the importance of maintaining good relationships with the
providers of this capital, and the Group Chief Executive and the
Group Finance Director brief the banks and note holders on a regular
basis on the Company and its performance. The Board receives
regular reports on any issues impacting these relationships.
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. These sensitised scenarios
show headroom on all covenant test dates for the foreseeable future.
Accountability
Financial and business reporting
The statement of directors’ responsibilities in respect of the financial
statements and accounting records maintained by the Company is set
out on page 53.
Having taken all the matters considered by the Board and brought
to the attention of the Board during the year into account, the Board
is satisfied that the annual report and accounts for the year ended
31 October 2018, taken as a whole, is fair, balanced and understandable.
Furthermore, the Board believes that the disclosures set out on pages
8 to 47 provide the information necessary to assess the Company’s
performance, business model and strategy.
Risk management and internal control
The Board is responsible for determining the nature and extent of
the risks that it is willing to take to achieve its strategic objectives.
The Board is also responsible for ensuring that the Group’s risk
management and internal control systems are effective across the
businesses, and that appropriate risk mitigation plans are in place.
The Board undertakes an annual review of the effectiveness of the
Group’s systems of internal control, including financial, operational and
compliance controls, and risk management systems. Further details of
the review undertaken during the financial year ended 31 October 2018
are set out on page 33.
Going concern
The Group’s business activities, key performance indicators, and
principal risks and uncertainties are set out within the strategic report
on pages 8 to 47. 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 2020, 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:
JJ trading risks presented by economic conditions in the defence
market, particularly in relation to government budgets and spends;
JJ the timing of delivery of key contracts;
JJ the impact of macroeconomic factors, particularly interest rates
and foreign exchange rates;
JJ the status of the Group’s existing financial arrangements and
associated covenant requirements; and
JJ the availability of mitigating actions should business activities fall
behind current expectations including the deferral of discretionary
overheads and restricting cash flows.
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 on pages 8 to 47. 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.
Long-term viability statement
The directors have assessed the Group’s viability over a three-year
period to October 2021 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 2021.
In considering our viability statements we have considered the principal
risks and uncertainties discussed in the strategic report and assessed
the impact.
Sensitivity analyses were run to model the financial and operational
impact of plausible downside scenarios of these risk events occurring
individually or in combination. These included the impacts of a further
deterioration in the macroeconomic environment, underperformance
in executing the Group’s strategy, failure to derive targeted benefits
from the Group’s Operational Excellence Programme, material movements
in foreign exchange rates and a change in regulations impacting the
Group’s internal financing structure. Consideration was also given to
the plausibility of the occurrence of other individual events that in
their own right could have a material impact on the Group’s viability.
Based on the consolidated financial impact of the sensitivity analyses
and associated mitigating internal controls and risk management
actions that are either now in place or could be implemented, the
Board has been able to conclude that the Group will be able to
maintain sufficient bank facilities to meet its funding needs over the
three-year period.
Insurance
The Company maintains directors’ and officers’ liability insurance in
respect of legal action against its directors and officers.
Chemring Group PLC Annual Report and Accounts 2018
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OverviewStrategic reportGovernanceFinancial statementsOther information Audit Committee report
Annual statement by the Chairman of the Audit Committee
The Audit Committee continues to play a very important role
in the governance of the Group’s financial affairs, both through
monitoring the integrity of the Group’s financial reporting and
reviewing material financial reporting judgements.
It was a year of significant activity for the Audit Committee, with
changes to both our external and our internal auditors. I am pleased
to report that KPMG and PwC are now fully engaged in their new
roles as external and internal auditors respectively and their fresh
perspective is proving very beneficial. Further details of both
appointment processes are set out later in the report.
The Committee also reviewed several other key matters during the year:
The enactment of The US Tax Cuts and Jobs Act 2017 (the “TCJA”) in
December 2017 was of significance to the Group, given its substantial
US operations. The TCJA impacted the Group in two aspects, as a
result of the reduction in the main rate of US federal corporate income
tax and the introduction of restrictions on the future availability of
interest deductions, both of which necessitated a partial write-off of
our deferred tax asset. The Committee initially reviewed the impact
of the TCJA at the half year and again at the year end.
The Committee reviewed the revenue recognition policies and
procedures ensuring they remained appropriate and that the Group’s
internal controls were operating effectively in this area.
A number of impairments have been recognised in the 2018 financial
statements in respect of the goodwill associated with certain businesses
and the related acquired intangibles. In addition, following the Board’s
strategic decision to exit the commodity Energetics businesses, the
accounting treatment in respect of treating those businesses as
discontinued and held for sale was considered, along with their
carrying value.
The Committee considered the appropriateness and sufficiency of
the use of Alternative Performance Measures and those items classified
as non-underlying during the preparation of the 2018 results.
Further details of the Committee’s activities during the year are set
out on the following pages.
Nigel Young
Chairman of the Audit Committee
17 January 2019
Nigel Young
Chairman of the Audit Committee
Key responsibilities of the Audit Committee
JJ Making recommendations on the appointment, reappointment and
remuneration of the internal and external auditor
JJ Ensuring that an appropriate relationship between the Group and
the external auditor is maintained, and overseeing the provision of
non-audit services
JJ Reviewing and monitoring the external auditor’s independence and
objectivity
JJ Reviewing the effectiveness of the Group’s internal controls and
risk management systems
JJ Considering the effectiveness of the Group’s internal audit function
and monitoring internal audit activities
JJ Reviewing arrangements by which the Group’s employees may
confidentially raise concerns about possible improprieties
JJ Providing guidance to the Board in its consideration of whether the
annual report and accounts are fair, balanced and understandable
62
Chemring Group PLC Annual Report and Accounts 2018
Governance
Operation of the Audit Committee
The Audit Committee monitors the integrity of the Group’s
financial statements and the effectiveness of the internal and
external audit processes.
The Committee is authorised to seek any information it requires
from any employee of the Group in order to perform its duties,
and to obtain any outside legal or other professional advice it
requires at the Company’s expense.
The Committee reviews its terms of reference and its effectiveness
annually, and recommends to the Board any changes required as the
result of the review.
Meetings
Meetings of the Committee are attended, at the invitation of the
Chairman, by the external auditor, the Chairman of the Board, the
Group Chief Executive, the Group Finance Director, the internal
auditors and representatives from the Group finance function.
The Committee meets with the external and internal auditors
on a regular basis without the executive directors being present.
The Company Secretary acts as secretary to the Committee
and minutes of meetings are circulated to all Board members.
A verbal report on key issues discussed by the Committee is
provided to the Board after every meeting.
The Committee plans to meet four times in the current financial year.
The Chairman of the Committee meets regularly with the Group Finance
Director, the external audit lead partner and the internal audit lead
partner outside of scheduled meetings.
Principal activities of the Audit Committee during the year
January 2018
JJ Review of the status of the Group’s significant research and
development projects, and associated capitalised development costs
JJ Consideration of the auditor’s report on the results of the full
year audit
JJ Review of the Group’s preliminary announcement and annual
results for the year ended 31 October 2017, including the
Group’s going concern status and the viability statement
JJ Initial consideration of the potential impact of the TCJA
JJ Consideration of KPMG’s internal audit report
March 2018
JJ Selection and appointment of new external auditor
JJ Approval of the interim review and full year audit plans
JJ Review of future internal audit requirements
June 2018
JJ Updated status review of the Group’s significant research and
development projects, and associated capitalised development costs
JJ Review of the Group’s half year results, including the going
concern status
JJ Consideration of the auditor’s report on the results of the
interim review
JJ Selection and appointment of new internal auditors
JJ Approval of PwC’s internal audit plan for 2018
September 2018
JJ Annual review of the Committee’s terms of reference
JJ Review of audit services for the year ended 31 October 2018
JJ Annual review of policy on the provision of non-audit services by
the external auditor
JJ Consideration of PwC’s internal audit report
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OverviewStrategic reportGovernanceFinancial statementsOther information Audit Committee report continued
Significant issues considered by the Audit Committee in relation to the financial statements
Revenue recognition policies
and procedures
The Committee reviews the Group’s revenue recognition policies and procedures on an ongoing basis, to
ensure that they remain appropriate and that the Group’s internal controls are operating effectively in this
area. The Committee considered the key assumptions underlying the accounting treatment of any material
contract with a customer where judgement on revenue recognition was required.
Impairment of goodwill and
other intangible assets
The Committee considered the recognised impairment losses in respect of Chemring Ordnance, Chemring
Defence UK, Chemring EOD and Leafield Engineering and management’s review of the carrying value of
goodwill and intangible assets held on the Group’s balance sheet as at 30 April 2018 and 31 October 2018,
against the latest forecasts for each of the businesses concerned and the future strategic plan for the Group.
Capitalised development costs
The Committee continued to monitor the level of development costs capitalised during the year and the
periods over which such costs are to be amortised. Detailed reviews of the Group’s ten most significant
research and development projects, and their associated capitalised development costs, were undertaken
by the Committee in January 2018 and June 2018. The Committee reviewed the impairment charges in
respect of certain capitalised development charges reflected in the 2018 financial statements.
Deferred tax assets on tax
losses and US interest
deductions
The Committee considered the management’s review of the recoverability of US interest deductions and
tax losses carried forward following the enactment of the TCJA. A review of management’s projections of
future taxable profits that will be available to utilise tax losses and interest carried forward, and the assumptions
made, was undertaken by the Committee, and the appropriate adjustment to be made to the value of the
Group’s deferred tax asset was considered accordingly.
Going concern and
long-term viability
In order to satisfy itself that the Group has sufficient financial resources to enable it to continue trading for
the foreseeable future, the Committee regularly reviews the adequacy of the Group’s financing facilities
against future funding requirements and working capital projections.
Based on its review of the Group’s forecasts and discussions with the external auditor, the Committee
recommended to the Board the adoption of the going concern basis for the preparation of both the 2017
financial statements and the 2018 interim results.
The Group was also required to make a statement on its long-term viability in the 2017 financial statements.
The Committee considered the period over which the Group’s viability would be assessed and having
concluded that a three-year period was appropriate, the Committee undertook a review of the analysis
and projections which supported the viability assessment prior to submission to the Board.
External audit
The Audit Committee is responsible for making recommendations to
the Board on the appointment, reappointment and removal of the
Company’s external auditor. The Committee also undertakes an
annual assessment of the auditor’s independence and objectivity,
taking into account relevant professional and regulatory requirements
and the relationship with the auditor as a whole, including the
provision of any non-audit services.
of KPMG as the new external auditor. KPMG proceeded to undertake
the half year review of the Group.
The Committee assesses the effectiveness of the external auditor on
an ongoing basis, with particular reference to:
JJ the arrangements for ensuring the external auditor’s independence
and objectivity;
Audit effectiveness and tendering
As indicated in last year’s report, the Committee commenced a tender
process for the appointment of a new external auditor following the
release of the 2017 results in January 2018. A tender review committee
was established, including the Chairman of the Committee, the Group
Finance Director and key members of the head office finance function,
to establish and oversee the initial stages of the tender process and to
brief the firms involved on the Group’s requirements. Five firms were
initially invited to tender, two of whom subsequently withdrew from
the tender process. The three remaining firms were invited to present
their detailed proposals to the Committee in March 2018, following
which the Committee recommended to the Board the appointment
JJ the external auditor’s fulfilment of the agreed audit plan and any
variations from the plan;
JJ the robustness and perceptiveness of the auditor in their handling
of the key accounting and audit judgements;
JJ the content of the external auditor’s reports and internal control
recommendations; and
JJ the feedback received on the conduct of the external audits from
key people involved in the audit process.
There are no contractual or similar obligations to restrict the choice
of external auditor.
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Chemring Group PLC Annual Report and Accounts 2018
Governance Auditor independence
The Committee keeps under review the level of any non-audit services
which are provided by the external auditor, to ensure that this does
not impair their independence and objectivity.
The Committee has adopted a policy which states that the external
auditor should not be appointed to provide any non-audit services
to the Group, unless the Committee agrees that their appointment
would be in the best interests of the Company’s shareholders in
particular circumstances and would not create any direct conflict
with their role as external auditor. In approving any such appointment,
the Committee is also required to consider:
JJ whether the provision of the proposed services might compromise
the auditor’s independence or objectivity;
JJ whether the non-audit services will have a direct or material effect
on the Group’s audited financial statements;
JJ whether the skills and experience of the external auditor make it
Internal audit
The Audit Committee is responsible for reviewing the work undertaken
by the Group’s internal auditors, assessing the adequacy of the internal
audit resource, and recommending changes for increasing the scope of
the internal audit activities.
The Group’s internal audit programme incorporates an annual rolling
review of all businesses, and focuses on both financial and non-financial
controls and procedures. The Committee approves the annual internal
audit plan and receives regular reports from the internal auditors.
Prior to appointment as external auditor in March 2018, KPMG was
appointed by the Committee to provide internal audit services for the
Group. The Committee undertook a tender process for the appointment
of new internal auditors in April 2018 and appointed PwC as a result.
The PwC internal audit programme covers financial and commercial
processes, governance issues, and key corporate risks. The internal
audit plan for 2018 included specific focus on:
the most suitable supplier of the non-audit services; and
JJ IT and cyber-security risk management and controls;
JJ the level of fees proposed for the non-audit services relative to the
JJ adherence to the Group’s Bribery Act Compliance Manual; and
audit fees.
The external auditor is required to provide the Committee with a
written confirmation of independence for all duly-approved
engagements for non-audit services.
The policy adopted by the Committee expressly prohibits the provision
of certain non-audit services by the external auditor, in line with
regulatory requirements and UK ethical guidance.
Deloitte did not provide any additional services to the Group during
the year under review. Prior to appointment as external auditor,
KPMG provided internal audit services to the Group but has provided
no other additional services since 1 November 2017.
Details of the amounts paid to the external auditor during the year
for audit are set out in note 4 to the Group financial statements.
The Committee, in conjunction with the Group Finance Director,
ensures that the Group maintains relationships with a sufficient choice
of appropriately-qualified alternative audit firms for the provision of
non-audit services.
JJ the key financial and operating controls at each business.
PwC presents its internal audit reports to the Committee on a
quarterly basis. The management of each business is responsible
for implementing the recommendations made by the internal auditors,
and the Committee reviews progress on a regular basis.
Having undertaken a review of the effectiveness of PwC in fulfilling
the internal audit function, the Committee is satisfied that the quality,
experience and expertise of PwC meets the Company’s requirements,
and PwC has therefore been reappointed to provide internal audit
services for the Group in 2019. In 2019 the work programme for
internal audit will continue on a site rotation basis, where every site
will be covered on a two or three-year rotational basis, and PwC will
create bespoke risk-based testing plans for each site.
Chemring Group PLC Annual Report and Accounts 2018
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OverviewStrategic reportGovernanceFinancial statementsOther information Directors’ remuneration report
Annual statement by the Chairman of the Remuneration Committee
essentially the same as the current policy but with some updates to
keep pace with the current views of shareholders and to align to the
new UK Corporate Governance Code, although the Code does not
yet apply to the Group.
The key policy changes are as follows:
JJ Pensions – the pension allowance for new joiners will be reduced
to 10% of salary (20% under the current policy) which is directionally
more in line with the pension allowance for all other UK employees.
The range of contributions in the UK is currently 4% to 20% of
salary and Michael Ord was appointed with a pension allowance
of 10% of salary.
JJ Annual bonus – no change aside from strengthening and
broadening the malus and clawback provisions.
JJ Performance Share Plan (“PSP”) – no changes to award levels,
but we are introducing a two-year holding period following the
three-year performance period which will continue to apply post
cessation of employment.
JJ Share ownership guidelines – increased to 200% of salary for
all executive directors (currently 100% of salary) and the retention
policy remains unchanged. The treatment of good leavers under
the annual bonus deferral and the operation of the new holding
period attached to PSP awards maintain a link between the
Group’s performance even after employment has ceased.
We will also be making changes to the administration and operation
of our incentive plans to ensure malus and clawback provisions are
consistently applied across all plans and will cover events which are
deemed to cause serious reputational damage to the Group. Also,
the default treatment for good leavers in respect of the PSP will
be amended so that any time pro-rating is applied, awards will be
rounded up to the next complete month (rather than the next
complete financial year as is currently the case).
Major shareholders with whom we spoke during the consultation
process were generally supportive of the developments in respect
of the directors’ remuneration policy.
UK Corporate Governance Code and Regulations update
The Remuneration Committee welcomed the revised UK Corporate
Governance Code which was published by the Financial Reporting
Council during 2018. While the Code will not formally apply to the
Company until the financial year commencing 1 November 2019, the
Remuneration Committee has adopted a number of the provisions
early on a voluntary basis. These include the addition of a two-year
holding period in addition to the three-year performance period for
the PSP, the strengthening of malus and clawback provisions, and the
phased alignment of pensions with the wider workforce. The Committee
already has responsibility for setting remuneration for senior management
and is informed of pay-related matters throughout the Group. During
this year, we will be looking at other aspects of the Code and the
new disclosure regulations. We shall in particular look at how we
can build upon our existing engagement mechanisms to help develop
the interaction with our workforce and the Board, and how this can
be used by the Remuneration Committee.
Andrew Davies
Chairman of the Remuneration Committee
Dear Shareholder
This year’s directors’ remuneration report covers what has been a busy
year for the Remuneration Committee as well as a challenging year for
the business. The tragic incident at the Chemring Countermeasures
UK facility in August fatally injured one of our employees and badly
injured another. We continue to work with the regulator on the
investigation into the incident.
Policy review
The current directors’ remuneration policy was approved at the 2016
Annual General Meeting and is therefore due to expire at the 2019
Annual General Meeting. In preparation for approval of a new policy,
the Remuneration Committee spent time during 2018 considering the
approach to remuneration that would best support the business in
the next stage of its development.
The updated UK Corporate Governance Code and recent investor
and voting guidance was considered as part of this overall review
process. In particular, the Committee considered how the directors’
remuneration policy currently fits with the Group’s overall strategy
and culture, as well as the associated risks with its operation. Our aim
has always been to ensure transparency in our approach, with simple
to understand incentives clearly aligned to the delivery of the strategy
and which emphasise the long-term sustainability of the business.
This continued to be our focus during a thorough review process,
which incorporated internal and external engagement with the
Group’s largest investors and the voting guidance services. Taking into
account all these factors, as well as the current business performance
and the recent appointment of Michael Ord as Chief Executive, the
Remuneration Committee believes that material changes to the policy
are not currently required. The existing policy is now considered to
be embedded into the business, is well understood by participants,
is generally aligned with our approach for other employees and is
fulfilling its purpose and supports our values as a business. Therefore,
the directors’ remuneration policy which will be put forward for
shareholder approval at the 2019 Annual General Meeting is
66
Chemring Group PLC Annual Report and Accounts 2018
Governance The new reporting regulations do not apply to the Group until the
next financial year. We have, however, shown the impact of share
price growth on potential pay outcomes on page 73. The Committee
considered publishing a CEO pay ratio for 2018 but given the change
in incumbents during the year it is unlikely to provide meaningful
analysis in isolation. We will therefore take time during the current
financial year to determine the best way to calculate and present this
information so that it can be useful to the reader. We plan to publish
for the year ending 31 October 2019, which will still be earlier than
required under the regulations.
The Remuneration Committee’s activities during the year
The Committee was heavily involved in the recruitment of the new
Chief Executive, Michael Ord, and in determining the arrangements
for Michael Flowers, following his retirement as Chief Executive.
Mr Flowers’ terms are in line with our approved directors’ remuneration
policy. In line with investors’ expectations, the Committee applied
time pro-rating and the performance criteria continue in force. The
Committee exercised its discretion to adapt the application of the
time pro-rating criteria to Mr Flowers’ outstanding 2017 PSP award
and to ensure that any outstanding shares awarded in 2018 would
be forfeited. This took account of his service to the Group which
amounted to two-thirds of the performance period in respect of
the 2017 award. It was intended to be effectively value-neutral for
Mr Flowers, although the vesting outcome remains entirely dependent
on the performance of the Company against the performance
conditions for the award. The details of Mr Flowers’ retirement terms
are set out on page 86 and are as already disclosed on 1 May 2018.
As noted at the time of his appointment, Mr Ord was granted a
PSP award of 200% of salary on joining the Group. This award was
in line with our recruitment policy and was, in part, to compensate
for remuneration he forfeited from his previous employer. The
Committee believed that this one-off enhancement (of 50% of salary)
was the most effective way to ensure the timely appointment of the
talented new Chief Executive and to provide some compensation for
forfeited remuneration on a performance-linked and long-term basis.
The PSP award made to Mr Ord is subject to a two-year holding
period post-vesting, in line with the proposed new policy. The full
details of the awards to the executive directors granted during the
year are set out on pages 81 and 82.
The Committee itself was refreshed during the year, with Daniel Dayan
stepping down as Chairman of the Remuneration Committee and my
appointment as Chairman in August 2018. I want to thank Daniel for
his leadership of the Committee over the last two years.
Performance outcomes
Following the post-incident closure of the Chemring Countermeasures
UK facility, the Group failed to meet its financial targets for the year.
JJ The earnings per share (“EPS”) and operating cash targets within
the annual bonus plan for 2018 were not achieved, and hence no
bonus is payable to the executive directors in respect of either
financial performance or personal objectives.
JJ The PSP awards granted to the executive directors who were in
post on 25 January 2016 were subject to performance conditions
based on two measures – EPS and total shareholder return
(“TSR”). The performance conditions were not met and the
awards will lapse on 25 January 2019.
The Committee did not apply any discretion when determining
the outcomes.
Implementation for 2018/19
The Committee proposes a very minor change to the implementation
of the remuneration policy for the 2019 financial year, namely a small
alteration to the weightings of annual bonus performance measures
so 40% is based on EPS, 40% on operating cash and 20% on personal
objectives (2018 financial year: 37.5%:37.5%:25% weightings). The
Committee had considered further rebalancing of measures in the
PSP, but following shareholder feedback and based on our business
strategy following the appointment of our new Chief Executive,
we decided against any changes to the mix of measures at this stage.
With regards to the EPS performance condition, the Committee has
decided to maintain the growth range of 5% to 10% a year, which is
in line with the business plan and brokers’ forecasts. The Committee
will, however, be making an adjustment to the reported underlying
EPS for 2018 to set an adjusted baseline EPS for 2018 which reflects
the estimated EPS which would have been achieved by the Group had
the August incident not occurred. This means that the base year EPS
for the 2019 PSP awards will be 11.3p instead of the reported 8.9p.
We have also made some minor changes to the TSR comparator
group. For completeness, there are no intended changes to other
elements of the policy.
Over the coming year the Committee will be focused on the effective
implementation of the new directors’ remuneration policy, and will
undertake further work to embed the new Code into the operation
of the Committee and the Board.
Conclusion
I hope you will find this report helpful and informative and look
forward to receiving your support for the two remuneration-related
resolutions to be tabled at our forthcoming Annual General Meeting.
Please do not hesitate to contact me on executive directors’
remuneration matters via Sarah Ellard, Group Legal Director &
Company Secretary at sarahe@chemring.co.uk.
Andrew Davies
Chairman of the Remuneration Committee
17 January 2019
Chemring Group PLC Annual Report and Accounts 2018
67
OverviewStrategic reportGovernanceFinancial statementsOther information Directors’ remuneration report continued
Part A – remuneration policy
Element
Salary
This report sets out the information required by Part 4 of Schedule 8
to the Large and Medium-Sized Companies and Groups (Accounts and
Reports) Regulations 2008 (as amended) (the “Regulations”). The report
also satisfies the relevant requirements of the Listing Rules of the
Financial Conduct Authority, and describes how the Board has applied
the principles and complied with the provisions relating to directors’
remuneration in the UK Corporate Governance Code.
Part A of this report represents the directors’ remuneration policy.
Part B constitutes the implementation sections of the report (the
“annual report on remuneration”). The auditors have reported on
certain sections of Part B and stated whether, in their opinion, those
parts have been properly prepared in accordance with the Companies
Act 2006. Those sections of Part B subject to audit are clearly indicated.
The Remuneration Committee has been established by the Board and
is responsible for the remuneration of the executive directors, the
Chairman and for the leadership team at the next level. The Committee’s
terms of reference are available in full on the Company’s website or
from the Company Secretary on request.
Bonus
In determining remuneration for the executive directors, the Remuneration
Committee seeks to maintain a competitive package of rewards
required to promote the long-term success of the Company, without
(i) being excessive by reference to market rates across comparator
companies and (ii) either encouraging or rewarding inappropriate
risk-taking. Performance-related elements should be transparent,
stretching and rigorously applied, form a significant proportion of the
total remuneration package of each executive director, and align the
interests of executives with those of shareholders, by ensuring that a
significant proportion of remuneration is performance-related and
delivered in shares. Remuneration is set in the context of the core
values of the business and aim to be aligned with our culture.
The table below summarises the Committee’s future policy on the
remuneration of executive directors which, if approved by shareholders
at the forthcoming Annual General Meeting on 21 March 2019, will
replace the existing policy for which shareholder approval was obtained
at the 2016 Annual General Meeting, and will become binding immediately
thereafter. The material differences between the existing and proposed
new policy (which has also been designed with due account taken of
the UK Corporate Governance Code) are explained in the statement
by the Committee Chairman and in the table below. It is currently intended
that the policy will remain valid until the 2022 Annual General Meeting.
Further details of the full policy are set out on pages 70 to 75.
.
68
Chemring Group PLC Annual Report and Accounts 2018
Purpose and link to strategy
Operation
Maximum
Performance assessment
JJ Reflects the performance of
the individual, their skills and
experience over time, and the
responsibilities of the role
JJ Provides an appropriate level of
basic fixed income, avoiding
excessive risk arising from
over-reliance on variable income
JJ Incentivises annual delivery of
financial, strategic and
personal goals
JJ Maximum bonus only payable
for achieving demanding targets
JJ Delivery of a proportion of
bonus in deferred shares plus
the ability to receive dividend
equivalents provides alignment
with shareholders’ interests and
assists with retention
JJ Normally reviewed annually
JJ Salary increases will normally
JJ None, although overall individual and company performance is a factor
with effect from 1 January
be in line with those received
considered when setting and reviewing salaries
JJ Benchmarked periodically
by the wider workforce
against companies with similar
JJ More significant increases may
characteristics and companies
be awarded at the discretion of
within the same sector
JJ Salaries take account of
complexity of the role, market
competitiveness, Group
performance and the
increases awarded to the
wider workforce
the Committee, for example
where there is a change in
responsibilities, to reflect
individual development and
performance in the role
JJ Paid in cash, with up to 40%
JJ Chief Executive –
JJ Mix of Group financial and non-financial objectives; financial objectives
deferred as a conditional award
125% of salary
of deferred shares
JJ Other executive directors –
JJ Vesting of deferred shares
100% of salary
will determine the majority of the award and will typically include a
measure of profitability and cash flow, although the Committee has
discretion to select other metrics
is subject to continued
employment (save in “good
leaver” scenarios) at the end
of three years from the
award of the bonus
JJ The payment of any earned
bonus remains ultimately at the
discretion of the Committee
JJ Non-pensionable
JJ Executives are entitled to
receive, on vesting of deferred
share awards, the value of
dividend payments that would
otherwise have been paid on
the deferred shares during the
deferral period
JJ Any shares vesting must be
held by the executives for a
further period of two years
JJ Executives are entitled to
receive the value of dividend
payments that would otherwise
have been paid on vested awards
JJ All awards are subject to the
discretions given to the
Committee in the plan rules
during the vesting period
JJ Non-financial objectives will be measurable and linked to goals that are
consistent with the Group’s longer-term goals
JJ Payment of the non-financial objectives element will be subject to an
underpin based on the Committee’s assessment of underlying business
performance, including inter alia levels of profitability and cash flow, as
well as health and safety performance
JJ Performance below the threshold for each financial target results in
zero payment in respect of that element. Payment rises from 0% to
100% of the maximum opportunity for levels of performance between
threshold and maximum with 50% of the maximum normally payable
for on-target performance
JJ Includes a malus and clawback mechanism8
The Committee will have discretion to set different measures and
weightings for awards in future years to best support the strategy of
the business at that time
JJ Targets for each performance measure are set by the Remuneration
Committee prior to each grant. Targets will be based on a sliding scale
where appropriate
JJ For each measure, performance below threshold results in zero
payment. Payment rises from 25% to 100% of the maximum
opportunity for that measure for levels of performance between
threshold and maximum
JJ Includes a malus and clawback mechanism8
Long-term incentive plan
(performance share plan – “PSP”)
JJ Incentivises executives to
achieve targets aligned to the
Group’s main strategic
objectives of delivering
sustainable growth and
shareholder returns
JJ Delivery of awards in shares
plus the ability to receive
dividend equivalents helps align
executives’ rewards with
shareholders’ interests
JJ Annual grants of shares, which
JJ Normally 150% of base salary
JJ Awards will be subject to a combination of long-term measures which
vest subject to the Group’s
(although grants of up to 200%
are aligned to the shareholder experience and may include financial
performance measured over at
of base salary may be made in
metrics (such as EPS), shareholder value metrics (such as TSR), capital
least three years
exceptional circumstances such
efficiency measures (such as ROCE) and/or other strategic measures
as on recruitment)
Governance Element
Salary
Bonus
JJ Reflects the performance of
the individual, their skills and
experience over time, and the
responsibilities of the role
JJ Provides an appropriate level of
basic fixed income, avoiding
excessive risk arising from
over-reliance on variable income
JJ Incentivises annual delivery of
financial, strategic and
personal goals
JJ Maximum bonus only payable
for achieving demanding targets
JJ Delivery of a proportion of
bonus in deferred shares plus
the ability to receive dividend
equivalents provides alignment
with shareholders’ interests and
assists with retention
Long-term incentive plan
JJ Incentivises executives to
(performance share plan – “PSP”)
achieve targets aligned to the
Group’s main strategic
objectives of delivering
sustainable growth and
shareholder returns
JJ Delivery of awards in shares
plus the ability to receive
dividend equivalents helps align
executives’ rewards with
shareholders’ interests
Purpose and link to strategy
Operation
Maximum
Performance assessment
JJ Salary increases will normally
be in line with those received
by the wider workforce
JJ More significant increases may
be awarded at the discretion of
the Committee, for example
where there is a change in
responsibilities, to reflect
individual development and
performance in the role
JJ Chief Executive –
125% of salary
JJ Other executive directors –
100% of salary
JJ Normally 150% of base salary
(although grants of up to 200%
of base salary may be made in
exceptional circumstances such
as on recruitment)
JJ Normally reviewed annually
with effect from 1 January
JJ Benchmarked periodically
against companies with similar
characteristics and companies
within the same sector
JJ Salaries take account of
complexity of the role, market
competitiveness, Group
performance and the
increases awarded to the
wider workforce
JJ Paid in cash, with up to 40%
deferred as a conditional award
of deferred shares
JJ Vesting of deferred shares
is subject to continued
employment (save in “good
leaver” scenarios) at the end
of three years from the
award of the bonus
JJ The payment of any earned
bonus remains ultimately at the
discretion of the Committee
JJ Non-pensionable
JJ Executives are entitled to
receive, on vesting of deferred
share awards, the value of
dividend payments that would
otherwise have been paid on
the deferred shares during the
deferral period
JJ Annual grants of shares, which
vest subject to the Group’s
performance measured over at
least three years
JJ Any shares vesting must be
held by the executives for a
further period of two years
JJ Executives are entitled to
receive the value of dividend
payments that would otherwise
have been paid on vested awards
JJ All awards are subject to the
discretions given to the
Committee in the plan rules
during the vesting period
JJ None, although overall individual and company performance is a factor
considered when setting and reviewing salaries
JJ Mix of Group financial and non-financial objectives; financial objectives
will determine the majority of the award and will typically include a
measure of profitability and cash flow, although the Committee has
discretion to select other metrics
JJ Non-financial objectives will be measurable and linked to goals that are
consistent with the Group’s longer-term goals
JJ Payment of the non-financial objectives element will be subject to an
underpin based on the Committee’s assessment of underlying business
performance, including inter alia levels of profitability and cash flow, as
well as health and safety performance
JJ Performance below the threshold for each financial target results in
zero payment in respect of that element. Payment rises from 0% to
100% of the maximum opportunity for levels of performance between
threshold and maximum with 50% of the maximum normally payable
for on-target performance
JJ Includes a malus and clawback mechanism8
JJ Awards will be subject to a combination of long-term measures which
are aligned to the shareholder experience and may include financial
metrics (such as EPS), shareholder value metrics (such as TSR), capital
efficiency measures (such as ROCE) and/or other strategic measures
The Committee will have discretion to set different measures and
weightings for awards in future years to best support the strategy of
the business at that time
JJ Targets for each performance measure are set by the Remuneration
Committee prior to each grant. Targets will be based on a sliding scale
where appropriate
JJ For each measure, performance below threshold results in zero
payment. Payment rises from 25% to 100% of the maximum
opportunity for that measure for levels of performance between
threshold and maximum
JJ Includes a malus and clawback mechanism8
Chemring Group PLC Annual Report and Accounts 2018
69
OverviewStrategic reportGovernanceFinancial statementsOther information Directors’ remuneration report continued
Part A – remuneration policy continued
Element
Purpose and link to strategy Operation
Maximum
Performance assessment
All-employee share scheme
Pension
JJ UK employees, including
executive directors, are
encouraged to acquire shares
by participating in the Group’s
all-employee share plan – the
UK Sharesave Plan
JJ Provides retirement benefits
that reward sustained contribution
Other benefits
JJ Provides a competitive package
of benefits that assists with
recruitment and retention
JJ The UK Sharesave Plan has
JJ Participation limits are those set
JJ N/A
standard terms
by HM Revenue & Customs from
time-to-time
JJ Ongoing pension provision is in
the form of a cash supplement,
subject to auto-enrolment in
the Group’s defined
contribution scheme
JJ Legacy arrangements: 20% of
base salary cash supplement
contribution paid in lieu of
occupational pension
scheme membership
JJ Longer-serving employees have
accrued benefits under the
Group’s defined benefit scheme,
which was closed to future
accrual for the executive
directors on 6 April 2010
JJ Main benefits currently provided
to UK executives are a car
allowance, life assurance and
private medical insurance
JJ Executive directors are eligible
for other benefits which may
also be introduced for the wider
workforce on broadly
similar terms
JJ New appointments: 10% of
base salary cash supplement
contribution paid in lieu of
occupational pension
scheme membership
JJ All UK employees, including the
executive directors, are subject to
auto-enrolment into the Group’s
defined contribution scheme, with
an employer contribution of 4% of
base salary. If executives do not
opt out of this scheme, their cash
supplement will be reduced by 4%
JJ Cash allowance in lieu of company
car of up to £25,000 per annum
JJ Other benefits will be in line with
market. The value of each benefit
is based on the cost to the Company
and is not pre-determined
JJ Any reasonable business-related
expenses (including tax thereon)
can be reimbursed if determined
to be a taxable benefit
JJ N/A
JJ N/A
Committee discretions
The Committee operates the Group’s variable incentive plans
according to their respective rules and in accordance with governing
legislation and HM Revenue & Customs rules where relevant. To ensure
the efficient administration of these plans, the Committee will apply
certain operational discretions. These include the following:
JJ selecting the participants in the plans on an annual basis;
JJ determining the timing of grants of awards and/or payment;
JJ determining the quantum of awards and/or payments (within the
limits set out in the policy table above);
JJ determining the extent of vesting based on the assessment
of performance;
JJ making the appropriate adjustments required in certain
circumstances (e.g. change of control, rights issues, corporate
restructuring events and special dividends); determining “good
leaver” status for incentive plan purposes and applying the
appropriate treatment; and
JJ undertaking the annual review of weighting of performance
measures, and setting targets for the annual bonus plan and the
PSP from year to year.
If an event occurs which results in the annual bonus plan or PSP
performance conditions and/or targets being deemed no longer
appropriate by the Committee (e.g. a material acquisition or divestment),
the Committee will have the ability to adjust appropriately the measures
and/or targets and alter weightings, provided that the revised conditions
or targets are not materially less difficult to satisfy (taking account of
the relevant circumstances).
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Chemring Group PLC Annual Report and Accounts 2018
Governance Element
Purpose and link to strategy Operation
Maximum
All-employee share scheme
JJ UK employees, including
executive directors, are
JJ The UK Sharesave Plan has
JJ Participation limits are those set
standard terms
by HM Revenue & Customs from
time-to-time
Performance assessment
JJ N/A
encouraged to acquire shares
by participating in the Group’s
all-employee share plan – the
UK Sharesave Plan
Pension
JJ Provides retirement benefits
JJ Ongoing pension provision is in
JJ Legacy arrangements: 20% of
that reward sustained contribution
the form of a cash supplement,
base salary cash supplement
JJ N/A
subject to auto-enrolment in
contribution paid in lieu of
the Group’s defined
contribution scheme
occupational pension
scheme membership
JJ Longer-serving employees have
JJ New appointments: 10% of
accrued benefits under the
base salary cash supplement
Group’s defined benefit scheme,
contribution paid in lieu of
which was closed to future
accrual for the executive
directors on 6 April 2010
occupational pension
scheme membership
JJ All UK employees, including the
executive directors, are subject to
auto-enrolment into the Group’s
defined contribution scheme, with
an employer contribution of 4% of
base salary. If executives do not
opt out of this scheme, their cash
supplement will be reduced by 4%
Other benefits
JJ Provides a competitive package
JJ Main benefits currently provided
JJ Cash allowance in lieu of company
JJ N/A
of benefits that assists with
recruitment and retention
to UK executives are a car
allowance, life assurance and
private medical insurance
car of up to £25,000 per annum
JJ Other benefits will be in line with
market. The value of each benefit
JJ Executive directors are eligible
is based on the cost to the Company
for other benefits which may
and is not pre-determined
also be introduced for the wider
workforce on broadly
similar terms
JJ Any reasonable business-related
expenses (including tax thereon)
can be reimbursed if determined
to be a taxable benefit
Notes:
1. A description of how the Company intends to implement the policy set out in this
table for the forthcoming year is set out in the annual report on remuneration on
pages 89 to 91.
2. The remuneration policy for the executive directors and other senior executives
is designed with regard to the policy for employees across the Group as a whole.
However, there are some differences in the structure of the remuneration policy for
executive directors and other senior executives. In general, these differences arise
from the development of remuneration arrangements that are market-competitive
for the various categories of individuals. They also reflect the fact that, in the case
of the executive directors and other senior executives, a greater emphasis tends to
be placed on performance-related pay in the market.
3. The all-employee share plan does not have performance conditions. UK-based
executive directors are eligible to participate in the UK Sharesave Plan on the same
terms as other employees.
4. As described on page 85, the Company operates share ownership guidelines
requiring executive directors to acquire and hold a specified level of shareholding.
5. The Committee may make minor amendments to the policy set out above for regulatory,
exchange control, tax or administrative purposes or to take account of a change in
legislation, without obtaining shareholder approval for that amendment.
6. The Regulations and related investor guidance encourages companies to disclose a
cap within which each element of the directors’ remuneration policy will operate.
Where maximum amounts for elements of remuneration have been set within the
policy, these will operate simply as caps and are not indicative of any aspiration.
7. While the Committee does not consider it to form part of benefits in the normal
usage of that term, it has been advised that corporate hospitality, whether paid for
by the Company or another, and business travel for directors and in exceptional
circumstances their families, may technically come within the applicable rules, and
so the Committee expressly reserves the right for the Committee to authorise
such activities within its agreed policies (and to discharge any related tax liability).
8. The annual bonus and PSP are subject to malus and clawback provisions in the event
of misconduct, error in calculation of performance, material misstatement of results,
serious reputational damage to the Group and in the case of insolvency.
Ultimately, the payment of any bonus is entirely at the discretion of
the Committee. In conjunction with malus and clawback provisions,
the Committee has the flexibility to override formulaic outcomes
and recover and/or withhold sums. In choosing to use this discretion,
the Committee will consider the specific circumstances at the time.
Where such action is considered necessary, this will be clearly stated
in the relevant directors’ remuneration report.
Selection of performance metrics and targets
The performance-related elements of remuneration will take into
account the Group’s risk policies and systems, and will be designed
to align the senior executives’ interests with those of shareholders.
The Committee reviews the metrics used and targets set for all of
the Group’s senior executives (not just the executive directors) every
year, in order to ensure that they are aligned with the Group’s strategy
and to ensure an appropriate level of consistency of arrangements
amongst the senior executive team. All financial targets will (where
appropriate) be set on a sliding scale. Non-financial targets are set
based on individual and management team responsibilities.
The annual bonus plan performance metrics include a mix of financial
targets and non-financial objectives, reflecting the key annual priorities
of the Group. The financial metrics determine the majority of the bonus
and normally include operating cash flow – a key measure of the Group’s
ability to invest in the business, and a measure of profitability, which
together reflect the Group’s financial performance and are key measures
for shareholders. For the 2019 financial year, the measure of profitability
will be underlying earnings per share. The non-financial objectives
agreed on an annual basis will be measurable and based on individual
and/or team performance, and will be consistent with the achievement
of the Group’s longer-term goals.
Chemring Group PLC Annual Report and Accounts 2018
71
OverviewStrategic reportGovernanceFinancial statementsOther information Directors’ remuneration report continued
Part A – remuneration policy continued
Selection of performance metrics and targets continued
The Committee has previously applied total shareholder return (“TSR”) and earnings per share (“EPS”) performance conditions to awards made
under the PSP. EPS is a measure of the Group’s overall financial success and TSR provides an external assessment of the Company’s performance
against a peer group. TSR also aligns the rewards received by executives with the returns received by shareholders. Other performance measures,
such as capital efficiency, are also considered important within the business and may be considered appropriate for inclusion in the PSP by the
Committee. Details of the specific targets applied to 2018 awards and those to be made in 2019 are set out on pages 82 and 90-91 respectively.
The Committee will review the choice and relative balance of performance measures and the appropriateness of performance targets prior to
each grant of awards under the PSP. Financial targets are reset prior to each grant, following a review of internal and external expectations of
growth for the Group, and are based on underlying performance assessment. Any TSR comparator group is reviewed prior to each grant to
ensure it remains as appropriate as possible, recognising the small size of the UK-listed defence company sector and the individual characteristics
of each company. The Committee retains discretion to set different targets for future awards, providing that, in the opinion of the Committee,
the new targets are no less challenging in light of the prevailing circumstances than those set previously. If substantially different targets to those
used previously are proposed, major shareholders will be consulted.
How the executive directors’ remuneration policy relates to the wider Group
In addition to determining the remuneration arrangements for the executive directors, the Committee considers and approves the base salaries
for nine other non-US senior executives, and reviews salaries for four US-based senior executives. The Committee also receives information
on general pay levels and policies across the Group. The Committee, therefore, has due regard to salary levels across the Group in applying
its remuneration policy. However, reflecting standard industry practice, the Committee has not previously consulted directly with employees in
relation to the design and operation of the executive remuneration policy, although this is something the Committee will revisit during the 2019
financial year in accordance with the UK Corporate Governance Code.
The remuneration policy described above provides an overview of the structure that operates for the most senior executives in the Group.
Lower aggregate incentive quanta are applied at below executive level, with levels driven by market comparatives and the impact of the role.
Employees are provided with a competitive package of benefits, which typically includes participation in the Group’s defined contribution
pension arrangements.
Long-term incentives are provided to the most senior executives and those identified as having the greatest potential to influence performance
within the Group. However, in order to encourage wider employee share ownership, the Company also operates a Sharesave Plan in the UK,
in which all UK employees are eligible to participate on completion of six months’ service. At the end of the financial year, 12% of our employees
participated in one of our share incentives schemes.
How shareholders’ views are taken into account
The Remuneration Committee considers shareholder feedback received on the directors’ remuneration report each year and guidance from
shareholder representative bodies more generally. Shareholders’ views are key inputs when shaping remuneration policy, with the Company’s
major shareholders being consulted in advance in connection with proposed changes to policy.
In relation to the formulation of this proposed pay policy, shareholders’ views were sought at an early opportunity. Feedback was supportive of
the changes being made and no substantial changes were considered necessary as a result. More general comments on the policy structure and
implementation were considered by the Remuneration Committee and will be kept under review.
Legacy arrangements
For the avoidance of doubt, authority is given to the Company to honour any commitments entered into with current or former directors
(such as the payment of a pension or the unwinding of legacy share schemes) permitted under the current policy or which have been disclosed
to shareholders in previous directors’ remuneration reports. Details of any payments to former directors will be set out in the annual report
on remuneration as they arise.
External appointments
The Company’s policy is to permit an executive director to serve as a non-executive director elsewhere when this does not conflict with the
individual’s duties to the Company, and where an executive director takes such a role they may be entitled to retain any fees which they earn
from that appointment. The executive directors do not currently have any external appointments for which they receive fees.
72
Chemring Group PLC Annual Report and Accounts 2018
Governance Potential remuneration scenarios for executive directors
The chart below details the hypothetical composition of each executive director’s remuneration package and how it could vary at different levels
of performance under the policy set out above.
£2,500,000
£2,000,000
£1,500,000
£1,999,500
16%
£1,677,000
38%
32%
£1,503,406
£1,253,563
17%
Fixed pay
PSP
Annual bonus
PSP with share
price growth
£1,000,000
£924,500
£500,000
£495,500
17%
29%
32%
27%
£420,750
100%
54%
30%
25%
100%
£712,234
18%
23%
59%
40%
33%
27%
33%
22%
28%
£0
Minimum
On-target
Maximum
Maximum +
share price
growth
Minimum
On-target
Maximum
Maximum +
share price
growth
£812,766
£973,461
17%
£277,113
£464,592
17%
23%
100%
60%
40%
26%
34%
Minimum
On-target
Maximum
33%
22%
28%
Maximum +
share price
growth
Group Chief Executive
Group Finance Director
Group Legal Director and Company Secretary
Assumptions:
1. Minimum = fixed pay only (2018 salary as at 1 November 2018 plus benefits plus pension cash supplement).
On target = fixed pay plus target annual bonus of 62.5% of salary for the Group Chief Executive and 50% for the other executive directors plus target PSP awards of 37.5%
of salary for the Group Chief Executive and the other executive directors.
Maximum = fixed pay plus maximum annual bonus of 125% of salary for the Group Chief Executive and 100% for the other executive directors plus maximum PSP awards
of 150% of salary for the Group Chief Executive and the other executive directors.
Maximum + share price growth = as maximum above, but with the value of the PSP awards increased by 50% to reflect potential share price growth.
2. The PSP awards section of the bars is shaded, as these awards are subject to performance in future years and cannot ordinarily vest until three years after grant.
3. Salary levels (on which other elements of the packages are calculated) are based on those applying from 1 January 2019. Note that Sarah Ellard’s remuneration reflects
her current contractual office-based hours, and may be increased or decreased pro-rata should these change in future.
4. The value of taxable benefits is based on an estimated cost of £21,500 for Michael Ord, £21,000 for Andrew Lewis and £20,000 for Sarah Ellard.
5. Pension provision is 10% of salary for Michael Ord and 20% of salary for Andrew Lewis and Sarah Ellard.
6. The executive directors may participate in all-employee share schemes on the same basis as other employees. The value that may be received under these schemes is subject
to tax-approved limits. For simplicity, the value that may be received from participating in these schemes has been excluded from the above chart.
Policy on payments for loss of office
All new executive directors appointed will have service contracts which are terminable on a maximum of twelve months’ notice. Provisions
permitting the Company to make any termination payments by instalments, and requiring directors to mitigate their loss in such circumstances,
will be included in each contract. The Remuneration Committee will exercise discretion in determining whether termination payments should
be paid by instalments, taking account of the reason for the departure of the director and their prior performance. Other than in gross misconduct
situations, the Company would expect to honour the contractual entitlements of terminated directors.
Other than in certain “good leaver” circumstances (including, but not limited to, redundancy, ill-health or retirement), no bonus would be payable
under the annual bonus plan unless the individual remains employed and is not under notice at the payment date. Any bonus paid to a “good leaver”
would be based on an assessment of their individual and the Company’s performance over the period, and would normally be pro-rated for the
proportion of the year worked.
Deferred bonus share awards will also normally lapse on cessation of employment, unless the executive director is deemed to be a “good leaver”
by the Remuneration Committee, as referred to above, in which case they would vest in full.
With regards to long-term incentive awards, the PSP rules provide that other than in certain “good leaver” circumstances, awards lapse on
cessation of employment. Where an individual is a “good leaver”, the Remuneration Committee’s policy for PSP awards is normally to permit
awards to remain outstanding until the end of the original performance period, when a pro-rata reduction will be made to take account of the
proportion of the vesting period that lapsed prior to termination of employment, although the Committee has the discretion to partly or completely
disapply pro-rating in exceptional circumstances. The Committee has discretion to deem an individual to be a “good leaver”. In doing so, it will
take account of the reason for their departure and the performance of the individual. The holding period which will apply to awards made from
2019 will normally apply even for “good leavers.”
The Committee will have authority to pay any statutory entitlements and settle claims against the Company (e.g. for unfair dismissal, discrimination
or whistleblowing) that arise on termination. The Committee may also authorise the provision of outplacement services and settle legal fees
where considered appropriate.
Chemring Group PLC Annual Report and Accounts 2018
73
OverviewStrategic reportGovernanceFinancial statementsOther information Directors’ remuneration report continued
Part A – remuneration policy continued
Executive directors’ service agreements and loss of office payments
The current executive directors have rolling service contracts, details of which are summarised in the table below:
Provision
Detailed terms
Contract dates
Michael Ord – 30 April 2018 (effective 1 June 2018)
Andrew Lewis – 12 December 2016 (effective 9 January 2017)
Sarah Ellard – 2 November 2011 (effective 7 October 2011)
Notice period
Twelve months from both the Company and from the executive
Termination payments
Contracts may be terminated without notice by the payment of a sum equal to the sum of salary due for
the unexpired notice period plus the fair value of any contractual benefits (including pension)
Payments may be made in instalments and in these circumstances, there is a requirement to mitigate loss
The Company’s policy on service agreements reflects the approach described above (e.g. notice periods will normally be twelve months or less).
The executive directors’ service contracts are available for inspection at the Company’s registered office.
Recruitment of executive directors
Salaries for new hires (including internal promotions) will be set to reflect their skills and experience, the Company’s intended pay positioning, and
the market rate for the applicable role.
Where it is appropriate to offer a below-market salary initially, the Committee has the discretion to allow higher phased salary increases over a
period of time for newly-appointed directors, even though this may involve increases in excess of the rate for the wider workforce and inflation.
Benefits will be provided in line with those offered to other executive directors, taking account of local market practice, with relocation expenses
or arrangements provided if necessary. Tax equalisation may also be considered if an executive is adversely affected by taxation due to their
employment with the Company. Legal fees and other costs incurred by the individual may also be paid by the Company.
The aggregate incentive opportunity offered to new recruits will normally be no higher than that offered under the existing incentive plans to the
incumbent executive directors. Different performance measures and targets may be set initially for the annual bonus plan, taking into account the
responsibilities of the individual and the point of the financial year at which they join. A Performance Share Plan award may be granted shortly
following appointment (assuming the Company is not in a close period). Any incentive quantum offered above the limits set out in the existing
incentive plans and policy will (save as set out below) be contingent on the Company receiving shareholder approval for an amendment to its
approved policy at its next general meeting.
Current entitlements of a new joiner from their previous employer that are forfeited (e.g. benefits, bonus and share schemes) may be bought out
on terms that take due account of the nature of the entitlements in terms of (for example) time horizon, fair value and performance conditions.
The Group’s existing incentive arrangements will be used to the extent possible, although awards may also be granted outside of these arrangements
if necessary, and as permitted under the Listing Rules, reflecting the above parameters. Such awards will not, in accordance with the Regulations,
be subject to the limits of the remuneration policy for incentive pay.
In the case of an internal hire, any outstanding variable pay awarded in relation to the previous role will be allowed to pay out according to its
terms of grant (adjusted as relevant to take into account the Board appointment).
74
Chemring Group PLC Annual Report and Accounts 2018
Governance Policy in respect of the Chairman and non-executive directors
Element
The Chairman’s and
non-executive
directors’ fees
Purpose and
link to strategy
Operation
Maximum
Performance
assessment
Takes account of
recognised practice
and set at a level
that is sufficient to
attract and retain
high-calibre
non-executive
directors
JJ The Chairman is paid a single fee for all his
JJ N/A
JJ N/A
responsibilities. The non-executives directors are
paid a basic fee. The Chairs of the Remuneration
Committee and the Audit Committee each receive
additional fees to reflect their extra responsibilities
JJ When reviewing fee levels, account is taken of
market movements in non-executive director
fees, Board Committee responsibilities, ongoing
time commitments, the general economic
environment and the level of increases awarded
to the wider workforce
JJ Fee increases, if applicable, are normally effective
from April of each year
JJ Non-executive directors do not participate in any
pension, bonus or share incentive plans
JJ Non-executive directors may be compensated for
travel, accommodation or hospitality-related expenses
in connection with their roles and any tax thereon
JJ In exceptional circumstances, additional fees may
be paid where there is a substantial increase in the
temporary time commitment required of
non-executive directors
The Chairman’s and non-executive directors’ letters of appointment
Non-executive directors do not receive compensation for loss of office but are appointed for a fixed term of three years, renewable for further
three-year terms if both parties agree and subject to annual re-election by shareholders. The Chairman’s appointment may be terminated on six
months’ notice by either party and the other non-executive directors’ appointments may be terminated on three months’ notice by either party.
The non-executive directors’ letters of appointment are available for inspection at the Company’s registered office.
The following table provides further details of the terms of appointment for the Chairman and the non-executive directors who served during
the year:
Name
Carl-Peter Forster
Andrew Davies
Nigel Young
Date original term commenced
Date current term commenced
1 May 2016
17 May 2016
1 May 2013
1 May 2016
17 May 2016
1 May 2016
Expected expiry date
of current term
30 April 2019
16 May 2019
30 April 2019
Daniel Dayan also served as a non-executive director of the Company throughout the year but stepped down from the Board
on 30 November 2018. His original term commenced on 7 March 2016.
Stephen King joined the Board as a non-executive director on 1 December 2018. His initial three-year term is expected to expire
on 30 November 2021.
Chemring Group PLC Annual Report and Accounts 2018
75
OverviewStrategic reportGovernanceFinancial statementsOther information Directors’ remuneration report continued
Part B – annual report on remuneration
This part of the report has been prepared in accordance with Part 3
of Schedule 8 to The Large and Medium-sized Companies and Groups
(Accounts and Reports) Regulations 2008 (as amended), and 9.8.6R
of the Listing Rules. The annual report on remuneration will be put
to an advisory shareholder vote at the 2019 Annual General Meeting.
The information on pages 77 to 86 has been audited.
The Remuneration Committee and its advisers
Members of the Remuneration Committee
The following individuals were members of the Remuneration
Committee during the year:
Name
From
Andrew Davies (Chairman)
17 May 2016
Carl-Peter Forster
1 May 2016
To
Present
Present
Principal activities of the Remuneration Committee during the year
November 2017
JJ Review of 2018 incentive arrangements
JJ Consideration of salary levels for the executive directors and the senior
management team
JJ Approval of financial targets and personal objectives for the 2018 annual
bonus plan
January 2018
JJ Consideration of bonus outturn for the 2017 financial year
JJ Approval of vesting of deferred share awards and Performance Share
Plan awards
JJ Grant of 2018 awards under the Performance Share Plan
JJ Approval of the directors’ remuneration report for 2017
Daniel Dayan
Nigel Young
7 March 2016 30 November 2018
1 May 2013
Present
March 2018
Daniel Dayan stepped down as Chairman of the Remuneration Committee
on 7 August 2018 and Andrew Davies was appointed Chairman on
8 August 2018.
JJ Market update and initial consideration of future policy
April 2018
Stephen King became a member of the Remuneration Committee on
1 December 2018.
JJ Approval of retirement arrangements for Michael Flowers and
remuneration package for Michael Ord
The Group Legal Director & Company Secretary acts as secretary
to the Committee, and the Group Chief Executive and the Group
Finance Director attend meetings by invitation, but no executive
director or other employee is present during discussions relating
directly to their own remuneration.
Meetings
The Remuneration Committee met for two scheduled meetings
during the year. In addition, three additional ad hoc meetings were
convened to deal with matters arising between scheduled meetings.
Details of the attendance of the Committee members at meetings are
set out on page 57 of the corporate governance report.
July 2018
JJ Initial shareholder consultation on proposed new directors’
remuneration policy
Advisers
During the year, FIT Remuneration Consultants LLP (“FIT”) were
retained by the Committee to advise on remuneration and incentive
plan related matters. FIT is a signatory to the Remuneration Consultants’
Group Code of Conduct. The Committee has reviewed the nature of
the services provided by FIT and is satisfied that no conflict of interest
exists in the provision of these services. The Company received no
other services from FIT during the year. The total fees paid to FIT in
respect of services to the Committee during the year were £36,903
(2017: £45,562). Fees were determined based on the scope and nature
of the projects undertaken for the Committee. The Company also
received advice from FIT on the renewal of the UK Sharesave Plan
during the year.
The Committee reviews the performance and independence of its
advisers on an annual basis.
The Committee consults internally with the Group Chief Executive
(Michael Ord) and the Group Legal Director & Company Secretary
(Sarah Ellard).
76
Chemring Group PLC Annual Report and Accounts 2018
Governance Audited
Directors’ emoluments
The emoluments of all the directors who served during the year are shown below:
Executives
Michael Flowers6
Michael Ord7
Andrew Lewis8
Sarah Ellard
Non-executives
Carl-Peter Forster
Andrew Davies9
Daniel Dayan10
Nigel Young11
Total remuneration
Salaries/
fees
£’000
Taxable
benefits 1
£’000
Bonus
(cash and
deferred
shares) 2
£’000
Deferred
share
awards 4
£’000
PSP 3
£’000
Pension
benefits 5
£’000
Total
£’000
455
415
143
—
332
265
213
208
200
200
57
55
63
65
65
66
1,528
1,274
23
23
7
—
21
16
20
20
—
—
—
—
—
—
—
—
71
59
—
310
—
—
—
193
—
121
—
—
—
—
—
—
—
—
—
624
209
—
—
—
—
—
115
—
—
—
—
—
—
—
—
—
324
—
33
—
—
—
—
—
43
—
—
—
—
—
—
—
—
—
76
—
85
83
14
—
66
53
43
42
—
—
—
—
—
—
—
—
805
831
164
—
419
527
434
391
200
200
57
55
63
65
65
66
208
178
2,207
2,135
Year
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
Notes:
1. Comprises an annual cash allowance of £21,500 for Michael Flowers, £20,000 for Michael Ord and £19,350 for each of Andrew Lewis and Sarah Ellard; plus private medical
insurance for each of the executive directors.
2. 40% of any bonus is delivered as an award of deferred shares.
3. PSP awards granted in January 2015 vested on 26 January 2018, as reported on pages 80 and 81, and have been included in the 2018 emoluments.
4. Deferred share awards granted in part satisfaction of bonuses paid in respect of the 2014 financial year vested on 27 January 2018 and have been included in the 2018 emoluments.
5. Michael Ord receives a cash supplement of 10% of salary in lieu of occupational pension scheme membership; the other executive directors receive a cash supplement of 20% of salary.
6. Michael Flowers stepped down from the Board on 30 June 2018 but remained an employee until 31 October 2018 and continued to receive his normal salary and benefits until
that date.
7. Michael Ord joined the Board on 1 June 2018 and was appointed as Group Chief Executive on 1 July 2017.
8. Andrew Lewis joined the Company on 9 January 2017 and was appointed to the Board on 19 January 2017.
9. Andrew Davies was appointed as Chairman of the Remuneration Committee on 8 August 2018 and received an additional fee of £10,000 per annum, included in the above
figures on a pro-rated basis, with effect from that date.
10. Daniel Dayan received an additional fee of £10,000 per annum, included in the above figures on a pro-rated basis, in respect of his Chairmanship of the Remuneration Committee
up until 7 August 2018.
11. Nigel Young receives an additional fee of £10,000 per annum, included in the figures above, in respect of his Chairmanship of the Audit Committee. This fee was increased from
£8,000 to £10,000 per annum with effect from 7 March 2016. However, the increased payment was not processed until January 2017 and the back-dated sum paid is therefore
included in the 2017 figures.
Amounts shown above in the salaries and fees column relate to base salary in the case of executive directors and fees in the case of non-executive directors.
Chemring Group PLC Annual Report and Accounts 2018
77
OverviewStrategic reportGovernanceFinancial statementsOther information Directors’ remuneration report continued
Part B – annual report on remuneration continued
Appointment of Michael Ord as Chief Executive
As noted at the time of his appointment, Michael Ord will receive the following remuneration as Chief Executive:
JJ base salary of £430,000 (with the next normal salary review effective from 1 January 2020);
JJ pension allowance of 10% of salary;
JJ annual bonus maximum of 125% of salary (with any bonus for 2018 pro-rated for period of service); and
JJ an annual PSP award of up to 150% of salary (with a one-off award of 200% of salary on joining, details of which are set out on pages 81 and 82).
Base salary and benefits paid during the year
Salaries for Michael Flowers, Andrew Lewis and Sarah Ellard were reviewed in November 2017 and a 2.5% increase, with effect from 1 January 2018,
was approved by the Committee. The salaries of the executive directors during the year were therefore as follows:
Executive
Michael Flowers1
Michael Ord2
Andrew Lewis
Sarah Ellard
Annual salary from
1 November 2017 to
31 December 2017
Annual salary from
1 January 2018 to
31 October 2018
£416,962
—
£325,000
£209,035
£427,386
£430,000
£333,125
£214,261
Notes:
1. Michael Flowers stepped down from the Board on 30 June 2018 but remained an employee until 31 October 2018 and continued to receive his normal salary and benefits until
that date.
2. Michael Ord joined the Board on 1 June 2018 and was appointed as Group Chief Executive on 1 July 2018.
Michael Flowers received a cash allowance of £21,500 per annum in lieu of a company car and Michael Ord receives a cash allowance of
£20,000 per annum. The other executive directors receive a cash allowance of £19,350 per annum. The cash allowances are reviewed every
three years and will next be reviewed in 2019.
Details of variable pay opportunity in the year
Annual bonus
In accordance with previous practice, 75% of the annual bonus opportunity for 2018 was based on financial targets (namely earnings per share
and operating cash flow), with 25% based on personal objectives. No bonus is payable in respect of the personal objectives unless the Committee
is satisfied that this is justified by the Group’s underlying performance, including inter alia levels of profitability and cash flow, as well as health and
safety performance.
The Committee has consistently set challenging targets for the achievement of maximum bonuses. The financial targets for the 2018 bonus plan,
compared with actual performance, were as follows:
Metric
Earnings per share
Operating cash flow
Weighting
(75% of overall bonus)
50%
50%
Performance
Threshold
Target
Maximum
Threshold
Target
Maximum
Target
12.3p
12.9p
14.2p
£64.3m
£71.5m
£75.0m
Actual
8.9p
£56.9m
78
Chemring Group PLC Annual Report and Accounts 2018
Governance The personal objectives set in respect of the 2018 bonus plan (25% of overall bonus) are set out below:
Executive
Personal objectives
Key aspects of performance against individual objectives
Michael Ord
JJ Health and safety performance
JJ Fatal incident during the year negated all performance targets
Payout
(as % of
salary)
0%
JJ Operational performance
improvement
JJ Group-wide safety culture review instigated, and new health and safety strategy formulated
JJ Operating margin and inventory improvements not achieved following the Chemring
Countermeasures UK incident
JJ Organisational performance
improvement
JJ Strategy and business
development:
Countermeasures
JJ ERP system upgrade plan established and commenced Group-wide roll-out
JJ Completed integration of Group-wide customer relationship management system
JJ Leadership development and cultural change programme initiated
JJ Succession plans under development for all leadership positions
JJ Management teams strengthened within key businesses
JJ Commenced implementation of Kilgore site transformation project
JJ Progressed development of F-35 flare supply strategy, with receipt of critical orders by
Kilgore and Alloy Surfaces
JJ Strategy and business
JJ Down-selected on AVCAD programme
development: Sensors and
Electronics
JJ Strategy and business
development: Energetics
JJ Transferred wire detection technology to the US and secured HMDS contracts
JJ Commenced development of next-generation electronic warfare technology
JJ Substantially completed closure of Torrance facility
JJ Implemented strategic plan for Chemring Nobel site
Andrew Lewis
JJ Health and safety performance
JJ Fatal incident during the year negated all performance targets
0%
JJ Operational performance
improvement
JJ Group-wide safety culture review instigated, and new health and safety strategy formulated
JJ Operating margin and inventory improvements not achieved following the Chemring
Countermeasures UK incident
JJ Organisational performance
improvement
JJ ERP system upgrade plan established and commenced Group-wide roll-out
JJ New cyber-security standards adopted in the UK and the US
JJ Established new Group intranet
JJ Leadership development and cultural change programme initiated
JJ Succession plans under development for all leadership positions
JJ Management teams strengthened within key businesses
JJ Refinanced Group bank facilities
JJ Strategy development: financial
and corporate management
JJ Strategy and business
development
JJ Completed external audit tender process
JJ Incorporated updated financial policies and procedures within the new Operational Framework
JJ Commenced implementation of Kilgore site transformation project
JJ Down-selected on AVCAD programme
JJ Transferred wire detection technology to the US and secured HMDS contracts
JJ Implemented plan for closure of Santa Clarita site
JJ Progressed divestment process for Chemring Defence UK
JJ Implemented strategic plan for Chemring Nobel site
Chemring Group PLC Annual Report and Accounts 2018
79
OverviewStrategic reportGovernanceFinancial statementsOther information Directors’ remuneration report continued
Part B – annual report on remuneration continued
Details of variable pay opportunity in the year continued
Annual bonus continued
Executive
Personal objectives
Key aspects of performance against individual objectives
Sarah Ellard
JJ Health and safety performance
JJ Fatal incident during the year negated all performance targets
Payout
(as % of
salary)
0%
JJ Operational performance
improvement
JJ Group-wide safety culture review instigated, and new health and safety strategy formulated
JJ Legal and commercial improvement plan adopted
JJ Contract risk management training programme established
JJ Extensive new legal and compliance policies and procedures incorporated within the
Operational Framework
JJ Updated online training programmes established for anti-corruption, data protection
and competition law compliance
JJ Organisational performance
JJ Leadership development and cultural change programme initiated
improvement
JJ Succession plans under development for all leadership positions
JJ Strategy development: financial
and corporate management
JJ Strategy and business
development
JJ Management teams strengthened within key businesses
JJ Refinanced Group bank facilities
JJ Adopted de-risking strategy for UK legacy defined benefit pension scheme
JJ Introduced salary sacrifice for UK pension arrangements
JJ Implemented GDPR compliance regime
JJ Commenced implementation of Kilgore site transformation project
JJ Down-selected on AVCAD programme
JJ Transferred wire detection technology to the US and secured HMDS contracts
JJ Implemented plan for closure of Santa Clarita site
JJ Progressed divestment process for Chemring Defence UK
JJ Implemented strategic plan for Chemring Nobel site
No bonuses are payable to the executive directors under the 2018 bonus plan, as the financial targets were not met.
Performance Share Plan
Vesting of 2015 PSP awards
The PSP awards granted on 26 January 2015 were made subject to the following performance conditions:
Measure
Total compound earnings per share growth per annum over three financial years
(50% of award)
Threshold vesting
Full vesting
5% p.a.
(25% vests)
10% p.a.
(100% vests)
Rank of the Company’s total shareholder return against the total shareholder return
of the members of the comparator group (50% of award)
Median ranking
(25% vests)
Upper quartile ranking
(100% vests)
The Group’s compound earnings per share growth over the three financial years ended 31 October 2017 was 8.01% p.a., and 70.15% of the
part of the awards subject to the earnings per share measure therefore vested. The Company’s total shareholder return over the performance
period was below the median ranking of the comparator group, and no part of this element of the award vested. In total therefore, 35.075% of
the awards granted on 26 January 2015 vested on 26 January 2018.
80
Chemring Group PLC Annual Report and Accounts 2018
Governance Details of the awards granted to the executive directors on 26 January 2015 are provided below:
Executive
Michael Flowers
Sarah Ellard
Executive
Michael Flowers
Sarah Ellard
Vesting date
26 January 2018
26 January 2018
Number of
shares
at grant
261,935
143,867
Rights issue
adjustment
during 2016
37,096
20,374
Number of
shares
vested
104,885
57,607
Number of
shares
lapsed
194,146
106,634
Value of shares
vested 1
Value of accrued
dividends
Total value of
vested awards
£201,379
£110,605
£6,179
£3,394
£207,558
£113,999
Note:
1. Value based on the closing share price of 192p on 26 January 2018, which is slightly lower than the share price used to calculate the taxable value of the vested awards shown in
the directors’ emoluments table on page 77.
Vesting of 2016 PSP awards
The PSP awards granted on 25 January 2016 were made subject to the following performance conditions:
Measure
Total compound earnings per share growth per annum over four financial years
commencing 1 November 2014 (50% of award)
Rank of the Company’s total shareholder return against the total shareholder return
of the members of the comparator group over three financial years commencing
1 November 2015 (50% of award)
Threshold vesting
Full vesting
5% p.a.
(25% vests)
10% p.a.
(100% vests)
Median ranking
(25% vests)
Upper quartile ranking
(100% vests)
The Group’s compound earnings per share growth over the four financial years ended 31 October 2018 was negative and no part of the
awards subject to the earnings per share measure will therefore vest. The Company’s total shareholder return over the performance period
was below the median ranking of the comparator group, and no part of this element of the award will vest. All awards will therefore lapse on
25 January 2019.
Details of the awards granted to the executive directors on 25 January 2016 are provided below:
Executive
Michael Flowers
Sarah Ellard
Vesting date
25 January 2019
25 January 2019
Number of
shares
at grant
388,516
194,774
Rights issue
adjustment
during 2016
55,022
27,584
Number of
shares
to vest
Nil
Nil
Number of
shares
to lapse
443,538
222,358
Value of
dividends
Nil
Nil
PSP awards granted in the year
The following conditional awards of shares were granted to the executive directors under the PSP during the year:
Executive
Date
of grant
Value
of award
Closing
share price
on date
of grant
Number of
conditional
shares
awarded
Face
value
% that
vests at
threshold
Vesting
determined by
Michael Flowers
19 January 2018 1
150% of salary
Michael Ord
26 June 2018 2
200% of salary
Andrew Lewis
19 January 2018
150% of salary
Sarah Ellard
19 January 2018
150% of salary
190.8p
218.0p
190.8p
190.8p
340,999
£650,626
394,495
£860,000
265,791
170,952
£507,129
£326,176
25%
25%
25%
25%
EPS growth (50%) and
relative TSR
performance (50%),
as detailed below
Notes:
1. The award granted to Michael Flowers lapsed during the year in accordance with the agreement reached with Mr Flowers on his retirement as Group Chief Executive.
2. Michael Ord was granted a one-off award on appointment of 200% of salary. This represents a “normal” award of 150% of salary and an additional 50% of salary which takes
into account the value of remuneration he forfeited from his previous employer. The whole award is subject to the same stretching performance conditions and vesting period
(i.e. three years). The Committee believes that such an award was appropriate to secure the services of a high-calibre executive. Mr Ord’s award is subject to a two-year holding
period post-vesting.
Chemring Group PLC Annual Report and Accounts 2018
81
OverviewStrategic reportGovernanceFinancial statementsOther information Directors’ remuneration report continued
Part B – annual report on remuneration continued
Details of variable pay opportunity in the year continued
Performance Share Plan continued
PSP awards granted in the year continued
Awards under the PSP are normally granted in January of each year, following the release of the results for the preceding financial year, and
award levels are calculated based on the closing share price on the trading day immediately preceding the date of grant. Michael Ord’s award
was granted following the release of the interim results.
The performance conditions applying to the awards made in January 2018 are based as to one half of each award on the Company’s compound
earnings per share growth over three financial years commencing 1 November 2017, and as to the other half of each award on the Company’s
total shareholder return performance over the same three-year performance period. The award made to Mr Ord in June 2018 is also subject to
the same performance conditions, save that compound earnings per share growth and total shareholder return performance will be measured
over the three-year performance period commencing 1 May 2018 and ending on 30 April 2021.
The earnings per share performance condition will be measured as follows:
Total compound earnings per share growth over the three-year performance period
% of earnings per share part that may vest
Less than 5% p.a.
5% p.a.
Between 5% p.a. and 10% p.a.
10% p.a. or more
0%
25%
On a straight-line basis between 25% and 100%
100%
Note:
1. Earnings per share is calculated on an underlying, fully-diluted and normalised basis, as specified by the Committee prior to grant.
The total shareholder return performance condition will be measured as follows:
Rank of the Company’s total shareholder return against the
total shareholder return of the members of the comparator group
Below median
Median
Between median and upper quartile
Upper quartile or above
% of total shareholder return part that may vest
0%
25%
On a straight-line basis between 25% and 100%
100%
The comparator group for the 2018 awards comprises BAE Systems, Cobham, Cohort, Esterline Technologies, FLIR Systems, L3 Technologies,
Leonardo Finmeccanica, QinetiQ Group, Raytheon, Rheinmetall and Ultra Electronics.
Performance conditions for outstanding awards
Awards made on
24 March 2017
Total compound earnings per share growth
per annum over three financial years (50%
of award) 1
Michael Flowers
Andrew Lewis
Sarah Ellard
150% of salary
5% p.a.
(25% vests)
10% p.a.
(100% vests)
Measure
Director
Awards to
executive directors
Threshold
vesting
Full
vesting
Rank of the Company’s total shareholder
return against the total shareholder return
of the members of the comparator group
over three financial years (50% of award)
Median ranking
(25% vests)
Upper quartile
ranking
(100% vests)
Note:
1. Earnings per share is calculated on an underlying, fully-diluted and normalised basis, as specified by the Committee prior to grant.
82
Chemring Group PLC Annual Report and Accounts 2018
Governance Summary of outstanding PSP awards
Executive
Michael Flowers
Michael Ord
Andrew Lewis
Sarah Ellard
At
1 November
2017
299,031
443,538
363,629
—
1,106,198
—
—
283,430
—
283,430
164,241
222,358
182,297
—
568,896
Number of shares under award
Awarded
during
the year
—
—
—
340,999
340,999
394,495
394,495
—
265,791
265,791
—
—
—
170,952
Lapsed
during
the year
(194,146)
—
—
(340,999)3
Vested
during
the year 1
(104,885)
—
—
—
At
31 October
2018
Date of
vesting
Closing
share price on
date of grant (p) 4
— 26 January 2018
443,538 2 25 January 2019
24 March 2020
363,629
— 19 January 2021
230.5
138.4
195.7
190.8
(535,145)
(104,885)
—
—
—
—
—
(106,634)
—
—
—
—
—
—
—
—
(57,607)
—
—
—
807,167
394,495
394,495
26 June 2021
218.0
283,430
265,791
24 March 2020
19 January 2021
549,221
— 26 January 2018
222,358 2 25 January 2019
24 March 2020
182,297
19 January 2021
170,952
195.7
190.8
230.5
138.4
195.7
190.8
170,952
(106,634)
(57,607)
575,607
Notes:
1. Awards partially vested on 26 January 2018, as detailed above.
2. As explained above, these awards will lapse on 25 January 2019 due to the performance conditions not being met.
3. The award granted to Michael Flowers lapsed during the year in accordance with the agreement reached with Mr Flowers on his retirement as Group Chief Executive.
4. Pre rights issue grant share price, where applicable.
Sharesave awards
Summary of outstanding Sharesave awards
Executive
Michael Flowers
Michael Ord
Andrew Lewis
Sarah Ellard
At
1 November
2017
17,142
17,142
—
—
12,162
12,162
7,297
7,297
Awarded
during
the year
—
—
16,853
16,853
—
—
—
—
Number of shares under award
Lapsed
during
the year
Exercised
during
the year
At
31 October
2018
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
17,142
17,142
16,853
16,853
12,162
12,162
7,297
7,297
Exercise
price
105p
178p
148p
148p
Exercise
date
1 October 2019–
31 March 2020
1 October 2023–
31 March 2024
1 October 2020–
31 March 2021
1 October 2020–
31 March 2021
Chemring Group PLC Annual Report and Accounts 2018
83
OverviewStrategic reportGovernanceFinancial statementsOther information Directors’ remuneration report continued
Part B – annual report on remuneration continued
Details of variable pay opportunity in the year continued
Deferred share awards
Vesting of deferred share awards
The deferred share awards granted to the executive directors in part satisfaction of their annual bonuses for the year ended 31 October 2014
vested in full on 27 January 2018 as detailed below:
Executive
Michael Flowers
Sarah Ellard
Number of shares
subject to
deferred award
at grant
14,606
18,973
Vesting date
27 January 2018
27 January 2018
Rights issue
adjustment
during 2016
2,068
2,687
Number of
shares
vested
16,674
21,660
Value of
accrued dividends
paid on
vested
shares
£982
£1,276
Number of
shares
lapsed
—
—
Summary of outstanding deferred share awards
Number of shares under award
Executive
Michael Flowers
Andrew Lewis
Sarah Ellard
At
1 November
2017 1
16,674
80,633
—
97,307
—
—
21,660
32,944
—
54,604
Awarded
during
the year
—
—
65,981
65,981
41,143
41,143
—
—
25,795
25,795
Lapsed
during
the year
—
—
—
—
—
—
—
—
—
—
Vested
during
the year
(16,674)
—
—
At
31 October
2018
Date of
vesting
Closing
share price on
date of grant (p) 2
— 27 January 2018
19 January 2020
18 January 2021
80,633
65,981
226.5
172.0
188.0
(16,674)
146,614
—
—
(21,660)
—
—
(21,660)
41,143
18 January 2021
188.0
41,143
— 27 January 2018
19 January 2020
18 January 2021
32,944
25,795
58,739
226.5
172.0
188.0
Notes:
1. Number of shares subject to awards, after 2016 rights issue adjustment.
2. Pre-rights issue grant share price, where applicable.
84
Chemring Group PLC Annual Report and Accounts 2018
Governance Directors’ shareholdings
Shareholding guidelines apply to executive directors and other participants in the PSP. Executive directors are expected to build-up and maintain
a shareholding in the Company equivalent to 200% of basic salary, by retaining at least 50% of the after-tax gain on vested PSP awards until such
time as the guidelines have been met. Other participants in the PSP are expected to retain a shareholding equivalent to 25% to 50% of their
basic salary.
The interests of the directors in the ordinary shares of the Company at 31 October 2018 are shown below. All are beneficial holdings.
Executive
Michael Ord
Andrew Lewis
Sarah Ellard
Carl-Peter Forster
Andrew Davies
Daniel Dayan
Nigel Young
Legally
owned
(number
of shares)
—
8,720
77,658
20,000
—
60,500
—
Value of
legally
owned
shares as %
of salary 1
Guideline
met
—
5%
66%
—
—
—
—
No
No
No
—
—
—
—
Unvested and subject to performance
conditions under the PSP
2016
award
—
2017
award
2018
award
Total at
31 October
2018
Deferred
bonus share
awards
— 394,495
394,495
— 283,430
265,791
549,221
222,358
182,297
170,952
575,607
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
41,143
58,739
—
—
—
—
Sharesave
options
16,853
12,162
7,297
—
—
—
—
Note:
1. Based on the number of shares legally owned, prevailing base salary and share price of 182.4p at 31 October 2018.
The directors’ share interests at 31 October 2018 include shares held by the directors’ connected persons, if any, as required by the Regulations.
There have been no changes to the directors’ interests in shares since 31 October 2018.
Pension
The following table sets out the pension benefits earned by the executive directors. Only Sarah Ellard previously accrued benefits during her
former membership of the Chemring Group Staff Pension Scheme.
Cash in lieu of
pension
contributions
£’000
Total benefit accrued at
31 October 2017
Pension
£’000 p.a.
Cash
£’000
Transfer value
of accrued
benefit at
31 October
2017
£’000
Total benefit accrued at
31 October 2018
Pension
£’000 p.a.
Cash
£’000
Transfer value
of accrued
benefit at
31 October
2018
£’000
Increase in
transfer value
during year
(less members’
contributions)
£’000
Value of
benefit
for single
figure
£’000
85
14
66
43
—
—
—
24
—
—
—
72
—
—
—
461
—
—
—
24
—
—
—
72
—
—
—
461
—
—
—
—
85
14
66
43
Executive
Michael Flowers
Michael Ord
Andrew Lewis
Sarah Ellard
Notes:
1. Michael Ord receives a 10% cash supplement in lieu of pension and the other executive directors receive a 20% cash supplement.
2. Transfer values represent liabilities of the applicable scheme, and do not represent sums paid to individuals.
3. Transfer values have been calculated in accordance with the Occupational Pension Scheme (Transfer Value) Regulations 1996.
4. Sarah Ellard left pensionable service on 6 April 2010 and therefore has not accrued additional pension over the year. The accrued benefits shown are the benefits at the date of exit.
5. The scheme provided pension at a rate of 1/80th of final pensionable salary plus a cash lump sum of 3/80ths for each year of membership. Final pensionable salary was capped at
the HMRC notional earnings cap, and the scheme assumed a normal retirement age of 65. Early retirement is permissible from age 55 but accrued benefits are reduced accordingly
using the early retirement factors in force at the date of early retirement.
Chemring Group PLC Annual Report and Accounts 2018
85
OverviewStrategic reportGovernanceFinancial statementsOther information Directors’ remuneration report continued
Part B – annual report on remuneration continued
Loss of office payments
The principles governing compensation for loss of office are set out on page 73.
Payments to past directors
As announced in May 2018, Michael Flowers stepped down as Chief Executive and as a director on 30 June 2018, although remained an
employee until 31 October 2018 to provide transition support to the incoming Chief Executive.
Mr Flowers continued to receive his salary and benefits in the usual way until 31 October 2018 and was eligible for a bonus for the full financial
year ended 31 October 2018, subject to the Remuneration Committee’s assessment of his performance against the relevant performance
measures and targets made at the same time as for other senior executives, after the end of the 2018 financial year. No bonuses are payable in
respect of the 2018 financial year.
Mr Flowers’ notice period started on 1 May 2018. Following cessation of his employment with the Company as of 31 October 2018, he was
paid a lump sum equivalent to his salary-in-lieu and the fair value for contractual benefits for the balance of his remaining six months’ notice
period. Further, although Mr Flowers has been released from his obligation to mitigate his loss given that he has retired, he will be required to
repay any sums earned from equivalent employment during what would have been the remainder of his notice period to 30 April 2019.
Mr Flowers is being treated as a good leaver for the purposes of the Group’s incentive schemes. Deferred bonuses that are payable in shares
will be released in line with the normal vesting timetable. Further, in respect of the PSP, it was agreed, in accordance with the rules of the plan,
that Mr Flowers would remain eligible to receive the outstanding PSP shares awarded in 2016 and in 2017 but awards made in 2018 would
lapse. As a result of the performance conditions not being met, the PSP awards made in 2016 will now lapse.
The Remuneration Committee chose to exercise limited discretion to disapply time pro-rating in respect of Mr Flowers’ 2017 PSP award but
instead applied a more stringent approach to his 2018 award which resulted in its lapsing in full. The table below shows that the overall impact
of such action was not intended to benefit Mr Flowers:
Award
2016 PSP
2017 PSP
2018 PSP
Total
Default formulaic approach1
Following Remuneration Committee discretion
Time pro-rating = 3/3
No impact as performance criteria
have not been met and award will lapse
Time pro-rating = 3/3
No impact as performance criteria
have not been met and award will lapse
Time pro-rating = 2/3
Time pro-rating = 1/3
Time pro-rating = 6/9
Time pro-rating = 3/3
Time pro-rating = 0/3 i.e. the shares lapsed
Time pro-rating = 6/9
Note:
1. The default treatment under the existing plan rules is to round up time pro-rating to the next anniversary of grant.
The Committee took the view that this approach was appropriate in the circumstances as it takes account of the fact that Mr Flowers had greater
influence on the 2017 performance period compared to his contribution to the 2018 performance period (i.e. eighteen months as Chief Executive
for the 2017 award versus six months for the 2018 award). Furthermore, the decision is not expected to result in a material benefit or loss for
Mr Flowers. For the avoidance of doubt, the 2017 award remains subject to a performance assessment at the end of the original performance
period and therefore it is not certain any value will be delivered on vesting.
The post-termination restrictions set out in Mr Flowers’ service agreement remain in force.
Consistent with the arrangement reached with Mr Flowers on his initial relocation to the UK in 2012, it was agreed that he would be
reimbursed for relocation expenses of up to £10,000, assessed against receipts, on relocation from the UK.
The Group paid a contribution of £5,000 plus VAT toward Mr Flowers’ legal fees incurred in connection with the cessation of his employment,
as is permitted under the remuneration policy.
86
Chemring Group PLC Annual Report and Accounts 2018
Governance Unaudited
Total shareholder return performance graph and Chief Executive remuneration table
The following graph shows the Company’s cumulative total shareholder return over the last ten financial years relative to the FTSE 250 and
FTSE Small Cap Indexes. The FTSE Small Cap has been selected by the Committee for this comparison because it provides the most
appropriate measure of performance of listed companies of a similar size to the Company. The FTSE 250 has been shown in previous years
and has been included this year for the purpose of continuity.
TSR graph
This graph shows the value, by 31 October 2018, of £100 invested in Chemring Group PLC on 31 October 2008 compared with the value
of £100 invested in the FTSE 250 and FTSE SmallCap. The other points are the values at intervening financial year ends.
)
£
(
e
u
a
V
l
450
400
350
300
250
200
150
100
50
0
31 Oct 2008
31 Oct 2009
31 Oct 2010
31 Oct 2011
31 Oct 2012
31 Oct 2013
31 Oct 2014
31 Oct 2015
31 Oct 2016
31 Oct 2017
31 Oct 2018
Chemring
FTSE 250
FTSE SmallCap
Source: Thomson Reuters
Chief Executive’s remuneration table
The total remuneration figures for the Group Chief Executive during each of the last ten financial years are shown in the table below. Mark
Papworth replaced David Price as Group Chief Executive on 5 November 2012, Michael Flowers replaced Mark Papworth on 24 June 2014 and
Michael Ord replaced Michael Flowers on 1 July 2018.
The total remuneration figures for 2012 and 2014 include the payments for loss of office made to David Price and Mark Papworth respectively.
The figures for 2018 include a full year’s salary and benefits for Michael Flowers.
The total remuneration figure for each year includes the annual bonus based on that year’s performance and, where applicable, vested PSP
awards based on the three-year performance period ending in the relevant year. The annual bonus payout and PSP award vesting level as a
percentage of the maximum opportunity are also shown for each of these years.
David Price
Mark
Papworth/
Michael
Flowers
Mark
Papworth
Total remuneration £’000
Annual bonus
(% of maximum)
PSP awards vesting
(% of maximum)
2009
2010
2011
2012
1,309
1,391
1,239
1,325
94%
62%
0%
0%
100%
100%
100%
54.1%
2013
785
40%
0%
2014
841
50%
0%
Michael Flowers
Michael
Flowers/
Michael Ord
2015
507
0%
0%
2016
855
2017
831
68.3%
59.5%
2018
969
0%
0%
0%
35%
Chemring Group PLC Annual Report and Accounts 2018
87
OverviewStrategic reportGovernanceFinancial statementsOther information
Directors’ remuneration report continued
Part B – annual report on remuneration continued
Percentage change in the Group Chief Executive’s remuneration
The table below shows the percentage change in the Group Chief Executive’s total remuneration (excluding the value of any PSP awards and
pension benefits receivable in the year) between the 2017 and 2018 financial years, compared to that of the average for all eligible employees of
the Group.
Group Chief Executive
Average of other employees
% change from 2017 to 2018
Salary
2.4
(3.7)
Benefits
Annual bonus
0.0
1.5
(100)
(15.6)
The Committee is cognisant of the new reporting regulations, which do not come into effect for the Group until the financial year commencing
1 November 2019, which will require companies to publish ratios comparing Chief Executive pay to employee pay. Due to the change in Chief Executive
during the year, the Committee does not believe that such a number in isolation would provide meaningful analysis for the reader. The Committee
will therefore spend time during the current financial year finalising the most appropriate calculation approach and deciding what additional information
can be disclosed to provide additional context. On this basis, the Committee has agreed to publish such ratios on a voluntary basis, commencing
with the financial year ending 31 October 2019, which would still be a year earlier than is required by the regulations.
Relative importance of spend on pay
The following table shows the Company’s actual spend on pay (for all employees) relative to dividends and retained profits:
Staff costs
Dividends
Retained profits
2018
£m
129.2
8.7
7.1
2017
£m
130.4
6.4
113.5
% change
(0.9)
35.9
(93.7)
The dividends figures relate to amounts payable in respect of the relevant financial year.
Shareholder voting on the directors’ remuneration report at the 2018 Annual General Meeting
At the Annual General Meeting held on 20 March 2018, the resolution relating to the directors’ remuneration report received the following
votes from shareholders:
Directors’ remuneration report
For
Against
Total votes cast (for and against excluding withheld votes)
Votes withheld1
Total votes cast (including withheld votes)
Note:
1. A vote withheld is not a vote in law and is not counted in the calculation of the proportion of votes cast “for” and “against” a resolution.
Total number
of votes
% of
votes cast
188,620,861
57,273,331
245,894,192
9,078
245,903,270
76.71%
23.29%
100.0%
0.004%
100.0%
88
Chemring Group PLC Annual Report and Accounts 2018
Governance Shareholder voting on the directors’ remuneration policy at the 2016 Annual General Meeting
At the Annual General Meeting held on 21 March 2016, the resolution relating to the directors’ remuneration policy received the following
votes from shareholders:
Directors’ remuneration policy
For
Against
Total votes cast (for and against excluding withheld votes)
Votes withheld1
Total votes cast (including withheld votes)
Total number
of votes
% of
votes cast
215,625,426
21,014,549
236,639,975
2,094,082
238,734,057
91.12%
8.88%
100.0%
0.88%
100.0%
Note:
1. A vote withheld is not a vote in law and is not counted in the calculation of the proportion of votes cast “for” and “against” a resolution.
Application of the remuneration policy for 2019
Base salary
The executive directors’ salaries were reviewed in November 2018. The salary increases, which took effect from 1 January 2019, are set out
below. The percentage increase applied to the executive directors’ salaries was in line with the average budgeted salary increase for UK
employees. Given Michael Ord’s relatively recent appointment his salary was not increased.
Executive
Michael Ord
Andrew Lewis
Sarah Ellard
Salary as at
1 January 2019
Percentage
increase
£430,000
£343,119
£220,689
0%
3%
3%
Pension/benefits
No changes are proposed to the structure of pension and benefits provision for 2019.
Fees for the Chairman and non-executive directors
As detailed in the remuneration policy, the Company’s approach to setting the non-executive directors’ remuneration takes account of recognised
practice, and is set at a level that is sufficient to attract and retain high-calibre non-executives. Details of the fees that will apply for 2019 are set
out below:
Chairman’s fee
Other non-executive directors’ base fee
Audit Committee Chair fee
Remuneration Committee Chair fee
Fee as at
1 January 2019
Percentage
increase
£200,000
£55,000
£10,000
£10,000
0%
0%
0%
0%
Chemring Group PLC Annual Report and Accounts 2018
89
OverviewStrategic reportGovernanceFinancial statementsOther information Directors’ remuneration report continued
Part B – annual report on remuneration continued
Application of the remuneration policy for 2019 continued
Annual bonus plan
The annual bonus plan for 2019 will operate on a similar basis to 2018. The performance measures and weightings for the annual bonus plan
will therefore be as follows:
Measure
Earnings per share
Operating cash flow
Personal objectives
As a percentage of maximum
bonus opportunity
40%
40%
20%
The slightly altered performance weightings are intended to place a greater emphasis on financial performance.
Personal objectives have been set to reflect performance in the following key areas:
JJ Safety, including implementation of the new Group HSE Management System Framework Standard and delivery of an agreed reduction in
the Group’s Total Recordable Injury Frequency (TRIF) rate.
JJ Operational improvement, including the establishment of continuous improvement initiatives under the Operational Excellence Programme.
JJ People management, including talent management, succession planning and leadership/management development.
JJ Development of an innovation framework to align with the Group’s strategy.
JJ Implementation of the new Operational Framework and associated assurance processes.
JJ Mobilisation across the US Programs of Record.
JJ Delivery of the Kilgore transformation project.
JJ Completion of divestment of commoditised Energetics businesses.
The Committee does not believe that it would be in shareholders’ interests to prospectively disclose the financial targets under the annual bonus plan
due to issues of commercial sensitivity. However, detailed retrospective disclosure of both the financial targets and the personal objectives, and
performance against them, will be included in next year’s annual report on remuneration.
No bonus will be payable in respect of the personal objectives unless the Committee is satisfied that this is justified by the Group’s underlying performance,
including inter alia levels of profitability and cash flow.
The 2019 bonus plan is consistent with the remuneration policy detailed on pages 68 to 75, in terms of maximum bonus opportunity, deferred
share arrangements and clawback.
Performance Share Plan
It is intended that the performance condition for the annual awards granted to the executive directors under the PSP in 2019 will incorporate
two equally weighted metrics, namely growth in adjusted EPS and relative TSR measured against an international peer group of defence sector companies.
25% of each part of the award will vest for threshold or median performance, with full vesting of each part of the award for stretch or upper
quartile performance.
The EPS performance condition for the 2019 awards will be measured as follows:
Total compound earnings per share
growth over the three-year performance period
Less than 5% p.a.
5% p.a.
Between 5% p.a. and 10% p.a.
10% p.a. or more
% of earnings per share part that may vest
0%
25%
On a straight-line basis between 25% and 100%
100%
The Committee will be making an adjustment to the reported underlying EPS for 2018 to set a baseline EPS for 2018 which reflects the EPS
which would have been achieved by the Group had the August incident not occurred. The EPS growth over the three-year performance period
will be measured against this adjusted baseline EPS. The adjusted baseline EPS is 11.3p instead of the reported 8.9p.
90
Chemring Group PLC Annual Report and Accounts 2018
Governance The TSR performance condition for the 2019 awards will be measured as follows:
Rank of the Company’s total shareholder return against the
total shareholder return of the members of the comparator group
Below median
Median
Between median and upper quartile
Upper quartile or above
% of total shareholder return part that may vest
0%
25%
On a straight-line basis between 25% and 100%
100%
The Committee has reviewed the TSR peer group and decided to make some changes to make the overall group more relevant and robust.
The sector peer group for the 2019 awards therefore comprises: AB Dynamics, Avon Rubber, Babcock, BAE Systems, Bodycote, Cobham, Cohort,
Gooch & Housego, Hill & Smith, Leonardo, Meggitt, Morgan Advanced Materials, Oxford Instruments, QinetiQ Rheinmetall, Ricardo, Senior,
TT Electronics, Ultra Electronics and XP Power.
Approval of the directors’ remuneration report
The directors’ remuneration report was approved by the Board on 17 January 2019.
Signed on behalf of the Board
Andrew Davies
Chairman of the Remuneration Committee
17 January 2019
Chemring Group PLC Annual Report and Accounts 2018
91
OverviewStrategic reportGovernanceFinancial statementsOther information Consolidated income statement
For the year ended 31 October 2018
Continuing operations
Revenue
Operating profit/(loss)
Finance expense
Profit/(loss) before tax
Taxation
Profit/(loss) after tax
Discontinued operations
Profit/(loss) after tax from discontinued operations
Profit/(loss) after tax
Earnings/(loss) per ordinary share
Continuing operations
Basic
Diluted
Continuing and discontinued operations
Basic
Diluted
1. Further information about non-underlying items is set out in note 3.
Underlying
performance
£m
2018
Non-
underlying
items 1
£m
Total
£m
Underlying
performance
£m
297.4
31.0
(6.1)
24.9
(5.7)
19.2
—
(46.9)
—
(46.9)
(13.1)
(60.0)
297.4
(15.9)
(6.1)
(22.0)
(18.8)
(40.8)
6.2
25.4
(71.2)
(65.0)
(131.2)
(105.8)
307.1
31.5
(11.3)
20.2
(3.7)
16.5
19.5
36.0
Note
1,2
2,4
7
8
5
2017
Non-
underlying
items 1
£m
—
(26.9)
—
(26.9)
6.1
(20.8)
(8.6)
(29.4)
2018
2017
Underlying
Note performance
Total
Underlying
performance
10
10
10
10
6.9p
6.7p
9.1p
8.9p
(14.6)p
(14.6)p
(37.8)p
(37.8)p
5.9p
5.8p
12.9p
12.6p
Total
£m
307.1
4.6
(11.3)
(6.7)
2.4
(4.3)
10.9
6.6
Total
(1.5)p
(1.5)p
2.4p
2.3p
92
Chemring Group PLC Annual Report and Accounts 2018
Financial statements Consolidated statement of comprehensive income
For the year ended 31 October 2018
(Loss)/profit after tax attributable to equity holders of the parent as reported
Items that will not be reclassified subsequently to profit and loss
Actuarial gains on defined benefit pension schemes
Movement on deferred tax relating to pension schemes
Items that may be reclassified subsequently to profit and loss
Exchange differences on translation of foreign operations
Current tax on items taken directly to equity
Deferred tax on exchange differences on translation of foreign operations
Total comprehensive (loss)/income attributable to equity holders of the parent
Note
30
23
23
2018
£m
(105.8)
0.9
(0.1)
0.8
5.2
—
(0.5)
4.7
(100.3)
2017
£m
6.6
11.9
(2.0)
9.9
(11.6)
(3.1)
0.8
(13.9)
2.6
Chemring Group PLC Annual Report and Accounts 2018
93
OverviewStrategic reportGovernanceFinancial statementsOther information Consolidated statement of changes in equity
For the year ended 31 October 2018
Share
premium
account
£m
305.3
Special
capital
reserve
£m
12.9
Revaluation
reserve
£m
1.1
Translation
reserve
£m
(24.8)
At 1 November 2017
Loss after tax
Other comprehensive (loss)/income
Tax relating to components of other
comprehensive income
Total comprehensive loss
Ordinary shares issued
Share-based payments (net of settlement)
Dividends paid
Transactions in own shares
Transfers between reserves
Share
capital
£m
2.8
—
—
—
—
—
—
—
—
—
—
—
—
—
0.1
—
—
—
—
At 31 October 2018
2.8
305.4
At 1 November 2016
Impact of IFRS 15
Profit after tax
Other comprehensive (loss)/income
Tax relating to components of other
comprehensive income
Total comprehensive income
Ordinary shares issued
Share-based payments (net of settlement)
Dividends paid
Share
capital
£m
2.8
—
—
—
—
—
—
—
—
Share
premium
account
£m
305.1
—
—
—
—
—
0.2
—
—
Retained
earnings
£m
113.5
(105.8)
8.5
(0.6)
(97.9)
—
0.1
(8.7)
—
0.1
7.1
Retained
earnings
£m
121.8
(10.2)
6.6
4.4
(4.3)
6.7
—
1.6
(6.4)
Own
shares
£m
(9.6)
—
—
—
—
—
—
—
1.8
—
(7.8)
Own
shares
£m
(9.6)
—
—
—
—
—
—
—
—
Total
£m
401.2
(105.8)
6.1
(0.6)
(100.3)
0.1
0.1
(8.7)
1.8
—
294.2
Total
£m
413.4
(10.2)
6.6
0.3
(4.3)
2.6
0.2
1.6
(6.4)
—
—
—
—
—
—
—
—
—
12.9
Special
capital
reserve
£m
12.9
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(0.1)
1.0
Revaluation
reserve
£m
1.1
—
—
—
—
—
—
—
—
1.1
—
(2.4)
—
(2.4)
—
—
—
—
—
(27.2)
Translation
reserve
£m
(20.7)
—
—
(4.1)
—
(4.1)
—
—
—
(24.8)
113.5
(9.6)
401.2
At 31 October 2017
2.8
305.3
12.9
94
Chemring Group PLC Annual Report and Accounts 2018
Financial statements Consolidated balance sheet
As at 31 October 2018
Non-current assets
Goodwill
Development costs
Other intangible assets
Property, plant and equipment
Retirement benefit surplus
Deferred tax
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
Derivative financial instruments
Assets classified as held for sale
Total assets
Current liabilities
Borrowings
Trade and other payables
Provisions
Current tax
Derivative financial instruments
Liabilities directly associated with assets classified as held for sale
Non-current liabilities
Borrowings
Provisions
Deferred tax
Preference shares
Retirement benefit obligations
Derivative financial instruments
Total liabilities
Net assets
Equity
Share capital
Share premium account
Special capital reserve
Revaluation reserve
Translation reserve
Retained earnings
Own shares
Total equity
Note
2018
£m
£m
2017
£m
£m
11
12
12
13
30
23
15
16
17
21
29
18
19
22
21
29
18,33
22
23
18,24
30
21
24
25
25
25
26
109.2
24.0
37.6
148.1
7.5
36.8
71.4
62.2
9.6
0.1
—
(68.6)
(6.7)
(0.8)
(0.3)
(91.3)
(14.0)
(47.1)
(0.1)
—
(0.2)
363.2
143.3
43.7
550.2
(76.4)
(26.9)
(152.7)
(256.0)
294.2
2.8
305.4
12.9
1.0
(27.2)
7.1
302.0
(7.8)
294.2
125.4
33.7
57.0
160.1
—
63.2
97.6
131.0
33.6
0.4
(51.6)
(111.9)
(6.5)
(5.5)
(0.4)
(61.9)
(8.8)
(53.5)
(0.1)
(0.6)
—
439.4
262.6
—
702.0
(175.9)
—
(124.9)
(300.8)
401.2
2.8
305.3
12.9
1.1
(24.8)
113.5
410.8
(9.6)
401.2
These financial statements of Chemring Group PLC (registered number 86662) were approved and authorised for issue by the Board of
directors on 17 January 2019.
Signed on behalf of the Board
Michael Ord
Director
Andrew Lewis
Director
Chemring Group PLC Annual Report and Accounts 2018
95
OverviewStrategic reportGovernanceFinancial statementsOther information Consolidated cash flow statement
For the year ended 31 October 2018
Cash flows from operating activities
Cash generated from continuing underlying operations
Cash generated from discontinued underlying operations
Cash impact of non-underlying items
Cash flows from operating activities
Retirement benefit deficit recovery contributions
Tax paid
Net cash inflow from operating activities
Cash flows from investing activities
Purchases of intangible assets
Purchases of property, plant and equipment
Acquisition – deferred consideration
Customer funding for capital programmes
Proceeds on disposal of property, plant and equipment
Net cash outflow from investing activities
Cash flows from financing activities
Dividends paid
Finance expense paid
Capitalised facility fees paid
Drawdown of borrowings
Repayments of borrowings
Repayments of obligations under finance leases
Net cash outflow from financing activities
Decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effect of foreign exchange rate changes
Cash and cash equivalents at end of year
Note
31
9
32
17,33
2018
£m
44.7
12.2
(7.6)
49.3
(7.9)
(5.5)
35.9
(3.2)
(18.8)
(0.7)
2.6
0.4
(19.7)
(8.7)
(6.0)
(0.6)
26.5
(51.9)
—
(40.7)
(24.5)
33.6
0.5
9.6
2017
£m
41.6
5.5
(6.3)
40.8
(5.0)
(3.6)
32.2
(3.9)
(12.6)
—
—
—
(16.5)
(6.4)
(9.3)
(0.5)
—
(28.8)
(0.1)
(45.1)
(29.4)
63.1
(0.1)
33.6
96
Chemring Group PLC Annual Report and Accounts 2018
Financial statements Notes to the Group financial statements
1. Revenue
All of the Group’s revenue is derived from the sale of goods and the provision of services. The following table provides an analysis of the
Group’s revenue by destination:
UK
US
Europe
Asia Pacific
Middle East
Rest of the world
UK
US
Europe
Asia Pacific
Middle East
Rest of the world
Countermeasures
£m
15.0
69.9
12.7
28.1
—
0.3
126.0
Countermeasures
£m
17.8
45.3
15.9
45.8
—
0.5
125.3
Sensors
£m
46.7
25.6
3.8
7.3
3.9
—
87.3
Sensors
£m
43.0
29.5
5.8
4.6
8.0
0.3
91.2
Energetics
£m
20.5
42.1
18.6
2.6
0.2
0.1
84.1
Energetics
£m
21.8
48.5
18.1
0.3
1.1
0.8
90.6
The directors consider that the only countries that are significant in accordance with IFRS 8 Operating Segments are the US and the UK.
The following table discloses the split of the Group’s revenue between goods and services:
Goods
Services
Goods
Services
Countermeasures
£m
124.3
1.7
126.0
Countermeasures
£m
120.8
4.5
125.3
Sensors
£m
22.6
64.7
87.3
Sensors
£m
27.0
64.2
91.2
Energetics
£m
81.1
3.0
84.1
Energetics
£m
87.8
2.8
90.6
All revenues recognised arose from contracts with customers.
In 2018 £nil (2017: £0.6m) of revenue was recognised in respect of performance obligations satisfied in previous periods.
As at 31 October 2018 £393.7m (2017: £325.2m) of revenue was outstanding in respect of obligations that were unfulfilled or only
partially fulfilled as at the year end. £241.9m (2017: £215.1m) of this revenue is expected to be recognised in the next financial year
and £151.8m (2017: £110.1m) in future periods.
2018
£m
82.2
137.6
35.1
38.0
4.1
0.4
297.4
2017
£m
82.6
123.3
39.8
50.7
9.1
1.6
307.1
2018
£m
228.0
69.4
297.4
2017
£m
235.6
71.5
307.1
Chemring Group PLC Annual Report and Accounts 2018
97
OverviewStrategic reportGovernanceFinancial statementsOther information 2. Business segments
IFRS 8 Operating Segments requires operating segments to be identified on the basis of internal reports about components of the Group that
are regularly reviewed by the Group Chief Executive and the Board to allocate resources to the segments and to assess their performance. For
management purposes, the Group’s operating and reporting structure clusters similar businesses together within the following three operating
segments – Countermeasures, Sensors and Energetics. These segments are the basis on which the Group reports its segmental information.
The principal activities of each segment are as follows:
Countermeasures
Development and manufacture of expendable countermeasures for air, sea and land platforms, and land-based
electronic warfare equipment.
Sensors
Energetics
Development and manufacture of IED detection equipment, chemical and biological threat detection equipment,
IED electronic countermeasures and network protection technologies.
Development, procurement and manufacture of cartridge/propellant actuated devices, pyrotechnic devices for satellite
launch and deployment, missile components, propellants, separation sub-systems, actuators and energetic materials.
A segmental analysis of revenue and operating (loss)/profit is set out below:
Year ended 31 October 2018
Revenue
Segment result before depreciation, amortisation, non-underlying items and
discontinued operations
Depreciation
Amortisation
Segmental underlying operating profit
Amortisation of acquired intangibles (note 3)
Non-underlying items (note 3)
Impact of non-underlying items on profit before tax (note 3)
Segmental operating (loss)/profit
Finance expense
Loss before tax
Tax
Loss for the year from continuing operations
Discontinued operations
Loss for the year
Countermeasures
£m
126.0
Sensors
£m
87.3
Energetics Unallocated
£m
—
£m
84.1
23.6
(9.7)
(1.8)
12.1
(0.4)
(15.9)
(16.3)
(4.2)
18.5
(1.7)
(1.5)
15.3
(6.4)
(3.7)
(10.1)
5.2
16.0
(3.8)
(0.4)
11.8
(4.8)
—
(4.8)
7.0
(8.1)
(0.1)
—
(8.2)
—
(15.7)
(15.7)
(23.9)
(6.1)
(30.0)
(18.8)
(48.8)
(65.0)
Total
£m
297.4
50.0
(15.3)
(3.7)
31.0
(11.6)
(35.3)
(46.9)
(15.9)
(6.1)
(22.0)
(18.8)
(40.8)
(65.0)
(113.8)
(105.8)
98
Chemring Group PLC Annual Report and Accounts 2018
Financial statementsNotes to the Group financial statements continued 2. Business segments continued
Year ended 31 October 2017
Revenue
Segment result before depreciation, amortisation, non-underlying items and
discontinued operations
Depreciation
Amortisation
Segmental underlying operating profit
Amortisation of acquired intangibles (note 3)
Non-underlying items (note 3)
Impact of non-underlying items on profit before tax (note 3)
Segmental operating profit/(loss)
Finance expense
Loss before tax
Tax
Loss for the year from continuing operations
Discontinued operations
Profit for the year
Countermeasures
£m
125.3
Sensors
£m
91.2
Energetics
£m
90.6
Unallocated
£m
—
27.5
(10.8)
(2.3)
14.4
(0.4)
(3.6)
(4.0)
10.4
19.3
(1.8)
(4.1)
13.4
(6.7)
(5.7)
(12.4)
1.0
18.3
(3.7)
(0.5)
14.1
(5.0)
(5.6)
(10.6)
3.5
(10.2)
(0.1)
(0.1)
(10.4)
—
0.1
0.1
(10.3)
(11.3)
(21.6)
2.4
(19.2)
10.9
(8.3)
Total
£m
307.1
54.9
(16.4)
(7.0)
31.5
(12.1)
(14.8)
(26.9)
4.6
(11.3)
(6.7)
2.4
(4.3)
10.9
6.6
Assets and liabilities by segment are not reported to the Group Chief Executive on a monthly basis, therefore are not used as a key decision
making tool and are not disclosed here. A disclosure of non-current assets by location is shown below:
Non-current assets by location
UK
US
Norway
Australia
2018
£m
175.8
160.8
7.7
18.9
363.2
2017
£m
224.8
186.9
5.0
22.7
439.4
Information on major customers
Included in segmental revenues for continuing operations are revenues of £92.4m (2017: £74.5m), which arose from sales to the Group’s largest
customer. The largest customer had sales reported in all of the Group’s business segments. This was the only individual customer where direct
sales accounted for more than 10% of Group revenue from continuing and discontinued operations for the year.
Chemring Group PLC Annual Report and Accounts 2018
99
OverviewStrategic reportGovernanceFinancial statementsOther information 3. Alternative performance measures
In accordance with our accounting policy we have presented the following reconciliation of Alternative Performance Measures used throughout
this report to their IFRS equivalent measures as follows:
Non-underlying items and non-underlying measures
Acquisition and disposal-related costs
Business restructuring costs
Less non-underlying depreciation in business restructuring costs
Legal costs
Change of Chief Executive
Pension scheme charge in respect of GMP equalisation court ruling
(Loss)/gain on the movement in the fair value of derivative financial instruments (note 21)
Impact of non-underlying items on EBITDA
Non-underlying depreciation in business restructuring costs
Impairment of capitalised development costs
Intangible amortisation arising from business combinations (note 12)
Impact of non-underlying items on profit before tax
Tax impact of non-underlying items
Impact of non-underlying items on continuing profit after tax
Discontinued operations after tax
Impact of non-underlying items on profit after tax
Underlying profit after tax
Statutory (loss)/profit after tax
2018
£m
(4.1)
(8.1)
0.7
(12.8)
(1.7)
(0.8)
(0.4)
(27.2)
(0.7)
(7.4)
(11.6)
(46.9)
(13.1)
(60.0)
(71.2)
(131.2)
25.4
(105.8)
2017
£m
(2.1)
(14.0)
1.0
(0.4)
—
—
1.7
(13.8)
(1.0)
—
(12.1)
(26.9)
6.1
(20.8)
(8.6)
(29.4)
36.0
6.6
The impact of non-underlying items on statutory basic and diluted EPS, as well as a reconciliation to the IFRS equivalent, is presented in note 10.
The impact of non-underlying items on cash generated from operating activities, as well as a reconciliation to the IFRS equivalent, is presented in
note 31.
Acquisition and disposal-related costs
Acquisition and disposal-related costs of £4.1m (2017: £2.1m) relate to transaction costs and an earnout payment on the acquisition of Wallop
Defence Systems’ assets for which no provision was made at the time of acquisition. Additional payments of up to £4m, although not probable
and considered remote, conditional upon the receipt of specific orders, may also be made over the next year and have not been provided for in
these accounts.
Business restructuring costs
In 2018, business restructuring costs of £8.1m (2017: £14.0m) relate to the non-capital costs/asset write offs and demolition element of the
Tennessee site transformation.
Legal costs
In 2018, legal costs of £12.8m (2017: £0.4m) were in relation to ongoing investigations. This includes a provision for estimated future committed
costs of £5.0m.
Change of Chief Executive
The costs associated with the change of Chief Executive were £1.7m (2017: £nil). As disclosed in the directors’ report, Michael Flowers stepped
down as Group Chief Executive on 30 June 2018 and Michael Ord was appointed as Group Chief Executive on 1 July 2018.
Pension scheme charge in respect of GMP equalisation court ruling
On 26 October 2018, the High Court handed down a judgement involving the Lloyds Banking Group’s defined benefit pension schemes.
The judgement concluded that pension schemes should be amended to equalise pension benefits for men and women in relation to guaranteed
minimum pension benefits. We are working with our actuarial advisers to understand the extent to which the judgement crystallises any
additional liabilities for the Group UK defined benefit pension scheme. We are early in the evaluation process, but we estimate that the
additional liability could be in the region of £0.4m and £1.2m, therefore we have recognised £0.8m in our 2018 results. Subsequent to further
assessment with our advisers, any necessary further adjustment is expected to be recognised in the first half of our 2019 financial year.
100
Chemring Group PLC Annual Report and Accounts 2018
Financial statementsNotes to the Group financial statements continued 3. Alternative performance measures continued
Derivative financial instruments
Included in non-underlying items is a £0.4m loss (2017: £1.7m gain) on the movement in fair value of derivative financial instruments. This is excluded
from underlying earnings to ensure the recognition of the gain or loss on the derivative matches the timing of the underlying transaction.
Impairment of capitalised development costs
In 2018, an impairment of capitalised product development costs of £7.4m (2017: £nil) was recognised following the appointment of a new
Chief Executive who conducted a strategic review of the Group’s product portfolio to rationalise future resources on areas where the Group
had a niche position and competitive advantage. The carrying value of the products for which an impairment charge was recognised exceeded
the expected future value, hence an impairment charge was recognised in the year.
Amortisation of acquired intangibles
Also included is the amortisation charge arising from business combinations of £11.6m (2017: £12.1m). The total amortisation charge arising from
business combinations for the year ended 31 October 2018 was £14.4m, of which £11.6m relates to continuing operations and £2.8m relates to
discontinued operations. Amortisation of acquired intangibles arising from business combinations is associated with acquisition costs under IFRS 3
Business Combinations. As such, these costs are not reflective of the underlying activities of the Group and therefore have been excluded from
the underlying measures.
Tax
The tax impact of non-underlying items comprises a £17.4m charge in respect of the enactment of the US Tax Cuts and Jobs Act on
22 December 2017, and a £4.3m tax credit on the above non-underlying items.
These significant one-off tax charges/credits have arisen from a change in legislation, and as such have been removed from underlying results to
aid comparability and understanding of the Group’s performance.
The items above are all removed from underlying measures in line with our accounting policy. The removal of these items allows for improved
comparability between reporting periods.
Discontinued operations
Further details on the results of discontinued operations is presented in note 5.
Net debt
An analysis and reconciliation of net debt is presented in notes 32 and 33.
EBITDA
In our financial review we present measures of continuing EBITDA which is calculated as follows:
Operating (loss)/profit
Amortisation arising from business combinations (note 4)
Amortisation arising from development costs (note 4)
Amortisation arising from patents and licences (note 4)
Impairment of capitalised development costs
Depreciation – continuing
EBITDA
Non-underlying items
Underlying EBITDA
2018
£m
(15.9)
11.6
3.6
0.1
7.4
16.0
22.8
27.2
50.0
2017
£m
4.6
12.1
6.9
0.1
—
17.4
41.1
13.8
54.9
Constant currency revenue and operating profit
In our financial review we present a measure of constant currency revenue and operating profit. This is calculated by translating our results
for the year ended 31 October 2018 at the average exchange rates for the comparative year ended 31 October 2017.
Chemring Group PLC Annual Report and Accounts 2018 101
OverviewStrategic reportGovernanceFinancial statementsOther information 4. Operating profit
Operating profit from continuing operations is stated after charging/(crediting):
Research and development costs
Amortisation
Depreciation of property, plant and equipment
Loss on disposal of non-current assets
Operating lease rentals
Government grants
Foreign exchange (gains)/losses
Staff costs (note 6)
Cost of inventories recognised as an expense
– customer-funded
– internally-funded
– arising from business combinations
– development costs
– patents and licences
– owned assets
– leased assets
– plant and machinery
– other
A detailed analysis of the auditor’s remuneration on a worldwide basis is set out below:
Auditor’s remuneration
Fees payable to the Company’s auditor and its associates for:
– the audit of the Company’s annual accounts
– the audit of the Company’s subsidiaries, pursuant to legislation
Other services
Audit-related assurance services
2018
£m
36.2
4.6
11.6
3.6
0.1
14.9
0.4
0.2
1.0
0.4
—
(0.7)
112.3
79.9
2018
£m
0.2
0.3
0.5
0.1
0.6
2017
£m
41.1
6.8
12.1
6.9
0.1
16.3
0.1
0.2
1.2
0.5
(0.1)
1.2
115.2
95.0
2017
£m
0.3
0.5
0.8
0.1
0.9
Included in the fees for the audit of the Company’s annual accounts is £0.1m (2017: £0.1m) in respect of the parent company.
A description of the work of the Audit Committee is set out in the Audit Committee report on pages 62 to 65, and includes an explanation of
how auditor objectivity and independence is safeguarded when non-audit services are provided by the auditor. No services were provided by
the auditor pursuant to contingent fee arrangements.
As detailed in the Audit Committee report, KPMG was appointed as the Group’s external auditor during the year, in place of Deloitte, thus
2018 fees relate to KPMG and 2017 fees relate to Deloitte.
102
Chemring Group PLC Annual Report and Accounts 2018
Financial statementsNotes to the Group financial statements continued 5. Results from discontinued operations
As disclosed in the Chairman’s statement on page 6, a strategic review of the Group’s Energetics portfolio was conducted during the year.
The Board concluded that the future focus within the Energetics segment should be on the Energetic Devices businesses. It therefore made
the decision to exit the commodity Energetics businesses.
Revenue
Underlying operating profit from discontinued operations
Tax on the underlying operating profit from discontinued operations
Underlying profit after tax
Profit after tax is analysed as:
Before exceptional items
Exceptional items
Tax on exceptional items
(Loss)/profit for the year from discontinued operations
2018
£m
138.6
8.0
(1.8)
6.2
6.2
(72.0)
0.8
(71.2)
(65.0)
2017
£m
240.4
23.9
(4.4)
19.5
19.5
(9.7)
1.1
(8.6)
10.9
In 2018 the exceptional items include the amortisation of acquired intangibles of £2.7m and an impairment loss of £69.3m in respect of the carrying
values of Chemring Defence UK Limited, Chemring Ordnance Inc., B.D.L. Systems Limited and Richmond Electronics & Engineering Limited.
Amortisation of acquired intangibles arising from business combinations is associated with acquisition costs under IFRS 3 Business Combinations.
As such, these costs are not reflective of the underlying activities of the discontinued operations and therefore have been treated as exceptional
items. Impairment losses have been removed from underlying measures to allow for improved comparability between reporting periods. This is
in line with the Group’s accounting policy.
In 2017 the exceptional items included a total impairment loss of £9.8m in respect of the Chemring Defence UK business and the amortisation
of acquired intangibles of £2.9m, offset by the release of provisions in respect of previously disposed businesses.
The cash flow from discontinued operations is as follows:
Discontinued operations
Operating cash flow from discontinued operations
Cash impact of non-underlying items from discontinued operations
Net cash inflow from discontinued operating activities
Net cash outflow from discontinued investing activities
Net cash inflow from discontinued operations
6. Staff costs
The average monthly number of employees, including executive directors, was:
Direct
Indirect
Continuing operations
Discontinued operations
2018
£m
12.2
(0.1)
12.1
(1.2)
10.9
2017
£m
5.5
(0.7)
4.8
(2.8)
2.0
2018
Number
1,323
882
2,205
418
2,623
2017
Number
1,223
853
2,076
434
2,510
Chemring Group PLC Annual Report and Accounts 2018 103
OverviewStrategic reportGovernanceFinancial statementsOther information 6. Staff costs continued
At the year end, the number of employees was 2,559 of which 353 are at discontinued operations (2017: 2,651 of which 476 were at discontinued
operations). The costs incurred in respect of employees at continuing operations, including share-based payments, were:
Wages and salaries
Social security costs
Other pension costs
Share-based payment charge
Staff costs
7. Finance expense
Bank overdraft and loan interest
Loan notes interest
Amortisation of debt finance costs
Interest cost of retirement benefit obligations (note 30)
Finance expense
2018
£m
94.8
10.6
5.8
1.1
2017
£m
97.0
11.0
5.5
1.7
112.3
115.2
2018
£m
1.2
3.5
1.3
0.1
6.1
2017
£m
1.1
7.4
2.4
0.4
11.3
There are future contractual cash flows for finance expenses as at 31 October 2018 of £5.8m (2017: £10.8m) of which £3.7m (2017: £5.2m) is
due within one year and the remainder in future years.
8. Taxation
Current tax (charge)/credit – current year
Current tax (charge)/credit – prior year
Deferred tax (charge)/credit – current year (note 23)
Deferred tax (charge)/credit – prior year (note 23)
Tax (charge)/credit for continuing operations
2018
£m
(9.1)
7.6
(14.7)
(2.6)
(18.8)
2017
£m
(8.8)
1.5
11.4
(1.7)
2.4
Income tax in the UK is calculated at 19.0% (2017: 19.4%) of the taxable profit for the year. Tax for other jurisdictions is calculated at the rates
prevailing in those jurisdictions. The deferred tax charge of £17.3m above differs to the deferred tax charged to income disclosed in note 23 by
£0.8m. This amount relates to deferred tax charged on discontinued operations.
The tax (charge)/credit for continuing operations can be reconciled to the income statement as follows:
Loss before tax from continuing operations
Tax at the UK corporation tax rate of 19.0% (2017: 19.4%)
Expenses not deductible for tax purposes
Changes in tax rates
Tax losses not recognised/carried forward
Prior period adjustments
Adjustment to provision for interest restriction (note 23)
Overseas profits taxed at rates different to the UK standard rate
Tax (charge)/credit for continuing operations
2018
£m
(22.0)
4.2
(7.4)
(4.7)
0.6
5.0
(14.8)
(1.7)
(18.8)
2017
£m
(6.7)
1.3
(2.3)
(0.3)
(0.7)
(0.2)
2.4
2.2
2.4
In addition to the tax (charge)/credit in the income statement, a tax charge of £0.6m (2017: £4.3m) has been recognised in equity in the year.
The effective rate of tax on the profit before tax of the Group is 85.5% (2017: 35.8%), and the effective rate of tax on the underlying profit
before tax of the Group is 22.9% (2017: 18.3%). The increase in the effective rate of tax on the results of the Group is primarily due to the
increased proportion of US profits which are taxed at a higher rate, changes to the amounts of deferred tax assets considered recoverable
in respect of US interest limitations, the non-deductibility of certain non-underlying items, and prior year adjustments.
104
Chemring Group PLC Annual Report and Accounts 2018
Financial statementsNotes to the Group financial statements continued 8. Taxation continued
Factors affecting the tax charge in future years
The Group’s future tax charge and effective tax rate could be affected by several factors including: tax reform in countries around the world,
including any arising from the implementation of the OECD’s BEPS actions and European Commission initiatives such as the proposed tax and
financial reporting directive or as a consequence of state aid investigations, future corporate acquisitions and disposals and any restructuring of our
business.
See note 23 for detail on the impact of the US Tax Cuts and Jobs Act.
9. Dividends
Dividends paid on ordinary shares of 1p each
Final dividend of 2.0p per share for the year ended 31 October 2017 (1.3p per share for the year ended 31 October 2016)
Interim dividend of 1.1p per share for the year ended 31 October 2018 (1.0p per share for the year ended 31 October 2017)
Total dividends
2018
£m
5.6
3.1
8.7
2017
£m
3.6
2.8
6.4
Subject to approval at the Annual General Meeting, the final dividend of 2.2p per ordinary share will be paid on 18 April 2019 to all shareholders
registered at the close of business on 5 April 2019. The total dividend for the year will therefore be 3.3p (2017: 3.0p) per ordinary share. As the
final dividend is subject to approval by the shareholders at the Annual General Meeting, it has not been included as a liability in the financial
statements for the year ended 31 October 2018.
The cumulative preference shares carry an entitlement to a dividend at the rate of 7p per share per annum which was paid in equal instalments
on 30 April 2018 and 31 October 2018.
10. Earnings/(loss) per ordinary share
Earnings per share is based on the average number of shares in issue, excluding own shares held, of 279,768,360 (2017: 279,244,616).
Diluted earnings per share has been calculated using a diluted average number of shares in issue, excluding own shares held, of 285,993,316
(2017: 285,023,906).
The number of shares used in the calculations are as follows:
Weighted average number of shares used to calculate basic earnings per share
Additional shares issuable other than at fair value in respect of options outstanding
Weighted average number of shares used to calculate diluted earnings per share
The earnings used in the calculations of the various measures of earnings per share are as follows:
Underlying profit after tax
Non-underlying items (note 3)
Loss from continuing operations
(Loss)/profit from discontinued operations
Total (loss)/profit after tax
2018
Basic EPS
(pence)
6.9
Diluted EPS
(pence)
6.7
(14.6)
(23.2)
(37.8)
(14.6)
(23.2)
(37.8)
£m
19.2
(60.0)
(40.8)
(65.0)
(105.8)
£m
16.5
(20.8)
(4.3)
10.9
6.6
2018
Ordinary
shares
Number
millions
279.8
6.2
286.0
2017
Basic EPS
(pence)
5.9
2017
Ordinary
shares
Number
millions
279.2
5.8
285.0
Diluted EPS
(pence)
5.8
(1.5)
3.9
2.4
(1.5)
3.8
2.3
Chemring Group PLC Annual Report and Accounts 2018 105
OverviewStrategic reportGovernanceFinancial statementsOther information 11. Goodwill
Cost
At 1 November 2016
Foreign exchange adjustments
At 31 October 2017
Foreign exchange adjustments
At 31 October 2018
Accumulated impairment losses
At 1 November 2016
Impairment
Foreign exchange adjustments
At 31 October 2017
Impairment
Foreign exchange adjustments
At 31 October 2018
Carrying amount
At 31 October 2018
At 31 October 2017
£m
206.5
(10.4)
196.1
4.7
200.8
(73.6)
(3.0)
5.9
(70.7)
(18.2)
(2.7)
(91.6)
109.2
125.4
Goodwill acquired in a business combination is allocated at acquisition to the cash-generating units (“CGUs”) that are expected to benefit from
that business combination. The carrying amount of the goodwill has been allocated to the Group’s principal CGUs, being the individual operating
companies described in the operating segment descriptions on pages 20 to 25.
The Group tests goodwill at least annually for impairment. Tests are conducted more frequently if there are indications that goodwill might be impaired.
The recoverable amounts of the CGUs are determined from value-in-use calculations. The key assumptions for the value-in-use calculations have been
individually estimated for each CGU and include the discount rates and expected changes to cash flows during the period for which management has
detailed plans, which are underpinned by the winning and execution of key contracts.
Management estimates discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks
specific to each of the CGUs. Pre-tax discount rates, derived from the Group’s post-tax weighted average cost of capital of 7.3% (2017: 6.9%)
which have been adjusted for a premium specific to each of the CGUs to account for differences in currency risk, country risk and other factors
affecting specific CGUs, have been used to discount projected cash flows. These premiums range from 2% to 4% (2017: 2% to 4%).
Expected changes to cash flows during the period for which management has detailed plans relate to revenue forecasts, expected contract
outcomes and forecast operating margins in each of the operating companies. The relative value ascribed to each varies between CGUs as the
budgets are built up from the underlying operating companies within each CGU, but the key assumption for each CGU is that demand from the
US and UK Governments and customers in our other principal markets for the product offering in each company will recover from its current
low base. In the case of Chemring Sensors & Electronic Systems, Inc. CGU, this will be to a level seen historically and in the case of the Roke
Manor Research Limited and Chemring Energetic Devices, Inc. CGUs it will continue at a similar or slightly enhanced level.
The calculations have used the Group’s forecast figures for the next five years. This is based on data derived from the five-year plan that has
been approved by the Board. At the end of five years, the calculations assume the performance of the CGUs will grow at a nominal annual rate
of 0.5% in perpetuity. Growth rates are based on management’s view of industry growth forecasts. Changes in selling prices and direct costs are
based on past practices and expectations of future changes.
The weighted average cost of capital is derived using beta values of a comparator group of defence companies adjusted for funding structures as appropriate.
106
Chemring Group PLC Annual Report and Accounts 2018
Financial statementsNotes to the Group financial statements continued 11. Goodwill continued
The pre-tax discount rates used for value-in-use calculations and the carrying value of goodwill by the principal CGUs are:
Roke Manor Research Limited
Chemring Energetics UK Limited
Chemring Sensors & Electronic Systems, Inc.
Chemring Energetic Devices, Inc.
Other
2018
%
11.9
10.6
10.9
13.3
2017
%
11.5
10.4
13.9
13.7
2018
£m
28.4
14.6
36.8
16.3
13.1
2017
£m
28.4
18.1
35.4
15.6
27.9
109.2
125.4
The pre-tax discount rates used for other CGUs ranged from 11.5% to 14.7% (2017: 11.7% to 19.3%).
In 2018 the Board has concluded that the goodwill relating to B.D.L. Systems Limited and Richmond Electronics & Engineering Limited was fully
impaired and a charge of £14.7m was recorded. This assessment was based on current market conditions. B.D.L. Systems Limited and Richmond
Electronics & Engineering Limited, which manufacture explosive ordnance disposal products, are part of the Sensors segment and were included
in the CGUs classified as “Other” in the above table.
In addition, the Board has concluded that the goodwill relating to the maintenance and repair business at Chemring Energetics UK Limited was
fully impaired and a charge of £3.5m was recorded. This assessment was based on current market conditions. Chemring Energetics UK Limited
is part of the Energetics segment.
In 2017 the Board concluded that the goodwill relating to Chemring Defence UK Limited was impaired and a charge of £3.0m was recorded.
This assessment was based on current market conditions in the military and law enforcement pyrotechnics market.
Following a detailed review, no other impairment losses were recognised in the years ended 31 October 2018 and 31 October 2017 for
continuing operations.
Stress testing was performed on the forecasts to consider the impact of reasonably possible worst case scenarios in the first two years,
including significant delays to major contracts and new product launches followed by a 10% fall in the forecast cash flows. Even under these
circumstances, no other CGUs would require an impairment against goodwill.
A 1% addition to the discount rate for each CGU was also separately modelled, and would not result in any CGUs requiring any further impairment.
Setting long-term growth rates beyond the five-year forecast period to zero would not result in any CGUs requiring any further impairment.
Chemring Group PLC Annual Report and Accounts 2018 107
OverviewStrategic reportGovernanceFinancial statementsOther information 12. Development costs and other intangible assets
Cost
At 1 November 2016
Additions
Disposals
Foreign exchange adjustments
At 31 October 2017
Additions
Disposals
Foreign exchange adjustments
At 31 October 2018
Amortisation
At 1 November 2016
Charge
Disposals
Foreign exchange adjustments
At 31 October 2017
Charge
Disposals
Impairment
Foreign exchange adjustments
At 31 October 2018
Carrying amount
At 31 October 2018
At 31 October 2017
Development
costs
£m
Acquired
technology
£m
Acquired
customer
relationships
£m
Patents and
licences
£m
64.4
3.9
(3.6)
(3.0)
61.7
3.0
(3.1)
1.1
62.7
(23.5)
(6.9)
1.6
0.8
(28.0)
(3.6)
2.8
(9.5)
(0.4)
101.1
—
—
(7.4)
93.7
—
(1.1)
3.3
95.9
(60.8)
(8.6)
—
4.7
(64.7)
(8.2)
0.8
(0.7)
(2.5)
87.5
—
(4.3)
(5.9)
77.3
—
—
2.5
79.8
(51.2)
(6.4)
4.3
3.6
(49.7)
(6.1)
—
(5.4)
(1.8)
1.0
0.1
(0.5)
(0.1)
0.5
—
(0.2)
0.1
0.4
(0.5)
(0.2)
0.5
0.1
(0.1)
(0.1)
0.1
—
(0.1)
Total
£m
189.6
0.1
(4.8)
(13.4)
171.5
—
(1.3)
5.9
176.1
(112.5)
(15.2)
4.8
8.4
(114.5)
(14.4)
0.9
(6.1)
(4.4)
(38.7)
(75.3)
(63.0)
(0.2)
(138.5)
24.0
33.7
20.6
29.0
16.8
27.6
0.2
0.4
37.6
57.0
Acquired intangibles are recognised at fair value on acquisition and are amortised over their estimated useful lives. Fair values for acquired
intangibles are assessed by reference to future estimated cash flows, discounted at an appropriate rate to present value, or by reference to the
amount that would have been paid in an arm’s length transaction between two knowledgeable and willing parties. Other intangible assets are
recognised at cost and are amortised over their estimated useful economic lives, which are set out in the accounting policies section.
During the year ended 31 October 2018, the Group recognised an impairment of capitalised development costs of £9.5m (2017: £nil) following
the appointment of a new Chief Executive who conducted a strategic review of the Group’s product portfolio. This review was performed to
rationalise the future resources on areas where the Group has a niche position and competitive advantage. Of the total impairment charge,
£0.9m of the impairment charge relates to discontinued operations. The £7.4m impairment charge, as disclosed in note 3, relates to continuing
operations, net of the release of an associated government grant.
Included within the development costs of £24.0m, individually material balances relate to Joint Biological Tactical Detection System £8.9m (2017:
£8.1m) and Next Generation Chemical Detector £9.8m (2017: £8.4m). Development costs are amortised over their useful economic lives,
estimated to be between three and ten years, with the remaining amortisation periods for these assets ranging up to eight years.
Acquired technology of £20.6m includes individually material balances relating to Chemring Sensors & Electronic Systems £12.6m (2017: £16.1m),
Chemring Energetic Devices £5.6m (2017: £8.7m) and Roke £2.1m (2017: £2.6m). The remaining amortisation periods for these assets are five
years, nine years and four years respectively.
Acquired customer relationships of £16.8m include individually material balances relating to Chemring Energetic Devices £10.5m (2017: £11.6m),
Chemring Ordnance £nil (2017: £7.1m), Chemring Sensors & Electronic Systems £3.4m (2017: £4.0m) and Roke £2.1m (2017: £3.3m). The remaining
amortisation periods for these assets are eight years, nil years, five years and two years respectively.
An impairment charge against acquired technology (£0.7m) and acquired customer relationships (£5.4m) has been recognised in respect of the
disposal group in 2018, and forms part of the overall impairment loss of £69.3m as disclosed in note 29.
108
Chemring Group PLC Annual Report and Accounts 2018
Financial statementsNotes to the Group financial statements continued 13. Property, plant and equipment
Cost or valuation
At 1 November 2016
Additions
Disposals
Foreign exchange adjustments
At 31 October 2017
Additions
Disposals
Foreign exchange adjustments
At 31 October 2018
Depreciation
At 1 November 2016
Charge
Impairment
Disposals
Foreign exchange adjustments
At 31 October 2017
Charge
Impairment
Disposals
Foreign exchange adjustments
At 31 October 2018
Carrying amount
At 31 October 2018
At 31 October 2017
Land and
buildings
£m
Plant and
equipment
£m
121.9
1.5
(0.7)
(5.5)
117.2
7.1
(1.2)
1.8
124.9
(16.2)
(3.9)
(3.1)
0.6
1.6
(21.0)
(3.6)
(10.9)
0.6
(0.7)
(35.6)
89.3
96.2
132.3
10.9
(6.0)
(8.3)
128.9
14.0
(7.4)
2.3
137.8
(58.1)
(15.6)
(2.3)
5.7
5.3
(65.0)
(14.1)
(4.8)
6.6
(1.7)
(79.0)
58.8
63.9
Total
£m
254.2
12.4
(6.7)
(13.8)
246.1
21.1
(8.6)
4.1
262.7
(74.3)
(19.5)
(5.4)
6.3
6.9
(86.0)
(17.7)
(15.7)
7.2
(2.4)
(114.6)
148.1
160.1
In 2018, there was no interest capitalised in the year (2017: £nil). £1.1m (2017: £1.2m) of capitalised interest was charged as depreciation and
£0.4m (2017: £nil) was disposed of. This results in a net book value for capitalised interest of £10.8m (2017: £12.3m).
In 2018, impairment losses were recognised in respect of Chemring Ordnance Inc. following assessment of its carrying value.
Land and buildings were revalued at 30 September 1997 by Chestertons Chartered Surveyors, independent valuers not connected with the
Group, on the basis of depreciated replacement cost for two pyrotechnic sites and on open market for the remainder, which represent Level 2
measurements in the fair value hierarchy.
30 September 1997 depreciated replacement cost
Freehold at cost
Cost of land and buildings as at 31 October 2018
If stated under historical cost principles, the comparable amounts for the total of land and buildings would be:
Cost
Accumulated depreciation
Historical cost value
2018
£m
5.8
119.1
124.9
2018
£m
122.9
(34.7)
88.2
2017
£m
5.8
111.4
117.2
2017
£m
115.2
(20.3)
94.9
All other tangible fixed assets are stated at historical cost.
At 31 October 2018, the Group had entered into contractual commitments for the acquisition of property, plant and equipment amounting to
£10.8m (2017: £2.8m).
Chemring Group PLC Annual Report and Accounts 2018 109
OverviewStrategic reportGovernanceFinancial statementsOther information 14. Subsidiary undertakings
All subsidiary undertakings have been reflected in these financial statements. The subsidiary undertakings held at 31 October 2018, all 100%
owned by the Group, are shown below. All of these subsidiary undertakings are wholly controlled by Chemring Group PLC.
Country of incorporation
(or registration) and operation
Australia
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
Luxembourg
Operating segment
Countermeasures
Dormant
Dormant
Countermeasures
Energetics
Dormant
Non-trading
Non-trading
Non-trading
Dormant
Non-trading
Dormant
Holding company
Energetics
Sensors
Dormant
Non-trading
Holding company
Non-trading
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Non-trading
Dormant
Dormant
Dormant
Dormant
Dormant
Sensors
Dormant
Dormant
Holding company
Subsidiary undertaking
Chemring Australia Pty Limited
B.D.L. Systems Limited
Celco Industries (USA) Limited
Chemring Countermeasures Limited
Chemring Defence UK Limited
Chemring Energetics Limited
Chemring Europe Limited
Chemring Finance Europe Investments Limited
Chemring Finance Europe Limited
Chemring International Limited
Chemring Investments Limited
Chemring Limited
Chemring North America Unlimited
Chemring Prime Contracts Limited
Chemring Technology Solutions Limited
CHG Design Limited
CHG Overseas Investments Limited
CHG Overseas Limited
Chemring UAE Limited
Coated Electrodes UK Limited
Greys Exports Limited
Haley and Weller Limited
Karma Industries No 1 Limited
Karma Industries No 2 Limited
Kembrey Corporate Trustee Limited
Kembrey Electronics Limited
Kembrey Engineering Limited
Kembrey Group Limited
Kembrey Industries Limited
Kembrey Limited
Kembrey Technologies Limited
Leafield Engineering Limited
Nobel Energetics Limited
Parkway No 3 Limited
Parkway No 7 Limited
Parkway No 8 Limited
Parkway No 9 Limited
Parkway No 10 Limited
Protox Environmental Systems Limited
PW Defence Limited
Richmond EEI Limited
Richmond Electronics & Engineering Limited
Ripault Drivex Limited
Roke Manor Research Limited
Sarclad Rolltex Limited
Schermuly Limited
Chemring Luxembourg Finance SARL
110
Chemring Group PLC Annual Report and Accounts 2018
Financial statementsNotes to the Group financial statements continued 14. Subsidiary undertakings continued
Subsidiary undertaking continued
Chemring Luxembourg Holding SARL
Chemring Nobel AS
Chemring Energetics UK Limited
Alloy Surfaces Company, Inc.
ASC Realty LLC
Chemring Energetic Devices, Inc.
Chemring Military Products, Inc.
Chemring North America Administration, Inc.
Chemring North America Group, Inc.
Chemring Ordnance, Inc.
CHG Flares, Inc.
CHG Group, Inc.
Kilgore Flares Company LLC
Chemring Sensors & Electronic Systems, Inc.
Tactical Systems and Ordnance, Inc.
Country of incorporation
(or registration) and operation
Operating segment
Luxembourg
Norway
Scotland
US
US
US
US
US
US
US
US
US
US
US
US
Holding company
Energetics
Energetics
Countermeasures
Property holding company
Energetics
Energetics
Dormant
Holding company
Energetics
Holding company
Head office
Countermeasures
Sensors
Sensors
During the year the Group disposed of one of its Norwegian subsidiaries, 3d-Radar AS (note 29), and disposed of its only associated undertaking,
Chemring Aasia Services Pvt Limited. The Group owed 49% of the associated undertaking, which did not trade during the period.
CHG Overseas Limited, Chemring North America Unlimited, Parkway No 10 Limited, Chemring Investments Limited, Chemring Energetics Limited
and CHG Overseas Investments Limited are exempt from the requirement to file audited accounts for the year ended 31 October 2018 by
virtue of section 479A of the Companies Act 2006. See page 150 for the registered offices of the subsidiary undertakings.
15. Inventories
Raw materials
Work in progress
Finished goods
2018
£m
30.9
21.9
18.6
71.4
2017
£m
45.7
30.6
21.3
97.6
There are no significant differences between the replacement cost of inventory and the carrying amount shown above. The Group recognised
£9.6m (2017: £8.8m) as a write down of inventories to net realisable value for continuing operations. See note 4 for details of cost of inventories
recognised as an expense.
16. Trade and other receivables
Trade receivables
Allowance for doubtful debts
Contract receivables
Advance payments to suppliers
Other receivables
Prepayments and accrued income
2018
£m
45.8
(0.4)
45.4
—
0.7
3.5
12.6
62.2
2017
£m
92.9
(0.9)
92.0
0.7
25.8
1.2
11.3
131.0
All amounts shown above are due within one year.
The average credit period taken by customers on sales of goods, calculated using a countback basis, is 30 days (2017: 34 days). No interest is
charged on receivables from the date of invoice to payment.
Chemring Group PLC Annual Report and Accounts 2018 111
OverviewStrategic reportGovernanceFinancial statementsOther information 16. Trade and other receivables continued
The Group’s policy is to provide in full for trade receivables outstanding for more than 120 days beyond agreed terms, unless there are facts and
circumstances that support recoverability.
The directors consider that the carrying amount of trade and other receivables approximates to their fair values.
17. Cash and cash equivalents
Bank balances and cash comprise cash held by the Group and short-term deposits with an original maturity of three months or less. The carrying
amount of these assets approximates to their fair value.
– US dollar denominated
– Sterling denominated
– US dollar denominated
– US dollar denominated
18. Borrowings
Within current liabilities
Loan notes
Short-term borrowings
Borrowings due within one year
Within non-current liabilities
Bank borrowings
Loan notes
Preference shares
Borrowings due after more than one year
Total borrowings
Analysis of borrowings by currency:
Sterling
US dollar
The weighted average interest rates paid were as follows:
Bank overdrafts
UK bank loans
Loan notes
– Sterling denominated
– Sterling denominated
– US dollar denominated
An analysis of borrowings by maturity is as follows:
2018
£m
—
—
—
—
25.9
65.4
0.1
91.4
91.4
2018
£m
26.0
65.4
91.4
2017
£m
46.1
5.3
0.2
51.6
—
61.9
0.1
62.0
113.6
2017
£m
5.4
108.2
113.6
2018
%
2.1
2.1
6.8
5.7–6.3
2017
%
1.9
1.9
7.2
6.0–6.7
Borrowings falling due:
– within one year
Borrowings falling due:
– within one to two years
– within two to five years
– after five years
Total borrowings
Bank
loans and
overdrafts
£m
2018
Loan
notes
£m
Preference
shares
£m
—
—
—
25.9
—
25.9
25.9
65.4
—
—
65.4
65.4
—
—
—
0.1
0.1
0.1
Bank
loans and
overdrafts
£m
0.2
—
—
—
—
0.2
Total
£m
—
65.4
25.9
0.1
91.4
91.4
2017
Loan
notes
£m
51.4
—
61.9
—
61.9
113.3
Preference
shares
£m
—
—
—
0.1
0.1
0.1
Total
£m
51.6
—
61.9
0.1
62.0
113.6
112
Chemring Group PLC Annual Report and Accounts 2018
Financial statementsNotes to the Group financial statements continued 18. Borrowings continued
The Group has a £90.0m revolving credit facility. The revolving credit facility was established in October 2018, is with a syndicate of four banks
and has a four-year initial term with options to extend by a further two years. In addition, the Group has ancillary UK facilities of £36.0m in
respect of bonding and trade finance requirements, and a £7.8m facility to fulfil US trade finance and working capital requirements. None of the
borrowings in the current or the prior year were secured.
There have been no breaches of the terms of the loan agreements during the current or prior year.
The Group has the following undrawn borrowing facilities available, in respect of which all conditions precedent have been met. Interest costs
under these facilities are charged at floating rates.
Undrawn borrowing facilities
2018
£m
68.1
2017
£m
106.0
The Group is subject to two key financial covenants, which are tested quarterly. These covenants relate to the leverage ratio, being the ratio
between underlying earnings before interest, tax, depreciation and amortisation (“underlying EBITDA”) and debt, and the interest cover ratio
between underlying EBITDA and finance costs. The calculation of these ratios involves the translation of non-sterling denominated debt using
average, rather than closing, rates of exchange. The Group complied with these covenants throughout the year.
19. Trade and other payables
Within current liabilities
Trade payables
Other payables
Interest payable
Other tax and social security
Advance receipts from customers
Accruals
Deferred income
2018
£m
12.1
20.9
1.7
3.3
5.7
12.5
12.4
68.6
2017
£m
37.7
20.0
3.2
3.7
30.7
14.3
2.3
111.9
Trade payables and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. Advance receipts from customers
arise on larger contracts to fund working capital. The directors consider that the carrying amount of payables approximates to their fair value.
The average credit period taken on purchases of goods is 34 days (2017: 42 days) using year-end trade payables divided by cost of sales. No interest
is payable on trade payables from the date of invoice to payment.
20. Financial risk management
The Group uses financial instruments to manage financial risk wherever it is appropriate to do so. The main risks addressed by financial instruments
are liquidity risk, foreign currency risk, interest rate risk and credit risk. The Group’s policies in respect of the management of these risks, which
remained unchanged throughout the year, are set out below.
(a) Credit risk
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations,
and arises principally from the Group’s receivables from customers.
The impairment provisions for financial assets disclosed in note 16 “Trade and other receivables” are based on assumptions about risk of default
and expected loss rates. The Group uses judgement in making these assumptions and selecting the inputs to the impairment calculation, based
on the Group’s past history and existing market conditions, as well as forward-looking estimates at the end of each reporting period. Customers
are mainly multinational organisations or government agencies with whom the Group has long-term business relationships. The Group’s principal
customers are government defence departments, such as the US Department of Defense, the UK Ministry of Defence, US and UK defence
prime contractors, such as BAE Systems and General Dynamics, and distributors of products for their onward sale to end users.
Approximately half of continuing revenue in 2018 related to the US DoD, the UK MOD and the US and UK defence prime contractors, who
consistently pay within terms and are deemed low credit risk as a result. For all other customers the Group’s policy is to trade under a letter of
credit. If there is any doubt over recoverability, the Group’s policy is to provide in full for trade receivables outstanding for more than 120 days
beyond agreed terms. The balances which might be affected by credit risk are trade receivables and cash and cash equivalents.
Chemring Group PLC Annual Report and Accounts 2018 113
OverviewStrategic reportGovernanceFinancial statementsOther information 20. Financial risk management continued
(b) Capital management
The Group manages its capital to ensure that all entities in the Group will be able to continue as a going concern while meeting the returns to
stakeholders. The capital structure of the Group consists of equity (as disclosed in the consolidated statement of changes in equity), retained
earnings, cash and cash equivalents (note 17), a revolving credit facility ("RCF") and private placement notes (note 18). The Group seeks to
manage its capital through an appropriate mix of these items.
In October 2018, the RCF was renewed at a level of £90.0m for four years with an option of increasing this by £60.0m of additional facility and
with the option of renewing this by two additional years. As at 31 October 2018, the RCF was drawn by £26.5m. Private placement notes of
$83.6m mature in November 2019 and it is management’s current intention to repay these using a mixture of internal resources and the RCF.
(c) Financial risk management
The primary risks that the Group is exposed to are liquidity risk, foreign currency risk, interest rate risk and credit risk. It is the Group’s policy
to manage these risks under the following policies:
i. Liquidity risk management
Liquidity risk is the risk that the Group does not have sufficient financial resources to meet its obligations as they fall due. The Group manages
liquidity risk by maintaining adequate reserves and by continually monitoring forecast and actual cash flows. The Group’s policy is to maintain
continuity of funding through available cash and cash equivalents and the RCF.
ii. Foreign currency risk management
The Group’s presentational currency is sterling. The Group is subject to exposure on the translation of the assets of foreign subsidiaries, whose
functional currencies differ from the Group. The Group’s primary balance sheet translation exposures are to the US dollar, Australian dollar and
Norwegian krone. The Group minimises the balance sheet translation exposures, where it is practical to do so, by funding subsidiaries with
long-term loans, on which exchange differences are taken to reserves. US dollar borrowings held by the Group are treated as a net investment
hedge against the US dollar assets of the Group.
The Group faces currency exposures arising from the translation of profits earned in foreign currency. These exposures are not hedged.
Exposures also arise from foreign currency denominated trading transactions undertaken by subsidiaries deemed transactional exposures.
The Group’s policy is to hedge transactional exposures above £250,000 in the banking market on a one-to-one basis using forward contracts.
Below £250,000, the exposures are netted across subsidiaries and any surplus or deficit hedged in the banking market using spot or forward
contracts. The Group’s policy is that there is no speculative trading in financial instruments. During the year to 31 October 2018, there were
no options or structured derivatives utilised.
iii. Interest rate risk management
The Group finances its operations through a combination of retained profits, bank and loan note borrowings. The UK borrowings are
denominated in sterling and US dollars, and at the shorter end are subject to floating rates of interest.
IFRS 9 Financial Instruments
The Group currently reports under IAS 39 Financial Instruments: Recognition and Measurement but will be applying IFRS 9 Financial Instruments
(as revised in July 2014) from 1 November 2018.
IFRS 9 introduces three new requirements for 1) the classification and measurement of financial assets and financial liabilities, 2) the impairment
of finance assets and 3) general hedge accounting.
Chemring Group PLC is not a financial institution and does not have any complex financial instruments. The Group does not apply hedge accounting
and the Group’s customers are generally governments that are considered creditworthy and pay consistently within agreed payment terms.
As such, adoption of IFRS 9 is not assessed as having a significant impact on the Group. Details of these new requirements and their impact are
described as follows:
Area
Classification and measurement
Impairment of financial assets
Hedge accounting
Impact on IFRS 9 adoption
Reclassification of financial assets into the IFRS 9 categories will have no overall impact on their respective
measurement bases.
New requirements to recognise expected credit losses on day one are not expected to materially
impact the Group, whose customer base typically has favourable credit history. Any debts considered
doubtful have been fully provided for in this financial year. In future, any material impairment on debtors
will need separate disclosure on an income statement line item, with debtors ageing analysis to be
provided in the disclosure note.
Chemring currently does not apply hedge accounting and has not done so in previous periods.
114
Chemring Group PLC Annual Report and Accounts 2018
Financial statementsNotes to the Group financial statements continued 20. Financial risk management continued
IFRS 9 Financial Instruments continued
On 1 November 2018, the Group has assessed which business models apply to the financial assets held by the Group on 1 November 2018, the
date of the initial application of IFRS 9, and has classified its financial instruments into the appropriate IFRS 9 categories.
The initial application of IFRS 9 is not expected to have any significant impact on the Group’s financial assets as regards their classification and measurement.
Assets carried at amortised cost
Trade receivables
Accrued income
Other receivables
Cash and cash equivalents
Assets classified as held for sale
Assets carried at fair value
Derivative financial instruments
Assets classified as held for sale
Liabilities carried at fair value
Derivative financial instruments
Liabilities classified as held for sale
Liabilities carried at amortised cost
Trade payables
Other payables
Interest payable
Other tax and social security
Accruals
Liabilities classified as held for sale
Borrowings
Provisions
2018
2017
Carrying value
£m
Fair value
£m
Carrying value
£m
Fair value
£m
45.4
9.0
3.5
9.6
25.5
0.1
18.2
45.4
9.0
3.5
9.6
25.5
0.1
18.2
(0.5)
(10.2)
(0.5)
(10.2)
(12.1)
(20.9)
(1.7)
(3.3)
(12.5)
(16.7)
(91.4)
(20.7)
(12.1)
(20.9)
(1.7)
(3.3)
(12.5)
(16.7)
(95.8)
(20.7)
92.0
7.0
1.2
33.6
—
0.4
—
(0.4)
—
(37.7)
(20.0)
(3.2)
(3.7)
(14.3)
—
(113.6)
(15.3)
92.0
7.0
1.2
33.6
—
0.4
—
(0.4)
—
(37.7)
(20.0)
(3.2)
(3.7)
(14.3)
—
(113.6)
(15.3)
The following items are not financial instruments as defined by IFRS 9:
(a) prepayments made/advances received (right to receive future goods or services, not cash or a financial asset);
(b) tax receivables and payables and similar items (statutory rights and obligations, not contractual); or
(c) deferred revenue and warranty obligations (obligations to deliver goods and services, not cash or financial assets).
21. Financial instruments
The following table details the fair value of derivative financial instrument assets/(liabilities) recognised in the balance sheet:
Included in current assets
Included in current liabilities
Included in non-current liabilities
Forward foreign exchange contracts
2018
£m
0.1
(0.3)
(0.2)
(0.4)
2017
£m
0.4
(0.4)
—
—
There was a £0.4m loss (2017: £1.7m gain) on the movement in the fair value of derivative financial instruments recognised in the income statement.
Chemring Group PLC Annual Report and Accounts 2018 115
OverviewStrategic reportGovernanceFinancial statementsOther information 21. Financial instruments continued
The table below details the maturity profile of the nominal value of the Group’s derivative financial instruments and loans:
Falling due:
– within one year
– within one to two years
– within two to five years
Derivative
instruments
£m
2018
Loans and
overdrafts
£m
0.2
0.1
(0.1)
0.2
—
65.4
26.0
91.4
Total
£m
0.2
65.5
25.9
91.6
Derivative
instruments
£m
0.1
—
—
0.1
2017
Loans and
overdrafts
£m
51.6
—
62.0
113.6
Total
£m
51.7
—
62.0
113.7
Fair value hierarchy
IFRS 7 Financial Instruments: Disclosures requires companies that carry financial instruments at fair value in the balance sheet to disclose their level
of visibility, determining into which category those financial instruments fall under the fair value hierarchy.
The fair value measurement hierarchy is as follows:
JJ Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities;
JJ Level 2 – inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or
indirectly (i.e. derived from prices); and
JJ Level 3 – inputs for the asset or liability that are not based on observable market data (i.e. as unobservable inputs).
The following tables present the Group’s assets and liabilities that are measured at fair value:
Held at amortised cost
Floating rate bank facilities due 2022
$83.6m fixed rate loan notes due 2019
$61.1m and £5.3m fixed rate loan notes due 2017
Held at fair value
Derivative financial instruments – assets
Assets classified as held for sale
Derivative financial instruments – liabilities
Liabilities classified as held for sale
Fair value
hierarchy
Level 2
Level 2
Level 2
Level 2
Level 3
Level 2
Level 3
2018
Carrying
amount
£m
Fair value
£m
2017
Carrying
amount
£m
Fair value
£m
(25.9)
(65.4)
—
0.1
18.2
(0.5)
(10.2)
(83.7)
(25.9)
(69.6)
—
0.1
18.2
(0.5)
(10.2)
(87.9)
(0.2)
(61.9)
(51.4)
0.4
—
(0.4)
—
(0.2)
(69.2)
(53.0)
0.4
—
(0.4)
—
(113.5)
(122.4)
The assets and liabilities under Level 3 on the fair value hierarchy relate to discontinued businesses (see note 29 for further details). The fair
value of derivative financial instruments is estimated by discounting the future contracted cash flow, using readily available market data.
Sensitivity analysis
For the year ended 31 October 2018 the closing exchange rate for the US dollar was 1.28 (2017: 1.33) and the average exchange rate was
1.34 (2017: 1.30).
For the year ended 31 October 2018 a 10 cent decrease in the US dollar exchange rate would have increased reported net debt by
approximately £5.6m (2017: £8.9m).
The following table details the Group’s sensitivity to a 10 cent movement in the US dollar rate against sterling with regards to its income statement.
The Group considers a 10 cent strengthening or weakening of US dollars against sterling as a reasonable possible change in foreign exchange
rates. The other functional currencies used in the Group (Norwegian krone and Australian dollars) are not significant enough to have a material
impact on the Group results in the event of a reasonable possible change to their exchange rates.
116
Chemring Group PLC Annual Report and Accounts 2018
Financial statementsNotes to the Group financial statements continued 21. Financial instruments continued
Sensitivity analysis continued
Continuing operations
Revenue
Underlying operating profit
Interest
Underlying profit before tax
+10 cents
US dollar impact
–10 cents
US dollar impact
2018
£m
(9.3)
(1.9)
0.2
(1.7)
2017
£m
(9.1)
(0.8)
0.5
(0.3)
2018
£m
10.8
2.2
(0.3)
1.9
2017
£m
10.6
1.0
(0.6)
0.4
71% of the Group’s gross debt is at a fixed rate of 5.68% and the remainder is at floating rates. The Group has not entered into any interest rate swaps
and the Group’s policy is to manage interest risk with a mixture of fixed and floating rate debt. This is monitored on an ongoing basis for appropriateness.
As the Group mainly has fixed interest rate debt, a change in interest rates would not have an immediate significant impact on the income
statement. A change in interest rates of 1% throughout the year would cause the Group’s finance expense to change by £0.1m.
22. Provisions
At 1 November 2017
Provided
Transfers between categories
Foreign exchange adjustments
Paid
Released
At 31 October 2018
These provisions are classified on the balance sheet as follows:
Included in current liabilities
Included in non-current liabilities
Legal
provision
£m
1.6
7.5
—
(0.1)
—
—
9.0
Environmental
provision
£m
3.1
—
—
0.1
—
—
Restructuring
provision
£m
5.9
1.1
0.2
—
(3.9)
—
3.2
3.3
Disposal
provision
£m
4.5
—
—
—
(0.1)
(2.2)
2.2
Other
provision
£m
0.2
3.0
(0.2)
—
—
—
Total
£m
15.3
11.6
—
—
(4.0)
(2.2)
3.0
20.7
2018
£m
6.7
14.0
20.7
2017
£m
6.5
8.8
15.3
The legal provision represents the estimated legal liabilities faced by the Group at the balance sheet date. Further details of the Group’s contingent
liabilities are set out in note 34.
The environmental provision is held in respect of potential liabilities, associated with the Group’s facility in Chicago, US. The range of possible
outcomes is between £1.1m and £7.3m.
The restructuring provision relates principally to the closure of an Energetics facility in California, US. The closure of the facility is expected to be
completed in the first half of 2019 and the likely cost of restructuring is expected to be between £2m and £4m.
The disposal provision relates to estimated liabilities faced by the Group in respect of the disposal of its European Munitions businesses in 2014,
under the terms of their respective sale agreements. The range of possible outcomes is between £nil and £10.7m, and the risk of economic
outflow relating to these reduces with the passage of time.
Other provisions relate to the Group’s offset obligations. As a result of sales transactions in certain jurisdictions, the Group may enter into
contracts that have offset commitments. The offset obligation is valued based on the amounts delivered under the contract over a certain
period of time. The range of possible outcomes of the offset obligations of the Group depends on the solution agreed and is between £1.6m
and £8.1m. A provision of £3.0m (2017: £nil) has been recognised to cover the estimated offset obligation.
Provisions are subject to uncertainty in respect of the outcome of future events. Legal provisions will be utilised based on the outcome of cases
and the level of costs incurred defending the Group’s position. Environmental provisions will be utilised based on the outcome of further environmental
studies and remediation work. Restructuring provisions will be utilised based on actual costs incurred for redundancy, dead rent and dilapidations
and these will be impacted by the final negotiated settlement of any claims with landlords. Disposal provisions will be utilised based on the outcome
of certain events which are specified in sale and purchase agreements. It is not possible to estimate more accurately the expected timing of any
resulting outflows of economic benefits.
Chemring Group PLC Annual Report and Accounts 2018 117
OverviewStrategic reportGovernanceFinancial statementsOther information 23. Deferred tax
The following are the principal deferred tax assets/(liabilities) recognised by the Group and movements thereon:
At 1 November 2016
(Charge)/credit to income
(Charge)/credit to equity
At 1 November 2017
(Charge)/credit to income
(Charge)/credit to equity
Transfers
At 31 October 2018
Analysed as:
Deferred tax assets
Deferred tax liabilities
At 31 October 2018
Deferred tax assets
Deferred tax liabilities
At 31 October 2017
Accelerated
tax
depreciation
£m
(16.6)
4.6
(0.3)
(12.3)
4.1
—
(0.6)
(8.8)
1.7
(10.5)
(8.8)
0.3
(12.6)
(12.3)
Pensions
£m
3.3
(1.2)
(2.0)
0.1
(1.2)
(0.1)
—
(1.2)
—
(1.2)
(1.2)
0.1
—
0.1
US interest
deductions
£m
14.6
10.8
(2.8)
22.6
(22.6)
—
—
—
—
—
—
22.6
—
22.6
Tax
losses
£m
7.4
(5.7)
(0.2)
Acquired
intangibles
£m
(9.8)
(0.9)
0.4
1.5
1.1
—
—
2.6
2.6
—
2.6
1.5
—
1.5
(10.3)
5.8
—
(0.5)
(5.0)
25.0
(30.0)
(5.0)
30.2
(40.5)
(10.3)
Other
£m
2.2
2.2
3.7
8.1
(5.3)
(0.5)
(0.2)
2.1
7.5
(5.4)
2.1
8.5
(0.4)
8.1
Total
£m
1.1
9.8
(1.2)
9.7
(18.1)
(0.6)
(1.3)
(10.3)
36.8
(47.1)
(10.3)
63.2
(53.5)
9.7
The Finance Act 2016, which provided for reductions in the main rate of UK corporation tax from 20% to 19% effective from 1 April 2017 and
to 17% effective from 1 April 2020, was substantively enacted on 19 September 2016.
The closing UK deferred tax asset as at 31 October 2018 has been calculated at the rates which will be in force when the assets and liabilities
are expected to reverse.
The Group’s deferred tax provision at the balance sheet date includes an asset of £nil (2017: £22.6m) in relation to amounts carried forward
under the US interest limitation regulations.
The US Tax Cuts and Jobs Act (“TCJA”) was substantively enacted on 22 December 2017. The TCJA provides for a reduction in the main rate
of federal corporate income tax from 35% to 21% for accounting periods beginning on or after 1 January 2018, thus impacting the Group for its
2019 financial year, however the impact on the deferred tax asset has been recognised in the year ended 31 October 2018.
The impact on Chemring has been two-fold; the reduction in the main rate of US federal corporate income tax has resulted in a write off of
deferred tax of £8.6m associated with tax losses and interest restrictions, offset by a £3.9m credit on the revaluation of the deferred tax liabilities
associated with US-related acquired intangibles. This has resulted in a net write off of £4.7m in respect of the rate change. In addition, the
introduction of restrictions on the availability of interest deductions has resulted in a write off of deferred tax of £12.7m. The total impact of
£17.4m has been treated as a non-underlying item in 2018 (see note 3).
Certain deferred tax assets and liabilities have been offset in accordance with the Group’s accounting policy. Deferred tax balances after offset
are analysed on the balance sheet as per the table above.
At the balance sheet date, the Group had unrecognised tax losses of £29.9m (2017: £27.5m) potentially available for offset against future profits
in certain circumstances, the increase arising primarily as a result of the tax losses arising in the UK. No deferred tax asset has been recognised
in respect of this amount because of the unpredictability of future taxable qualifying profit streams.
118
Chemring Group PLC Annual Report and Accounts 2018
Financial statementsNotes to the Group financial statements continued 24. Share capital
Issued and fully paid
281,763,364 (2017: 281,588,075) ordinary shares of 1p each
2018
£m
2.8
2017
£m
2.8
During the year, 175,289 ordinary shares (2017: 162,819) were issued for cash to employees under the Group’s approved savings-related share schemes.
The Company’s share capital also includes 62,500 7% cumulative preference shares of £1 each, which are all issued and fully paid up, and are
classified for accounting purposes within non-current liabilities. The cumulative preference shares carry an entitlement to a dividend at the rate
of 7p per share per annum, payable in equal instalments on 30 April and 31 October each year. Holders of the preference shares have the right
on a winding-up to receive, in priority to any other classes of shares, the sum of £1 per share together with any arrears of dividends.
25. Reserves
The share premium account, the special capital reserve and the revaluation reserve are not distributable.
The special capital reserve was created as part of a capital reduction scheme involving the cancellation of the share premium account which was
approved by the Court in 1986, in accordance with the requirements of the Companies Act 1985.
Included within retained earnings are £3.7m (2017: £3.6m) relating to the share-based payment reserve and £0.7m (2017: £nil) of the Company’s
own shares held by the Group’s Employee Share Ownership Plan Trust.
Group dividends (note 9) are payable out of the parent company retained earnings as disclosed in the parent company financial statements.
This provides cover over the declared final dividend of 2.2p per ordinary share for the year ended 31 October 2018.
26. Own shares
At 1 November 2017
Transactions
At 31 October 2018
2018
£m
9.6
(1.8)
7.8
2017
£m
9.6
—
9.6
The own shares reserve represents the cost of shares in the Company purchased in the market and held by the Group to satisfy awards under
the Group’s share-based incentive schemes, details of which are set out in note 28. No ordinary shares (2017: nil) were acquired during the year
and 410,104 ordinary shares (2017: nil) were distributed following the vesting of awards under the PSP. The total number of ordinary shares
held in treasury at 31 October 2018 was 1,788,710 (2017: 2,198,814), with an average cost of 439.0p (2017: 439.0p) per share.
This represents 0.6% (2017: 0.8%) of the total issued and fully paid ordinary share capital.
27. Obligations under non-cancellable operating leases
Minimum lease payments under operating leases recognised in the income statement
2018
£m
1.4
2017
£m
1.8
At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases,
falling due as follows:
Within one year
In the second to fifth years
Over five years
2018
£m
1.7
3.5
0.1
5.3
2017
£m
2.3
3.0
0.2
5.5
Operating lease payments represent rentals payable by the Group. Leases are largely negotiated for an average term of three years and rentals
are largely fixed for the lease period, with an option to extend for a further period at the then prevailing market rate.
Chemring Group PLC Annual Report and Accounts 2018 119
OverviewStrategic reportGovernanceFinancial statementsOther information 28. Share-based payments
The Group operates share-based compensation arrangements to provide incentives to the Group’s senior management and eligible employees.
The Group recognised a net charge of £1.1m (2017: £1.9m) in respect of share-based payments during the year.
Details of the four schemes which operated during the year are set out below.
The Chemring Group Performance Share Plan (the “PSP”) and The Chemring Group Performance Share Plan 2016 (the “2016 PSP”)
Under the PSP and the 2016 PSP, conditional awards of ordinary shares are made at nil cost to employees. Awards ordinarily vest on the third
anniversary of the award date. The PSP commenced in March 2006 and expired in March 2016, when it was replaced by the 2016 PSP, which
has broadly similar terms. Awards remain outstanding under the PSP but all new awards are now made under the 2016 PSP.
Outstanding at the beginning of the year
Awarded
Vested
Lapsed
Outstanding at the end of the year
Subject to vesting at the end of the year
The following awards were outstanding at 31 October 2018:
Date of award
25 January 2016
7 March 2016
24 March 20171
19 January 20181
26 June 20181
PSP
Number of conditional shares
2017
4,503,592
2016 PSP
Number of conditional shares
2017
—
2,295,577
—
(111,690)
2018
2,183,887
— 2,228,787
—
—
(1,333,619)
(558,877)
2018
3,169,973
—
(410,104)
(1,060,000)
1,699,869
3,169,973
3,853,797
2,183,887
—
—
—
—
Number of
ordinary
shares
under award
1,558,104
141,765
1,966,009
1,394,634
493,154
Vesting price
per share
Pence
nil
nil
nil
nil
nil
Date when
awards due
to vest
25 January 2019
7 March 2019
24 March 2020
19 January 2021
26 June 2021
1. These awards were granted under the 2016 PSP.
The Group has applied a discount to the share-based payments, to reflect the anticipated achievement of the stipulated targets for each PSP and
2016 PSP award based on the predicted figures within the Group’s financial projections and the expected number of leavers over the life of the awards.
The 2016 PSP awards made in the year ended 31 October 2018 had targets based on earnings per share growth and total shareholder return.
The awards have been valued using the following modelling inputs:
Share price at valuation
Exercise price
Risk-free rate
Expected volatility
Fair value
26 June
2018
218p
nil
0.6%
36.1%
153.3p
19 January
2018
188p
nil
0.6%
34.7%
132.2p
Date awarded
24 March
2017
196p
nil
0.2%
28.8%
165.5p
7 March
2016
134p
nil
0.4%
38.6%
85.5p
25 January
2016
138p
nil
0.7%
36.4%
107.0p
The weighted average fair value of awards made during the year was 136.9p (2017: 165.5p).
In the year to 31 October 2018 410,104 (2017: nil) awards vested. The charge recognised in respect of the awards is based on their fair value at
the grant date.
120
Chemring Group PLC Annual Report and Accounts 2018
Financial statementsNotes to the Group financial statements continued 28. Share-based payments continued
The Chemring Group Restricted Share Plan (the “RSP”)
Under the RSP, deferred awards of ordinary shares are made at nil cost to employees. Awards ordinarily vest on the second or third anniversary
of the award date. The first awards under the RSP were made in February 2013.
Outstanding at the beginning of the year
Awarded
Exercised
Outstanding at the end of the year
Subject to vesting at the end of the year
The following RSP awards were outstanding at 31 October 2018:
Date of award
7 March 2016
The Chemring Group 2008 and 2018 UK Sharesave Plan (the “UK Sharesave Plan”)
Options were granted during the year on 30 July 2018.
Outstanding at the beginning of the year
Granted
Exercised
Lapsed
Outstanding at the end of the year
Subject to exercise at the end of the year
The following options were outstanding at 31 October 2018:
Number of deferred shares
2018
50,000
—
—
50,000
—
2017
50,000
—
—
50,000
—
Number
of ordinary
shares under
award
50,000
Vesting
price
per share
Pence
nil
Date
when
award
due to vest
7 March 2019
2018
2017
Number
of share
options
1,813,653
461,603
(175,289)
(198,157)
1,901,810
42,420
Weighted
average
exercise
price
Pence
126.7
178.0
143.8
150.4
135.1
157.8
Number
of share
options
1,728,037
528,998
(162,819)
(280,563)
1,813,653
74,792
Weighted
average
exercise
price
Pence
128.1
148.0
141.3
166.7
126.7
150.7
Date of award
30 July 2013
30 July 2014
30 July 2015
30 July 2015
27 July 2016
27 July 2016
27 July 2017
27 July 2017
30 July 2018
30 July 2018
Number
of ordinary
shares under
award
4,296
52,515
38,124
33,848
798,933
78,853
394,659
65,470
351,531
83,581
Exercise price
per share
Pence
209.0
142.0
152.0
152.0
105.0
105.0
148.0
148.0
178.0
178.0
Dates between which
options may be exercised
1 October 2018–31 March 2019
1 October 2019–31 March 2020
1 October 2018–31 March 2019
1 October 2020–31 March 2021
1 October 2019–31 March 2020
1 October 2021–31 March 2022
1 October 2020–31 March 2021
1 October 2022–31 March 2023
1 October 2021–31 March 2022
1 October 2023–31 March 2024
The weighted average fair value of options granted in the year was 44.0p (2017: 37.0p).
The weighted average fair value of options exercised in the year was 36.6p (2017: 36.7p).
The weighted average share price on exercise of the options during the year was 143.8p (2017: 141.3p).
The fair values of the share options in the UK Sharesave Plan are based on the difference between the exercise price and the share price on the
grant date of the option.
Chemring Group PLC Annual Report and Accounts 2018 121
OverviewStrategic reportGovernanceFinancial statementsOther information 29. Disposals and held for sale
As disclosed in the Chairman’s statement on page 6, a strategic review of the Group’s Energetics portfolio was conducted during the year.
The Board concluded that the future focus within the Energetics segment should be on the Energetic Devices businesses. It therefore made the
decision to exit a number of commodity Energetics businesses including; Chemring Defence UK Limited, Chemring Prime Contracts Limited,
Chemring Military Products Inc. and Chemring Ordnance Inc. Accordingly, these businesses are presented as held for sale as at 31 October 2018.
Impairment losses relating to the disposal group
Impairment losses of £69.3m for write downs relating to the discontinued operations to the lower of their carrying amount and their fair value
less costs to sell have been included in non-underlying items (see note 5). The impairment losses have been applied to reduce the carrying
amount of goodwill, property, plant and equipment, capitalised development costs, inventory and receivables.
Assets and liabilities classified as held for sale
As at 31 October 2018, the discontinued operations were stated at fair value less costs to sell and comprised the following assets and liabilities:
Deferred tax asset
Inventory
Trade and other receivables
Assets classified as held for sale
Deferred tax liability
Trade and other payables
Current tax
Liabilities directly associated with assets classified as held for sale
2018
£m
4.4
7.3
32.0
43.7
(6.1)
(18.4)
(2.4)
(26.9)
The above items are presented at the lower of carrying amount and fair value less costs to sell. For those business units where the carrying
value of the assets and liabilities is expected to be realised through sale, no fair value adjustments have been carried out. £25.5m of the assets
classified as held for sale and £16.7m of the liabilities classified as held for sale are shown at carrying value.
The assets and liabilities at fair value less costs to sell are valued on an undiscounted basis, with impairments down to realisable value applied to
assets in order of increasing liquidity. This fair value measurement for the disposals has been categorised as a Level 3 fair value based on the inputs
to the valuation technique used. £18.2m of assets classified as held for sale and £10.2m of liabilities classified as held for sale are shown at fair value.
The costs to sell these businesses are estimated at £0.8m.
In 2017 a £3.5m credit from discontinued operations related to disposals made in prior years. The (costs)/credits in relation to disposals are
included within the results of discontinued operations – further analysis is presented in note 5.
Disposal (costs)/credits
European munitions businesses disposal
Disposed property dilapidations
Marine business disposal
3d-Radar disposal
2018
£m
—
—
—
(0.7)
(0.7)
2017
£m
2.7
0.1
0.7
—
3.5
30. Retirement benefit obligations
In the UK, the Group operates a defined benefit scheme (the “Chemring Group Staff Pension Scheme”). In Norway, Chemring Nobel operates
a defined benefit scheme (the “Chemring Nobel Scheme”). The Group’s other UK and overseas pension arrangements are all defined contribution
schemes, with a combined cost of £5.8m (2017: £5.5m) for continuing operations.
The Chemring Group Staff Pension Scheme is a funded scheme and the assets of the scheme are held in a separate trustee administered fund.
The scheme was closed to future accrual on 6 April 2012. A full actuarial valuation for the Scheme as at 6 April 2018 has been prepared and
updated to 31 October 2018, using the projected unit credit method. The main assumptions for the scheme are detailed below. The surplus
of the Chemring Group Staff Pension Scheme was £7.5m at 31 October 2018 (2017: £0.6m deficit).
122
Chemring Group PLC Annual Report and Accounts 2018
Financial statementsNotes to the Group financial statements continued 30. Retirement benefit obligations continued
Under the funding plan agreed with the trustees following the 2018 actuarial valuation, the Company agreed to eliminate the deficit indicated by
that valuation in the period to 31 December 2018. This funding plan provided for one further contribution of £0.4m to be made in November 2018.
The Company and the trustees monitor funding levels annually, and a new funding plan is agreed with the trustees every three years, based on
actuarial valuations. The Group considers that the current contribution rates agreed with the trustees are sufficient to eliminate the calculated
deficit over the agreed period.
In October 2018, the High Court handed down a judgement involving the Lloyds Banking Group’s defined benefit pension schemes. The judgement
concluded that pension schemes should be amended to equalise pension benefits for men and women in relation to guaranteed minimum pension
benefits. The Group is working with its actuarial advisers, to understand the extent to which judgement crystallises any additional liabilities for
the Group UK defined benefit pension scheme. It is estimated that the additional liability could be in the region of £0.4m and £1.2m therefore
£0.8m has been recognised in the year to 31 October 2018. Subsequent to further assessment, any necessary further adjustment is expected
to be recognised in the first half of the year ended 31 October 2019.
The trust deed provides for an unconditional right to a return of surplus assets in the event of a plan wind-up. The trustees gave no rights to unilaterally
wind up or augment the benefits due to members of the scheme. Based on these rights, any net surplus in the UK scheme is recognised in full.
The Chemring Nobel Scheme is a funded scheme and the assets of the scheme are held in a separate fund. The actuarial liability has been
calculated at 31 October 2018 by a qualified actuary using the projected unit credit method. The main assumptions used were a discount
rate of 2.0% and rate of increase in deferred pensions of 3.5%. The net surplus of the Chemring Nobel Scheme was £nil at 31 October 2018
(2017: £nil) and as such is immaterial for further detailed disclosures.
The movement in the net defined benefit liability is as follows:
Defined benefit obligations
Defined benefit asset
Net defined benefit asset/(liability)
At 1 November
Included in profit or loss
Past service cost
Net interest cost
Included in other comprehensive income
Remeasurement gain/(loss):
Actuarial gain/(loss) arising from:
– Demographic and financial assumptions
– Experience adjustment
– Return on plan assets excluding interest income
Other
Contributions by the employer
Additional contributions by the employer
Net benefits paid out
At 31 October
2018
£m
(83.8)
(0.8)
(2.3)
(3.1)
(0.8)
(0.1)
—
(0.9)
—
—
4.4
2017
£m
(94.7)
—
(2.5)
(2.5)
7.6
1.8
—
9.4
—
—
4.0
(83.4)
(83.8)
2018
£m
83.2
—
2.2
2.2
—
—
1.8
1.8
7.9
0.2
(4.4)
90.9
2017
£m
77.4
—
2.1
2.1
—
—
2.5
2.5
5.0
0.2
(4.0)
83.2
2018
£m
(0.6)
(0.8)
(0.1)
(0.9)
(0.8)
(0.1)
1.8
0.9
7.9
0.2
—
7.5
2017
£m
(17.3)
—
(0.4)
(0.4)
7.6
1.8
2.5
11.9
5.0
0.2
—
(0.6)
The Chemring Group Staff Pension Scheme had 966 members at the end of the year (2017: 1,030). Of these members 53.2% (2017: 53.1%)
were pensioners drawing benefits from the scheme and the balance were deferred members. The duration of the liability is long, with pension
payments expected to be made for at least the next 40 years.
Chemring Group PLC Annual Report and Accounts 2018 123
OverviewStrategic reportGovernanceFinancial statementsOther information 30. Retirement benefit obligations continued
Additional pension obligations arising from past additional voluntary contributions and corresponding insurance assets, both equalling £2.3m,
have been included in this year’s accounts for the first time. The comparative figures have not been restated as there is no impact to the primary
statements and the amount is considered not material.
The pension schemes’ assets are analysed as follows:
Equities
Liability Driven Investment
Corporate bonds
Assets held by insurance company
Cash
2018
£m
27.9
22.5
34.9
2.3
3.3
90.9
2017
£m
54.6
20.7
7.5
—
0.4
83.2
2018
%
30.7
24.8
38.4
2.5
3.6
2017
%
65.6
24.9
9.0
—
0.5
100.0
100.0
The schemes’ assets are invested in accordance with the statement of investment principles after taking professional advice from the schemes’
investment advisers. The investment strategy is to split the assets into a growth portfolio of index trading equity funds, real return funds, and a
matching portfolio of leveraged liability driven pooled funds.
The principal assumptions used in the actuarial valuation of the Chemring Group Staff Pension Scheme were as follows:
Discount rate
Rate of increase in deferred pensions
Rate of increase in pensions in payment (where applicable)
Inflation – RPI
– CPI
2018
%
2.8
2.1
3.1
3.2
2.1
2017
%
2.7
2.0
3.0
3.1
2.0
In determining defined benefit obligations, the Group uses mortality assumptions which are based on published mortality tables. For the Chemring
Group Staff Pension Scheme, the actuarial table currently used is SAPS Normal Health pensioner tables with future improvements in line with
CMI 2017 and a 1.25% long-term trend rate.
This results in the following life expectancies at age 65:
Future pensioners
– male
– female
Current pensioners – male
– female
2018
89.2
90.8
87.8
89.3
2017
88.5
90.5
87.1
89.0
The most significant assumptions in the pension valuation are the discount rate applied to the liabilities, the inflation rate to be applied to pension
payments and the mortality rates. If the discount rate used in determining retirement benefit obligations were to change by 0.1% then it is predicted
that the deficit in the scheme would change by approximately £1.2m. A change in the rate of inflation by 0.1% is predicted to change the deficit
by approximately £0.6m and a one year change to the longevity assumption would change the deficit by approximately £2.7m. The principal
risks to the schemes are that the investments do not perform as well as expected, the discount rate continues to fall driven by lower market
interest rates and the rate of improvement in mortality assumed is insufficient and life expectancies continue to rise.
The Group anticipates contributions to the defined benefit schemes for the year ending 31 October 2019 will be £0.4m (2018: £7.9m).
124
Chemring Group PLC Annual Report and Accounts 2018
Financial statementsNotes to the Group financial statements continued
31. Cash generated from operating activities
Operating (loss)/profit from continuing operations
Amortisation of development costs
Amortisation of intangible assets arising from business combinations
Amortisation of patents and licences
Loss on disposal of non-current assets
Depreciation of property, plant and equipment
Non-cash movement of non-underlying items
Gain on the fair value of derivative financial instruments
Share-based payment expense
Operating cash flows before movements in working capital
Decrease in inventories
Decrease/(increase) in trade and other receivables
(Decrease) in trade and other payables
(Decrease) in provisions
Operating cash flow from continuing underlying operations
Discontinued operations
Operating cash flow from discontinued underlying operations
Cash impact of non-underlying items from discontinued operations
Net cash inflow from discontinued operating activities
Net cash outflow from discontinued investing activities
Net cash inflow from discontinued operations
32. Reconciliation of net cash flow to movement in net debt
Decrease in cash and cash equivalents
Decrease in debt and lease financing due to cash flows
Decrease in net debt resulting from cash flows
Effect of foreign exchange rate changes
Amortisation of debt finance costs
Movement in net debt
Net debt at the beginning of the year
Net debt at the end of the year
2018
£m
(15.9)
3.6
11.6
0.1
0.2
15.3
35.3
—
1.1
51.3
1.6
0.2
(8.3)
(0.1)
44.7
12.2
(0.1)
12.1
(1.2)
10.9
2018
£m
(24.5)
26.0
1.5
(2.0)
(1.3)
(1.8)
(80.0)
(81.8)
2017
£m
4.6
6.9
12.1
0.1
0.2
16.4
15.0
(0.1)
1.7
56.9
3.5
(11.8)
(6.9)
(0.1)
41.6
5.5
(0.7)
4.8
(2.8)
2.0
2017
£m
(29.4)
29.4
—
10.0
(2.4)
7.6
(87.6)
(80.0)
Chemring Group PLC Annual Report and Accounts 2018 125
OverviewStrategic reportGovernanceFinancial statementsOther information 33. Analysis of net debt
Cash at bank and in hand
Debt due within one year
Debt due after one year
Preference shares
At
1 November
2017
£m
33.6
(51.6)
(61.9)
(0.1)
Cash flows
£m
(24.5)
26.0
—
—
Non-cash
changes
£m
—
25.6
(26.9)
—
Exchange
rate effects
£m
0.5
—
(2.5)
—
At
31 October
2018
£m
9.6
—
(91.3)
(0.1)
(80.0)
1.5
(1.3)
(2.0)
(81.8)
34. Contingent liabilities
At 31 October 2018, the Group had contingent liabilities in respect of bank and contractual performance guarantees and other matters arising
in the ordinary course of business. Where it is expected that a material liability will arise in respect of these matters, appropriate provision is
made within the financial statements. As the conditions of these guarantees are currently being met, no obligating event is foreseeable and
therefore no provision has been made.
The Group is, from time to time, party to legal proceedings and claims, and is involved in correspondence relating to potential claims, which
arise in the ordinary course of business.
Pricing of an historic contract
A dispute between Alloy Surfaces Company, Inc. and the US Army, in relation to disputed pricing of a certain historic contract fulfilled by Alloy
Surfaces Company, Inc., proceeded to a hearing in front of the US Armed Services Board of Contract Appeals (“ASBCA”) in April 2017. ASBCA
is expected to take approximately two years to issue its decision in relation to this matter, and therefore it is too early to predict the outcome
of the hearing. The range of possible outcomes is between £nil to £12.0m. A provision of £1.0m (2017: £1.1m) exists to cover estimated legal
costs for the Group with regards to this issue.
Controlled Foreign Company (“CFC”) Finance Company exemption
Since 2013, the Group has benefited from the UK’s Controlled Foreign Company (“CFC”) Finance Company exemption. The European Commission has
launched an investigation into whether the UK’s CFC Finance Company exemption breaches state aid rules. No timescale has been set for the review and
this could take several years to conclude. If, at the end of the investigation, the regime is considered to be in contravention of the State Aid provisions, the
UK Government will be required to seek repayment of the lost tax from the relevant taxpayers. Given the early stage of the investigation, it is too early to
determine whether a tax liability is probable. The range of possible outcomes is between £nil and £15m, plus interest.
Serious Fraud Office investigation
The Serious Fraud Office (“SFO”) is currently undertaking a formal investigation into concerns about bribery, corruption and money laundering
involving intermediaries who previously represented one of the Group’s UK-based subsidiaries, Chemring Technology Solutions Limited
(“CTSL”), and its predecessor companies. The investigation commenced following a voluntary report made by CTSL relating to two specific
historic contracts, the first of which was awarded prior to the Group’s ownership of the business concerned and the second in 2011, neither of
which are considered to be material in the context of the Group. It is too early to predict the outcome of the SFO’s investigation, in which the
Group continues to co-operate fully.
Countermeasures UK incident
On 10 August 2018 an incident occurred at our Countermeasures facility in Salisbury. The Group responded immediately to support those who
were injured, and maintains appropriate employers’ liability insurance that we expect will provide full compensation in due course. We continue to
fully support the Health and Safety Executive (“HSE”) as it undertakes its investigation. Whilst provisions have been recorded for costs that have
been identified, it is possible that additional uninsured costs and, depending on the outcome of the HSE investigation, financial penalties may be
incurred. At this stage these costs are not anticipated to be material in the context of the Group’s financial statements.
126
Chemring Group PLC Annual Report and Accounts 2018
Financial statementsNotes to the Group financial statements continued 35. Related party transactions
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed
in this note. Transactions with the Group’s pension schemes are disclosed in note 30.
Trading transactions
There were no trading activities between the Group and its associate in this period or the comparative period.
Remuneration of key management personnel
For the purposes of remuneration disclosure, key management personnel includes only the directors and excludes the other senior business
managers and members of the Executive Committee. Their remuneration is set out below in aggregate for each of the categories specified in
IAS 24 Related Party Disclosures. Further information on the remuneration of individual directors is provided in the audited part of the directors’
remuneration report on pages 76 to 91.
The directors of the Company had no material transactions with the Company during the year, other than in connection with their service
agreements. The remuneration of the executive directors is determined by the Remuneration Committee, having regard to the performance of
the individuals and market trends. The remuneration of the non-executive directors is determined by the Board, having regard to the practice of
other companies and the particular demands of the Group.
Remuneration of key management personnel
Further detail can be found in the directors’ remuneration report on pages 66 to 91.
36. Events since the end of the year
There are no post balance sheet events.
2018
£m
2.2
2017
£m
2.1
Chemring Group PLC Annual Report and Accounts 2018 127
OverviewStrategic reportGovernanceFinancial statementsOther information Parent company balance sheet
As at 31 October 2018
Non-current assets
Property, plant and equipment
Investments in subsidiaries
Amounts owed by subsidiary undertakings
Retirement benefit surplus
Current assets
Trade and other receivables
Cash and cash equivalents
Total assets
Current liabilities
Borrowings
Trade and other payables
Non-current liabilities
Borrowings
Trade and other payables
Provisions
Deferred tax
Preference shares
Retirement benefit obligations
Total liabilities
Net assets
Equity
Share capital
Share premium account
Special capital reserve
Retained earnings
Own shares
Total equity
Note
1
2
4
12
4
6
5
6
5
7
11
8
12
9
10
2018
£m
£m
2017
£m
£m
0.2
652.8
436.9
3.1
8.1
—
—
(294.0)
(84.6)
(63.0)
(5.0)
(0.1)
(0.1)
—
0.3
625.2
360.3
—
1,093.0
985.8
8.1
1,101.1
12.9
25.3
(51.4)
(214.1)
38.2
1,024.0
(294.0)
(265.5)
(61.9)
(62.8)
(0.2)
(0.4)
(0.1)
(0.2)
(125.6)
(391.1)
632.9
2.8
305.3
12.9
321.5
642.5
(9.6)
632.9
(152.8)
(446.8)
654.3
2.8
305.4
12.9
341.0
662.1
(7.8)
654.3
Profit attributable to shareholders
In accordance with the concession granted under section 408 of the Companies Act 2006, the profit and loss account of Chemring Group PLC
has not been presented separately in these financial statements. There is no material difference between the results disclosed and the results on
an unmodified historical cost basis. The Company reported a profit for the year ended 31 October 2018 of £28.2m (2017: £27.4m).
These financial statements of Chemring Group PLC (registered number 86662) were approved and authorised for issue by the Board of
directors on 17 January 2019.
Signed on behalf of the Board
Michael Ord
Director
Andrew Lewis
Director
128
Chemring Group PLC Annual Report and Accounts 2018
Financial statements Parent company statement of comprehensive income
For the year ended 31 October 2018
Profit after tax attributable to equity holders of the parent as reported
Items that will not be reclassified subsequently to profit and loss
Actuarial (losses)/gains on pension scheme, net of deferred tax
Total comprehensive income attributable to the equity holders of the parent
2018
£m
28.2
(0.2)
28.0
2017
£m
27.4
2.8
30.2
Parent company statement of changes in equity
For the year ended 31 October 2018
At 1 November 2017
Profit after tax
Other comprehensive loss
Total comprehensive income
Ordinary shares issued
Share-based payments (net of settlement)
Transactions in own shares
Dividends paid
At 31 October 2018
At 1 November 2016
Profit after tax
Other comprehensive income
Total comprehensive income
Ordinary shares issued
Share-based payments (net of settlement)
Dividends paid
At 31 October 2017
Share capital
£m
2.8
—
—
—
—
—
—
—
Share
premium
account
£m
305.3
—
—
—
0.1
—
—
—
Special
capital
reserve
£m
12.9
—
—
—
—
—
—
—
Retained
earnings
£m
321.5
Own shares
£m
(9.6)
28.2
(0.2)
28.0
—
0.2
—
(8.7)
—
—
—
—
—
1.8
—
Total
£m
632.9
28.2
(0.2)
28.0
0.1
0.2
1.8
(8.7)
2.8
305.4
12.9
341.0
(7.8)
654.3
Share capital
£m
2.8
—
—
—
—
—
—
2.8
Share
premium
account
£m
305.1
—
—
—
0.2
—
—
Special
capital
reserve
£m
12.9
—
—
—
—
—
—
Retained
earnings
£m
296.1
Own shares
£m
(9.6)
27.4
2.8
30.2
—
1.6
(6.4)
—
—
—
—
—
—
Total
£m
607.3
27.4
2.8
30.2
0.2
1.6
(6.4)
305.3
12.9
321.5
(9.6)
632.9
The auditor’s remuneration for audit and other services is disclosed in note 4 to the Group financial statements.
A final dividend of 2.2p per ordinary share has been proposed. See note 9 to the Group financial statements.
As at 31 October 2018 the Company had distributable reserves of £336.3m (2017: £316.9m). When required, the Company can receive
dividends from its subsidiaries to further increase distributable reserves.
Chemring Group PLC Annual Report and Accounts 2018 129
OverviewStrategic reportGovernanceFinancial statementsOther information Notes to the parent company financial statements
1. Property, plant and equipment
Cost
At 1 November 2016
Disposals
At 31 October 2017 and 31 October 2018
Depreciation
At 1 November 2016
Charge
Disposals
At 31 October 2017
Charge
At 31 October 2018
Carrying amount
At 31 October 2018
At 31 October 2017
Land and
buildings
£m
Plant and
equipment
£m
0.1
—
0.1
—
—
—
—
—
—
0.1
0.1
0.4
(0.1)
0.3
0.1
0.1
(0.1)
0.1
0.1
0.2
0.1
0.2
Total
£m
0.5
(0.1)
0.4
0.1
0.1
(0.1)
0.1
0.1
0.2
0.2
0.3
The Company had no capital commitments as at 31 October 2018 or 31 October 2017. Land and buildings represent leasehold improvements.
2. Investments in subsidiaries
Cost
At 1 November 2016
Additions
At 31 October 2017
Additions
At 31 October 2018
Impairment
At 1 November 2016 and 31 October 2017
Impairment
At 31 October 2018
Carrying amount
At 31 October 2018
At 31 October 2017
Shares in
subsidiary
undertakings
£m
Loans to
subsidiary
undertakings
£m
548.6
113.9
662.5
30.0
692.5
43.9
2.4
46.3
646.2
618.6
6.6
—
6.6
—
6.6
—
—
—
6.6
6.6
Total
£m
555.2
113.9
669.1
30.0
699.1
43.9
2.4
46.3
652.8
625.2
The additions of £30.0m in the year ended 31 October 2018 represent a capital contribution to CHG Overseas Limited.
The additions of £113.9m in the year ended 31 October 2017 represent a capital contribution to CHG Overseas Limited.
Investment values are allocated to their respective cash-generating units (“CGUs”). The carrying amount of the investments has been allocated
to the Group’s principal CGUs, being the individual operating companies described in the operating segment descriptions on pages 20 to 25.
Where the investment value relates to an intermediate holding company, the CGUs that are the subsidiaries of that holding company are used
to support the carrying value.
The Company tests investments at least annually for impairment. Tests are conducted more frequently if there are indications that investments
might be impaired. The recoverable amounts of the CGUs are determined from value-in-use calculations. The key assumptions for the value-in-use
calculations have been individually estimated for each CGU and are detailed in note 11 of the Group financial statements.
In 2018 the Company concluded that the investment value relating to Chemring Defence UK Limited and Chemring Prime Contracts Limited
was fully impaired and a charge of £2.4m was recorded.
130
Chemring Group PLC Annual Report and Accounts 2018
Financial statements 2. Investments in subsidiaries continued
Stress testing was performed on the forecasts to consider the impact of reasonably worst case scenarios in the first two years, including
significant delays to major contracts and new product lines followed by a 10% fall in the forecast cash flows. This would result in an additional
impairment of £33.4m to CHG Overseas Limited being required.
A 1% addition to the discount rate for each CGU was also separately modelled, and would result in an additional impairment of £33.5m to
CHG Overseas Limited being required.
Setting long-term growth rates beyond the five-year forecast period to zero would not result in any CGUs requiring further impairment.
3. Investments in Group undertakings
Details of the Group undertakings at 31 October 2018 are set out in note 14 to the Group financial statements.
The directors consider that the carrying value of the investments does not exceed their fair value.
4. Trade and other receivables
Within current assets
Trade receivables
Amounts owed by subsidiary undertakings
Other receivables
Corporation tax recoverable
Prepayments and accrued income
Within non-current assets
Amounts owed by subsidiary undertakings
2018
£m
0.1
5.7
0.9
0.7
0.7
8.1
2017
£m
—
—
12.2
—
0.7
12.9
436.9
436.9
360.3
360.3
An asset of £0.1m (2017: £0.4m) is recognised within other receivables in respect of the fair value of derivative financial instruments, as set out
in note 21 to the Group financial statements. The directors consider that the carrying value of the trade and other receivables approximates to
their fair value.
Interest on amounts owed by subsidiary undertakings is charged between 3%-8%. No interest is charged on trade and other receivables from
the date of invoice to payment.
5. Trade and other payables
Within current liabilities
Corporation tax payable
Derivative financial instruments (note 21 to the Group financial statements)
Trade payables
Amounts owed to subsidiary undertakings
Other payables
Other tax and social security
Accruals and deferred income
Within non-current liabilities
Derivative financial instruments (note 21 to the Group financial statements)
Amounts owed to subsidiary undertakings
2018
£m
—
0.3
0.8
287.7
3.3
0.2
1.7
294.0
0.2
62.8
63.0
2017
£m
1.2
0.4
0.1
205.5
3.5
0.2
3.2
214.1
—
62.8
62.8
Interest on amounts owed to subsidiary undertakings attracts interest rates between 1%-4%. No interest is payable on trade payables from the
date of invoice to payment.
Chemring Group PLC Annual Report and Accounts 2018 131
OverviewStrategic reportGovernanceFinancial statementsOther information 6. Borrowings
Within current liabilities
Loan notes
– US dollar denominated
– Sterling denominated
Borrowings due within one year
Within non-current liabilities
Bank borrowings
Loan notes
– US dollar denominated
Borrowings due after more than one year
Total borrowings
An analysis of borrowings by maturity is as follows:
Borrowings falling due:
– less than one year
– within one to two years
– within two to five years
2018
£m
—
—
—
19.2
65.4
84.6
84.6
2018
£m
—
65.4
19.2
84.6
The interest incurred on the above borrowings is detailed within notes 7 and 18 to the Group financial statements.
7. Provisions
At 1 November 2017
Provided
Released
Paid
At 31 October 2018
Disposal
provision
£m
0.1
—
—
(0.1)
—
Legal
provision
£m
0.1
5.0
(0.1)
—
5.0
2017
£m
46.1
5.3
51.4
—
61.9
61.9
113.3
2017
£m
51.4
—
61.9
113.3
Total
£m
0.2
5.0
(0.1)
(0.1)
5.0
It is not possible to estimate more accurately the expected timing of any resulting outflows of economic benefits. The legal provision represents
the estimated legal costs relating to ongoing investigations.
8. Preference shares
Cumulative preference shares (62,500 shares of £1 each)
2018
£m
0.1
2017
£m
0.1
The cumulative preference shares carry an entitlement to a dividend at the rate of 7p per share per annum, payable in equal instalments on 30 April
and 31 October each year. Holders of the preference shares have the right on a winding-up to receive, in priority to any other classes of shares,
the sum of £1 per share together with any arrears of dividends.
9. Share capital
Issued, allotted and fully paid
281,763,364 (2017: 281,588,075) ordinary shares of 1p each
2018
£m
2.8
2017
£m
2.8
During the year, 175,289 ordinary shares (2017: 162,819) were issued for cash to employees under the Group’s approved savings-related share schemes.
The preference shares are presented as a liability and accordingly are excluded from called-up share capital in the balance sheet.
Share-based incentive schemes
Full details of the schemes are set out in note 28 to the Group financial statements.
132
Chemring Group PLC Annual Report and Accounts 2018
Financial statementsNotes to the parent company financial statements continued
10. Own shares
At the beginning of the year
Transactions
At the end of the year
2018
£m
9.6
(1.8)
7.8
2017
£m
9.6
—
9.6
The own shares reserve represents the cost of shares in Chemring Group PLC purchased in the market and held by the Group to satisfy
awards under the Group’s share-based incentive schemes (see note 28 to the Group financial statements). During the year, no ordinary shares
(2017: nil) were acquired and 410,104 ordinary shares (2017: nil) were distributed following the vesting of awards under the Chemring Group
Performance Share Plan. The total number of ordinary shares held in treasury at 31 October 2018 was 1,788,710 (2017: 2,198,814), with an
average cost of 439.0p (2017: 439.0p) per share. This represents 0.6% (2017: 0.8%) of the total issued and fully paid ordinary share capital.
11. Deferred tax
At the beginning of the year
Charge to income statement
Charge to other comprehensive income
Deferred tax liability at the end of the year
The amount provided represents:
Other timing differences
2018
£m
(0.4)
0.3
—
(0.1)
2017
£m
6.7
(5.6)
(1.5)
(0.4)
(0.1)
(0.4)
At the balance sheet date, the Company had unrecognised tax losses of £17.5m (2017: £21.1m) potentially available for offset against future profits
in certain circumstances. No deferred tax asset has been recognised in respect of this amount because of the unpredictability of future taxable
qualifying profit streams.
12. Pensions
The Company has assumed its share of the assets and liabilities of the Group’s defined benefit pension scheme. An analysis of the surplus/deficit
balance is shown below:
At 1 November 2016, retirement benefit obligation
Contributions
Other finance costs
Actuarial movements
At 31 October 2017, retirement benefit obligation
Contributions
Other finance costs
Actuarial movements
At 31 October 2018, retirement benefit surplus
Further details are set out in note 30 to the Group financial statements.
13. Staff costs
Average monthly number of total employees (including executive directors)
The costs incurred in respect of these employees (including share-based payments) were:
Wages and salaries
Social security costs
Other pension costs
Share-based payment
Total
£m
(6.3)
2.1
(0.3)
4.3
(0.2)
3.5
—
(0.2)
3.1
2018
Number
29
2017
Number
24
2018
£m
3.9
0.5
0.4
0.6
5.4
2017
£m
4.3
0.5
0.4
1.1
6.3
Disclosures in respect of directors’ emoluments can be found in the directors’ remuneration report on pages 66 to 91.
Chemring Group PLC Annual Report and Accounts 2018 133
OverviewStrategic reportGovernanceFinancial statementsOther information Accounting policies
1. General information
Chemring Group PLC is a company incorporated in England and Wales under registration number 86662. The address of the registered office is
Roke Manor, Old Salisbury Lane, Romsey, Hampshire, SO51 0ZN. The nature of the Group’s operations and its principal activities are set out in
note 2 of the Group financial statements and in the directors’ report on pages 50 to 53. These financial statements are the consolidated financial
statements of Chemring Group PLC and its subsidiaries (the “Group”).
The financial statements are presented in pounds sterling, being the currency of the primary economic environment in which the Group
operates, and rounded to the nearest £0.1m. Foreign operations are included in accordance with the foreign currencies accounting policy.
Going concern
The directors have, at the time of approving the financial statements, a reasonable expectation that the Group and the Company have adequate
resources to continue to adopt the going concern basis of accounting in preparing these financial statements. Further detail is contained in the
statement on going concern on page 61.
2. Adoption of new and revised standards
The following International Financial Reporting Committee (“IFRIC”) interpretations, amendments to existing standards and new standards were
adopted in the year ended 31 October 2018 but have not materially impacted the reported results or the financial position:
JJ Amendments to IAS 7 Statement of Cash Flows; and
JJ Amendments to IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses.
Early adoption of revised standards and interpretations
In the year ended 31 October 2017, the following standard was adopted and has affected the amounts reported in these financial statements:
JJ IFRS 15 Revenue from Contracts with Customers (effective for periods beginning on or after 1 January 2018 with early adoption permitted).
New and revised standards and interpretations in issue but not yet effective
At the date of authorisation of these financial statements, the following standards and interpretations that are potentially relevant to the Group
and which have not yet been applied in these financial statements were in issue but not yet effective (and in some cases had not yet been
adopted by the European Union):
Effective for periods beginning on or after 1 January 2018
JJ Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions;
JJ IFRS 9 Financial Instruments: Recognition and Measurement;
JJ Annual Improvements to IFRSs 2014–2016 Cycle; and
JJ IFRIC 22 Foreign Currency Transactions and Advance Consideration.
Effective for periods beginning on or after 1 January 2019
JJ IFRS 16 Leases;
JJ Amendments to IAS 19 Employee Benefits;
JJ Annual Improvements to IFRSs 2015–2017 Cycle; and
JJ IFRIC 23 Uncertainty over Income Tax Treatments.
Effective for periods beginning on or after 1 January 2021
JJ IFRS 17 Insurance Contracts.
The directors do not expect the adoption of these standards and interpretations will have a material impact on the financial statements of the
Group in future periods except as follows:
JJ IFRS 16 Leases will impact the measurement, recognition, presentation and disclosure of leases, particularly operating leases where the term
is longer than 12 months.
The impact of IFRS 16 Leases is currently being assessed. Under IFRS 16 Leases, lessees will be required to apply a single model to recognise a
lease liability and asset for all leases, including those classified as operating leases under current accounting standards, unless the underlying asset
has a low value or the lease term is 12 months or less. The adoption of IFRS 16 will have a significant impact on the results as each lease will give
rise to a right of use asset which will be depreciated on a straight-line basis, and a lease liability with a related interest charge. The depreciation
and interest will replace the operating lease payments currently recognised as an expense. The impact will depend on the transition approach
and the contracts in effect at the time of the adoption. At 31 October 2018, operating lease commitments were £5.3m and operating lease
payments for 2018 were £1.4m.
134
Chemring Group PLC Annual Report and Accounts 2018
Financial statements 2. Adoption of new and revised standards continued
New and revised standards and interpretations in issue but not yet effective continued
IFRS 9 sets out requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial
items. This standard replaces IAS 39 Financial Instruments: Recognition and Measurement. The adoption of IFRS 9 Financial Instruments from
1 November 2018 is expected to result in changes in accounting policies and adjustments to the amounts recognised in the financial statements,
however the overall impact on the financial statements is not expected to be material. In accordance with the transitional provisions in IFRS 9,
comparative figures will not be restated.
Trade receivables, contract assets and cash and cash equivalents will now be classified as amortised cost, rather than loans and receivables,
however as these assets were accounted for at amortised cost under IAS 39, there is not expected to be a change in the carrying amount.
Trade payables and bank loans and overdrafts continue to be classified as other financial liabilities and accounted for at amortised cost.
Regarding impairment, the Group will apply the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected
loss allowance for all assets held at amortised cost. The impact of the change in impairment methodology is not expected to be material.
Further information on IFRS 9 is provided in note 20 of the Group financial statements.
Beyond this information, it is not practicable to provide a reasonable estimate of the effect of these standards.
3. Group accounting policies
Basis of preparation
These financial statements have been prepared in accordance with IFRS adopted for use in the EU and therefore comply with Article 4 of the
EU IAS Regulation. These financial statements have also been prepared in accordance with IAS, IFRS and related IFRIC interpretations,
subsequent amendments to those standards and related interpretations, future standards and related interpretations issued or adopted by the
International Accounting Standards Board (“IASB”) that have been endorsed by the EU (collectively referred to as IFRS). These are subject to
ongoing review and endorsement by the EU or possible amendment by interpretive guidance from the IASB and the IFRIC, and are therefore
still subject to change.
In accordance with IFRS 5, the 2017 comparative figures in the consolidated income statement and consolidated statement of cash flows and related
notes have been represented to show only continuing operations. Discontinued operations are shown as a single line item in the consolidated
income statement as required by the standard. The comparative balance sheet has not been represented in respect of held for sale assets, in
accordance with IFRS 5.
The financial statements are prepared under the historical cost convention, except as described below under the heading of “Derivative
financial instruments”.
The particular accounting policies adopted have been applied consistently throughout the current and previous year.
Basis of consolidation
The Group financial statements consolidate those of the Company and all of its subsidiaries. A subsidiary undertaking is an entity over which
the Group has the power to govern the financial and operating policies so as to obtain benefits from its activities. The results of subsidiaries
acquired are consolidated from the date on which control passes to the Group and the results of disposed subsidiaries are consolidated up
to the date on which control passes from the Group.
The Company considers that it has the power to govern the financial and operating policies of the US entities falling within the Special Security
Agreement and these entities have therefore been consolidated in these financial statements.
The Company and all of its subsidiaries make up their financial statements to the same date. All intra-group transactions, balances, income and
expenses are eliminated on consolidation.
Operating profit
Operating profit is stated before the share of results of associates and before finance income and expense. 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 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, and excludes
discontinued operations.
Chemring Group PLC Annual Report and Accounts 2018 135
OverviewStrategic reportGovernanceFinancial statementsOther information 3. Group accounting policies continued
Revenue recognition
The majority of the Group’s revenue arises from the manufacture and shipment of goods. Sales contracts are reviewed for performance
obligations but the principal driver for timing of revenue recognition is delivery obligations, typically based on Incoterms. Once the relevant
delivery obligation has been met revenue can be recognised. This also applies to sales where there are no goods shipped but a deliverable is
completed at a certain point in time, such as the issue of a report.
Revenue also arises from milestone contracts, typically with larger and more complex projects that contain multiple performance obligations.
Often the contracts are divided into milestones for payment purposes anyway, but judgement is required when assessing the way the contract
is broken up to ensure that each one is a separate and valid performance obligation. If they are not, the relevant revenue amount is allocated
across the other obligations as appropriate.
A number of sales contracts allow for bill and hold arrangements, where the customer has bought the goods but has not yet taken physical
possession. This usually arises when the customer has limited storage space or there have been delays in their own production schedule.
For such revenue to be recognised the bill and hold arrangement must be substantive and the relevant goods must be clearly identified as
belonging to the customer and ready for immediate shipment at the customer’s request.
These categories of sales are common across all segments.
Sale of goods
Revenue from the sale of goods is recognised when all of the following conditions are satisfied:
JJ the Group has identified a sales contract with a customer;
JJ the performance obligations within this contract have been identified;
JJ the transaction price has been determined;
JJ this transaction price has been allocated to the performance obligations in the contract; and
JJ revenue is recognised as or when each performance obligation is satisfied.
Performance obligations are satisfied when the customer gains control of promised goods or services from the contract.
Another significant source of Group revenue, especially within the Sensors segment, arises from time and materials contracts, where revenue
is typically billed on a monthly basis based on work performed to date.
Rendering of services
Revenue from a contract to provide services, including customer-funded research and development, is recognised by reference to the stage of
completion of the contract. Stage of completion is typically estimated by either completion of relevant milestones or proportion of contract
costs incurred for work performed to date, as appropriate.
Acquisitions and disposals
On acquisition of a subsidiary, associate or jointly controlled entity, the cost is measured as the fair value of the consideration. The assets,
liabilities and contingent liabilities of subsidiary undertakings that meet the IFRS 3 (Revised) Business Combinations recognition criteria are
measured at the fair value at the date of acquisition, except that:
JJ deferred tax assets or liabilities, and liabilities or assets relating to employee benefit arrangements, are recognised and measured in
accordance with IAS 12 Income Taxes and IAS 19 (Revised) Employee Benefits respectively;
JJ liabilities or equity instruments related to the replacement by the Group of an acquiree’s share-based payment awards are measured in
accordance with IFRS 2 Share-based Payments; and
JJ assets (or disposal groups) that are classified as held for sale, in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations, are measured in accordance with that standard.
Where cost exceeds fair value of the net assets acquired, the difference is recorded as goodwill.
Where the fair value of the net assets exceeds the cost, the difference is recorded directly in the income statement. The accounting policies
of subsidiary undertakings are changed where necessary to be consistent with those of the Group.
136
Chemring Group PLC Annual Report and Accounts 2018
Financial statementsAccounting policies continued 3. Group accounting policies continued
Acquisitions and disposals continued
If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group
reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement
period (see below), or additional assets or liabilities recognised, to reflect new information obtained about facts and circumstances that existed
as at the acquisition date that, if known, would have affected the amounts recognised as at that date.
The measurement period runs from the date of acquisition to the date the Group obtains complete information about facts and circumstances
that existed as at the acquisition date, subject to a maximum period of one year.
In accordance with IFRS 3 (Revised) Business Combinations, acquisition and disposal-related items are recognised through the income statement.
Acquisition and disposal-related items refer to credits and costs associated with the acquisition and disposal of businesses, together with the
costs of aborted bids and the establishment of joint ventures.
Discontinued operations and assets held for sale
When the Group makes a decision to exit a significant business unit or separate major line of business, the associated operations and cash flows
are classified as discontinued operations in the financial statements, in accordance with the provisions of IFRS 5 Non-current Assets Held for Sale
and Discontinued Operations.
These discontinued operations may represent components of the Group that have already been disposed of or are classified as held for sale.
Non-current assets and disposal groups classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell.
Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sales transaction
rather than continuing use. This condition is regarded as met only when the sale is highly probable and the asset or disposal group is available
for immediate sale in its present condition. Management must be committed to the sale which should be expected to qualify as a completed
sale within one year from the date of classification.
Intangible assets – goodwill
The purchased goodwill of the Group is regarded as having an indefinite useful economic life and, in accordance with IAS 36 Impairment of Assets,
is not amortised but is subject to annual tests for impairment. On disposal of a subsidiary, associate or jointly controlled entity, the amount
attributable to goodwill is included in the determination of the profit or loss on disposal.
Acquired intangibles
The Group recognises separately from goodwill intangible assets that are separable or arise from contractual or other legal rights and whose fair
value can be measured reliably. These intangible assets are amortised at rates calculated to write down their cost or valuation to their estimated
residual values by equal instalments over their estimated useful economic lives, which are:
JJ technology
– average of ten years
JJ customer relationships – average of ten years
Development costs
Development costs that qualify as intangible assets are capitalised as incurred and, once the relevant intangible asset is ready for use, are
amortised on a straight-line basis over their estimated useful lives, averaging three years (2017: five years).
The carrying value of development assets is assessed for recoverability at least annually or when a trigger is identified.
Patents and licences
Patents and licences are measured initially at purchase cost and are amortised on a straight-line basis over their estimated useful lives, averaging
eight years (2017: seven years).
Property, plant and equipment
Other than historically revalued land and buildings, property, plant and equipment is held at cost less accumulated depreciation and any
recognised impairment loss. Borrowing costs on significant capital expenditure projects are capitalised and allocated to the cost of the project.
No depreciation is provided on freehold land. On other assets, depreciation is provided at rates calculated to write down their cost or valuation
to their estimated residual values by equal instalments over their estimated useful economic lives, which are:
JJ freehold buildings
– up to fifty years
JJ leasehold buildings
–
the period of the lease
JJ plant and equipment
– up to ten years
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OverviewStrategic reportGovernanceFinancial statementsOther information 3. Group accounting policies continued
Impairment of non-current assets
Assets that have indefinite lives are allocated to the Group’s cash-generating units and tested for impairment at least annually. Assets that are
subject to depreciation or amortisation are reviewed for impairment whenever changes in circumstances indicate that the carrying value may
not be recoverable. To the extent that the carrying value exceeds the recoverable amount, an impairment loss is recorded for the difference as
an expense in the income statement. The recoverable amount used for impairment testing is the higher of the value-in-use and the asset’s fair
value less costs of disposal. For the purpose of impairment testing, assets are grouped at the lowest levels for which there are separately
identifiable cash flows.
Inventories
Inventories are recorded at the lower of cost and net realisable value. Cost represents materials, direct labour, other direct costs and related
overheads, and is determined using the “first-in, first-out” (“FIFO”) method. Net realisable value is based on estimated selling price, less further
costs expected to be incurred to completion and disposal.
Provision is made for slow-moving, obsolete and defective items where appropriate.
Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take
a substantial period of time to prepare for their intended use, are added to the cost of those assets, until such time as the assets are ready
for their intended use. Once the assets are ready for their intended use, these capitalised borrowing costs are depreciated in line with the
underlying asset.
All other borrowing costs are recognised in the income statement in the period in which they are incurred.
Government grants
Government grants are not recognised until there is reasonable assurance that the Group will comply with the conditions attaching to them and
that the grants will be received.
Government grants for staff retraining costs are recognised as income over the periods necessary to match them with the related costs and are
deducted in reporting the related expense.
Government grants relating to property, plant and equipment are treated as deferred income and released to the income statement over the
expected useful economic lives of the assets concerned.
Tax
The tax expense represents the sum of current tax and deferred tax.
Current tax is based on taxable profit for the year. Taxable profit differs from profit as reported in the income statement because it excludes
items of income or expense that are taxable or deductible in other years, and it excludes items of income or expense that are never taxable
or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted at the balance
sheet date.
Deferred tax represents amounts expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in
the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet
liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences, and deferred tax assets are recognised to
the extent that it is probable taxable profits will be available in the future against which deductible temporary differences can be utilised. Such
assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business
combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in
joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary
difference will not reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that
sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are
expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement,
except where it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities, when
they relate to income taxed by the same tax authority, and when the Group intends to settle its current tax assets and liabilities on a net basis.
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Chemring Group PLC Annual Report and Accounts 2018
Financial statementsAccounting policies continued 3. Group accounting policies continued
Special capital reserve
The special capital reserve was created as part of a capital reduction scheme involving the cancellation of the share premium account which was
approved by the Court in 1986, in accordance with the requirements of the Companies Act 1985.
Foreign currencies
The individual financial statements of each Group company are presented in its functional currency, being the currency of the primary economic
environment in which it operates. For the purpose of these Group financial statements, the results and financial position of each Group company
are expressed in pounds sterling, which is the functional currency of the Company, and the presentation currency for these financial statements.
In preparing the financial statements of each Group company, transactions in foreign currencies, being currencies other than the entity’s functional
currency, are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and
liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items
carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was
determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.
Exchange differences arising on the settlement of monetary items and on the retranslation of monetary items are included in the income statement
for the period.
In order to hedge its exposure to certain foreign exchange risks, the Group enters into forward foreign exchange contracts which are accounted
for as derivative financial instruments (see below for details of the Group’s accounting policies in respect of such derivative financial instruments).
For the purpose of presenting these financial statements, the assets and liabilities of the Group’s foreign operations are translated at exchange
rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and
translated at the closing rate.
Financial instruments
Financial assets and liabilities are recognised in the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument.
Financial assets
Trade receivables
Trade receivables do not carry any interest and are stated at their fair value and amortised cost as reduced by appropriate allowances for
estimated irrecoverable amounts.
Cash and cash equivalents
Cash and cash equivalents comprise cash on hand and demand deposits, and other short-term highly liquid investments that are readily
convertible to a known amount of cash and are subject to an insignificant risk of change in value.
Financial liabilities and derivative financial instruments
Financial liabilities
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into.
Bank borrowings
Interest bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges, including premiums
payable on settlement or redemption, and direct issue costs are accounted for on an accruals basis in the income statement using the effective
interest method, and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise.
Trade payables
Trade payables are not interest bearing and are stated at their fair value and amortised cost.
Chemring Group PLC Annual Report and Accounts 2018 139
OverviewStrategic reportGovernanceFinancial statementsOther information 3. Group accounting policies continued
Financial liabilities and derivative financial instruments continued
Derivative financial instruments
The Group’s activities expose it to the financial risks of foreign currency transactions, and it uses forward foreign exchange contracts to hedge
its exposure to these transactional risks. The Group does not use derivative financial instruments for speculative purposes.
Derivative financial instruments are recognised at fair value on the date the derivative contract is entered into and are revalued to fair value at
each balance sheet date. The fair values of derivative financial instruments are calculated by external valuers.
The method by which any gain or loss is recognised depends on whether the instrument is designated a hedging instrument or not. To be
designated as a hedging instrument, the instrument must be documented as such at inception, and must be assessed at inception and on an
ongoing basis to be highly effective in offsetting changes in fair values or cash flows of hedged items.
Hedge accounting principles are used for forward foreign exchange contracts where appropriate, with movements in fair value taken to equity,
until such time as the underlying amounts of the contract mature. At maturity or disposal of the net investment, the amounts held in equity will
be recycled to the income statement. Changes in fair value of any ineffective portion of net investment hedges and interest rate swap contracts
are recognised in the income statement immediately.
Where derivative financial instruments do not meet the criteria for hedge accounting principles, the changes in fair value are immediately
recognised in the income statement.
Hedges of net investments in foreign operations
Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in the statement of comprehensive income
and accumulated in the translation reserve. The gain or loss relating to the ineffective portion is recognised immediately in the income statement.
Retirement benefit costs
Payments to defined contribution retirement benefit schemes are charged as an administrative expense in the period to which they relate.
For defined benefit schemes, the cost of providing benefits is determined using the projected unit credit method, with actuarial valuations
being carried out at each balance sheet date. Actuarial gains and losses are recognised in the statement of comprehensive income in full in
the period in which they occur.
Past service cost is recognised immediately to the extent that the benefits are already vested, and otherwise is amortised on a straight-line basis
over the average period until the benefits become vested.
The discount on scheme liabilities less the expected return on scheme assets on defined benefit obligations is included within finance expense.
The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation as adjusted
for unrecognised past service cost and as reduced by the fair value of scheme assets. Any asset resulting from this calculation is limited to past
service cost, plus the present value of available refunds and reductions in future contributions to the scheme.
Leased assets
Where the Group enters into a lease which entails taking substantially all the risks and rewards of ownership of an asset, the lease is treated as a
finance lease. The asset is recorded in the balance sheet as property, plant and equipment, and is depreciated over the shorter of its estimated
useful economic life and the lease term. Future instalments under such leases, net of finance charges, are recognised as a liability. The finance
element of the instalments is charged to the income statement at a constant rate of interest on the remaining balance of the obligation.
All other leases are operating leases, for which rental charges are recognised in the income statement on a straight-line basis over the life of
the lease.
Share-based compensation
The Group operates equity-settled and cash-settled share-based compensation schemes.
For grants made under the Group’s share-based compensation schemes, the fair value of an award is measured at the date of grant and reflects
any market-based vesting conditions. Non-market-based vesting conditions are excluded from the fair value of the award. At the date of grant,
the Company estimates the number of awards expected to vest as a result of non-market-based vesting conditions, and the fair value of this
estimated number of awards is recognised as an expense in the income statement on a straight-line basis over the vesting period. At each
balance sheet date, the impact of any revision to vesting estimates is recognised in the income statement over the vesting period. Proceeds
received, net of any directly attributable transaction costs, are credited to share capital and share premium.
For cash-settled share-based grants, the total amount recognised is based on the fair value of the liability incurred. The fair value of the liability is
remeasured at each balance sheet date, with changes in the fair value recognised in the income statement.
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Financial statementsAccounting policies continued 3. Group accounting policies continued
Provisions
Provisions are recognised when the Group has a present obligation, either legal or constructive, as a result of a past event, it is probable that the
Group will be required to settle that obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognised as
a provision is the best estimate of the consideration required to settle the present obligation at the balance sheet date, taking into account the
risks and uncertainties surrounding the obligation. Where a provision is measured using the estimated cash flows to settle the present obligation,
its carrying amount is the present value of those cash flows.
When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is
recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.
Environmental provisions
Where the Group is liable for decontamination work or the restoration of sites to their original condition, an estimate is made of the costs
needed to complete these works, discounted back to present values, relying upon independent third party valuers where appropriate.
Restructuring provisions
A restructuring provision is recognised when the Group has developed a detailed formal plan for the restructuring and has raised a valid
expectation in those affected that it will carry out the restructuring by starting to implement the plan or announcing its main features to those
affected by it. The measurement of a restructuring provision includes only the direct expenditures arising from the restructuring and not those
associated with the ongoing activities of the entity.
Warranty provisions
Provisions for the expected cost of warranty obligations under local sale of goods legislation are recognised at the date of sale of the relevant
products, based upon the best estimate of the expenditure required to settle the Group’s obligations.
Disposal provisions
Disposal provisions relate to estimated liabilities faced by the Group in respect of discontinued operations and other disposed entities under the
terms of their respective sale agreements.
Contingent liabilities
The Group exercises judgement in recognising exposures to contingent liabilities related to pending litigation or other outstanding claims subject
to negotiated settlement, mediation, arbitration or government regulation, as well as other contingent liabilities. Judgement may be necessary in
assessing the likelihood that a pending claim will succeed, or a liability will arise, and/or to quantify the possible range of the financial settlement.
Alternative Performance Measures
In the analysis of the Group’s financial performance and position, operating results and cash flows, APMs are presented to provide readers with
additional information. The principal APMs presented are underlying measures of earnings including underlying operating profit, underlying profit
before tax, underlying profit after tax, underlying EBITDA, underlying earnings per share and underlying operating cash flow. In addition,
EBITDA, net debt and constant currency revenues are presented which are also considered non-IFRS measures. These measures are consistent
with information regularly reviewed by management to run the business, including planning, budgeting and reporting purposes and for its
internal assessment of the operational performance of individual businesses.
The directors believe that the use of these APMs assist in providing additional information on the underlying trends, performance and position
of the Group. APMs are used to improve the comparability of information between reporting periods by adjusting for items that are non-recurring
or otherwise non-underlying. Management consider non-underlying items to be:
JJ amortisation of acquired intangibles;
JJ material exceptional items, for example relating to acquisitions and disposals, business restructuring costs and legal costs;
JJ material exceptional items from changes in legislation, for example the GMP equalisation court ruling and the enactment of the US Tax Cuts
and Jobs Act;
JJ gains or losses on the movement in the fair value of derivative financial instruments; and
JJ the tax impact of all of the above.
The Group’s use of APMs is consistent and we provide comparatives alongside all current period figures.
Further detail on the APMs presented within these financial statements, including a reconciliation to the IFRS equivalent, is presented in note 3.
Chemring Group PLC Annual Report and Accounts 2018 141
OverviewStrategic reportGovernanceFinancial statementsOther information 3. Group accounting policies continued
Exceptional items
Exceptional items are excluded from management’s assessment of profit because by their size or nature they could distort the Group’s
underlying quality of earnings. They are typically gains or losses arising from events that are not considered part of the core operations of the
business. These items are excluded to reflect performance in a consistent manner and are in line with how the business is managed and
measured on a day-to-day basis.
Post balance sheet events
In accordance with IAS 10 Events after the Balance Sheet Date, the Group continues to disclose events that it considers material, non-disclosure
of which can influence the economic decisions of users of the financial statements.
4. Chemring Group PLC – parent company accounting policies
FRS 101 Reduced Disclosure Framework
The financial statements have been prepared in accordance with FRS 101 Reduced Disclosure Framework.
The Company operates a multi-employer defined benefit scheme including employees of other Group companies. Following FRS 101, the
scheme assets and liabilities have been allocated across the Group companies using a method that management considers to be the most
appropriate, based on scheme membership.
The following exemptions from the requirements of IFRS have been applied in the preparation of these financial statements, in accordance with
FRS 101:
JJ share-based payments;
JJ financial instruments;
JJ fair value measurements;
JJ presentation of comparative information in respect of certain assets;
JJ IFRSs issued but not yet effective;
JJ related party transactions;
JJ assumptions and sensitivities for impairment review; and
JJ cash flow.
Investment in Group undertakings
Investments are stated at cost less any provision for impairment in value.
Critical accounting judgements and sources of estimation uncertainty
There are no critical accounting judgements and sources of estimation uncertainty for the Company.
5. Accounting judgements and sources of estimation uncertainty
When applying the Group’s accounting policies, management must make judgements, assumptions and estimates concerning the future that
affect the carrying amounts of assets and liabilities at the balance sheet date and the amounts of revenue and expenses recognised during the
period. Such judgements, assumptions and estimates are based upon factors including historical experience, the observance of trends in the
industries in which the Group operates, and information available from the Group’s customers and other external sources.
At the balance sheet date there were no key judgements concerning the future that have significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial year. Revenue recognition does however include a degree of judgement, as
disclosed below:
Accounting judgements
Revenue recognition
In 2017 the Group adopted IFRS 15 Revenue from Contracts with Customers. The standard recognises revenue on the basis of the satisfaction of
performance obligations.
Management has to consider whether performance obligations should be recognised at a single point in time, which is generally the case for the
sale of products by the Group, or over a period of time, which is more common for certain service contracts.
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Financial statementsAccounting policies continued 5. Accounting judgements and sources of estimation uncertainty continued
Accounting judgements continued
Revenue recognition continued
In making its judgement about obligations that are satisfied at a point in time, management has to consider at what point control has passed to
the customer, allowing revenue to be recognised. This is typically determined through a consideration of customer acceptance testing, contract
terms and delivery arrangements.
The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date that have a significant risk
of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year include:
Key sources of estimation uncertainty
Goodwill impairment
Determining whether goodwill is impaired requires an estimation of the value-in-use of the cash-generating units to which goodwill has been
allocated. The value-in-use calculation requires the entity to estimate the future cash flows expected to arise from the cash-generating unit, and
to determine a suitable discount rate in order to calculate present value (see note 11). In reviewing the carrying value of goodwill of the Group’s
businesses, the Board has considered the separate plans and cash flows of these businesses consistent with the requirements of IAS 36
Impairment of Assets. The plans and cash flows of these businesses reflect current and anticipated conditions in the defence industry. The total
goodwill intangible asset is set out in note 11, which shows a carrying value of £109.2m at 31 October 2018.
Capitalised development costs
IAS 38 Intangible Assets requires that development costs, arising from the application of research findings or other technical knowledge to a plan
or design of a new substantially improved product, are capitalised, subject to certain criteria being met. Determining the future cash flows
generated by the products in development requires estimates which may differ from the actual outcome. In particular, this can depend on the
estimation applied to future milestone events to secure long-term positions on production contracts, for example Programs of Record for the
US DoD. The total capitalised development intangible asset is set out in note 12, which shows a carrying value of £24.0m at 31 October 2018.
Included in this balance are individually material balances relating to Joint Biological Tactical Detection System (£8.9m) and Next Generation
Chemical Detector (£9.8m).
Deferred tax assets on tax losses and US interest deductions
The category of deferred tax asset which contains significant estimation uncertainty and which requires management judgement in assessing its
recoverability relates to US interest limitations and tax losses carried forward (see note 23).
Applicable accounting standards permit the recognition of deferred tax assets only to the extent that it is probable that future taxable profits
will be available to utilise the tax losses carried forward. The assessment of future taxable profits involves significant estimation uncertainty,
principally relating to an assessment of management’s projections of future taxable income based on business plans and ongoing tax planning
strategies. These projections include assumptions about the future strategy of the Group, the economic and regulatory environment in which
the Group operates, future tax legislation and customer behaviour, amongst other variables.
Provisions
The Group holds provisions where appropriate in respect of future economic outflows which arise due to past events. These are subject to
uncertainty in respect of the outcome of future events. Estimates, judgements and assumptions are based on factors including historical experience,
the observance of trends in the industries in which the Group operates, and information available from the Group’s customers and other
external sources. Actual outflows of economic benefit may not occur as anticipated, and estimates may prove to be incorrect, leading to further
charges or releases of provisions as circumstances change. The provisions held by the Group as at 31 October 2018 are set out in note 22.
Taxation
The Group operates in a number of countries around the world. Uncertainties exist in relation to the interpretation of complex tax legislation,
changes in tax laws and the amount and timing of future taxable income. In some jurisdictions agreeing tax liabilities with local tax authorities
can take several years. This could necessitate future adjustments to taxable income and expense already recorded. At the year end date, tax
liabilities and assets are based on management’s best judgements around the application of the tax regulations and management’s estimate of
the future amounts that will be settled.
The Group’s operating model involves the cross-border supply of goods into end markets. There is a risk that different tax authorities could
seek to assess higher profits (or lower costs) to activities being undertaken in their jurisdiction, potentially leading to higher total tax payable by
the Group.
At 31 October 2018 there is a provision of £4.2m in respect of uncertain tax positions. Due to the uncertainties noted above, there is a risk
that the Group’s judgements are challenged, resulting in a different tax payable or recoverable from the amounts provided. Management
estimates that the reasonably possible range of outcomes is between £0.5m and £6.0m.
The key uncertainties impacting taxation arise from potential changes to legislation such as the OECD’s Base Erosion and Profit Shifting
(BEPS) project.
Chemring Group PLC Annual Report and Accounts 2018 143
OverviewStrategic reportGovernanceFinancial statementsOther information Independent auditor’s report to the
members of Chemring Group PLC
1. Our opinion is unmodified
We have audited the financial statements of Chemring Group PLC (the “Company”) for the year ended 31 October 2018 which comprise the
consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity, consolidated
balance sheet, consolidated cash flow statement, parent company balance sheet, parent company statement of comprehensive income, parent
company statement of changes in equity, and the related notes, including the accounting policies in notes 1–4.
In our opinion:
JJ the financial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 October 2018 and
of the Group’s loss for the year then ended;
JJ the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by
the European Union;
JJ the parent company financial statements have been properly prepared in accordance with UK accounting standards, including FRS 101
Reduced Disclosure Framework; and
JJ the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group
financial statements, Article 4 of the IAS Regulation.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities are
described below. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Our audit opinion is
consistent with our report to the Audit Committee.
We were first appointed as auditor by the directors on 17 March 2018. The period of total uninterrupted engagement is for the financial year
ended 31 October 2018. We have fulfilled our ethical responsibilities under, and we remain independent of the Group in accordance with, UK
ethical requirements including the FRC Ethical Standard as applied to listed public interest entities. No non-audit services prohibited by that
standard were provided.
Overview
Materiality: Group financial statements as a whole
Coverage: by full scope audit procedures
Risks of material misstatement
Revenue Recognition
£1.8m
5% of 3 year average underlying profit before tax
88% of total profits and losses that made up Group profit before tax
(including all operations classed as continuing and discontinuing)
Recoverability of Group goodwill, Group other intangibles and of the parent company’s investments in, and intergroup receivable balances
with, subsidiaries
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Chemring Group PLC Annual Report and Accounts 2018
Financial statements 2. Key audit matters: our assessment of risks of material misstatement
Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the financial statements and
include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the
greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. We
summarise below the key audit matters, in decreasing order of audit significance, in arriving at our audit opinion above, together with our key
audit procedures to address those matters and, as required for public interest entities, our results from those procedures. These matters were
addressed, and our results are based on procedures undertaken, in the context of, and solely for the purpose of, our audit of the financial
statements as a whole, and in forming our opinion thereon, and consequently are incidental to that opinion, and we do not provide a separate
opinion on these matters.
The risk
Our response
Revenue recognition
(£297.4m; 2017: £307.1m)
Refer to page 64 (Audit Committee report),
page 136 (accounting policy) and page 97
(financial disclosures).
Revenue cut off
There is a cut off risk over the existence of
goods and services revenue due to pressures
on management to increase profitability and
other key metrics, increasing the risk of
fraudulent premature revenue recognition.
Certain ‘point in time’ contracts require
management to exercise some judgement with
respect to determining the timing of the
satisfaction of the performance obligations.
Our procedures included:
JJ Control design: evaluating controls over
the revenue process;
JJ Corroborating terms: assessing
management’s assumptions behind the
timing of when control transfers to the
customer against the customer contract;
JJ Tests of detail: comparing the timing of
revenue recognition for a sample of revenue
transactions in the final month of the
accounting period against the point at which
control transfers to the customer; and
JJ Assessing transparency: assessing the
adequacy of the Group’s disclosures about
the degree of judgement involved in determining
the timing of revenue recognition.
Our results
JJ We found the timing of revenue recognition
to be acceptable.
Chemring Group PLC Annual Report and Accounts 2018 145
OverviewStrategic reportGovernanceFinancial statementsOther information Independent auditor’s report to the
members of Chemring Group PLC continued
2. Key audit matters: our assessment of risks of material misstatement continued
The risk
Our response
Recoverability of Group
goodwill, Group other
intangibles and of the
parent company’s
investments in, and
intergroup receivable
balances with, subsidiaries
(Group: £170.8m; 2017:
£216.1m; parent company:
£1,089.7m; 2017: £985.5m)
Refer to page 64
(Audit Committee report),
page 137 (accounting policy)
and pages 106, 108 and
130 (financial disclosures).
Forecast-based valuation
A history of business combinations results
in significant Group goodwill, Group other
intangibles and of the parent company’s
investments in and intergroup receivable
balances with subsidiaries.
Due to the above and the movement in
share price, parent company equity is greater
than the total value of market capitalisation
and debt, thus the recoverability of parent
company investments in, and intergroup
receivable balances with, subsidiaries is reliant
on the estimates made of the valuation of
future cash flows.
The estimated recoverable amount of all
Group intangible assets and parent company
investments and intergroup receivables is
subjective due to the inherent uncertainty
involved in forecasting and discounting future
cash flows for CGUs.
Our procedures included:
JJ Extrapolating past forecasting accuracy: assessing three
years’ historical accuracy of the Group’s forecasting and
building comparable variations in forecasting accuracy into
our own models that were used to re-perform the valuation;
JJ Our sector experience: evaluating assumptions used, in
particular those relating to operating cash flow forecasts;
JJ Benchmarking assumptions: benchmarking discount rates
(including the underlying assumptions used) against market
data, including publicly available analysts’ reports and peer
comparison using input from our own valuation experts;
JJ Sensitivity analysis: performing sensitivity analysis by
reviewing the impact of reasonable downward changes to
the assumptions noted above;
JJ Comparing valuations: comparing the sum of the discounted
cash flows to the aggregate of the Group’s market capitalisation
and the fair value of the net debt to assess the reasonableness
of those cash flows; and
JJ Assessing transparency: assessing whether the Group’s
and parent company’s disclosures about the sensitivity of the
outcome of the impairment assessment to changes in key
assumptions reflected the risks inherent in the valuation of
Group goodwill, Group other intangibles and of the parent
company’s investments in and intergroup receivable balances
with subsidiaries.
Our results
JJ We found the resulting estimate of the recoverable amount of
Group goodwill, Group other intangibles and parent company’s
investments in and intergroup receivable balances with
subsidiaries to be acceptable.
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Chemring Group PLC Annual Report and Accounts 2018
Financial statements 3. Our application of materiality and an overview of the
scope of our audit
Materiality for the Group financial statements as a whole was set at
£1.8m, determined with reference to a benchmark of Group profit
before tax, normalised to exclude this year’s non-underlying items as
disclosed in note 3 and by averaging over the last three years due to
the impact on profits of the Salisbury incident during the year at the
UK Countermeasures facility, as described in the strategic report.
This materiality was revised down from £2.4m used during the
planning stage, due to the energetic incident described above.
Materiality for the parent company financial statements as a whole
was set at £1.4m determined with reference to a benchmark of parent
company net assets, of which it represents 0.2%.
We agreed to report to the Audit Committee any corrected or
uncorrected identified misstatements exceeding £0.1m, in addition
to other identified misstatements that warranted reporting on
qualitative grounds.
Of the Group’s 15 components, we subjected 10 to full scope
audits for Group purposes and two to specified risk-focused audit
procedures over revenue and inventory. The components for which
we performed work other than audits for Group reporting purposes
were not individually significant but were included in the scope of our
Group reporting work in order to provide further coverage over the
Group’s results.
The components within the scope of our work accounted for the
percentages illustrated opposite.
The remaining 17% of total Group revenue, 10% of total profits and
losses that made up Group profit before tax and 15% of total Group
assets is represented by three components, none of which individually
represented more than 11% of any of total Group revenue, Group
profit before tax or total Group assets. For these residual components,
we attended inventory counts and performed analysis at an aggregated
Group level to re-examine our assessment that there were no
significant risks of material misstatement within these.
The Group team instructed component auditors as to the significant
areas to be covered, including the relevant risks detailed above and
the information to be reported back. The Group team approved
component materiality, which ranged from £0.1m to £1.4m, having
regard to the mix of size and risk profile of the Group across the
components. The work on 8 of the 12 components was performed
by component auditors and the rest, including the audit of the parent
company, was performed by the Group team. The Group team
performed procedures on the items excluded from underlying Group
profit before tax.
Underlying profit before tax
£24.9m
Group materiality
£1.8m
£1.8m
Whole financial
statements materiality
(£0.1m–£1.4m) 93+7+M
£1.4m
Range of materiality at
13 components
JJUnderlying profit before tax
JJGroup materiality
£0.1m
Misstatements reported
to the Audit Committee
Group revenue*
Group revenue*
Total profits and losses that
Total profits and losses that
made up Group before tax*
made up Group before tax*
69
14
17
83%
Group total assets*
69+
72+
85%
15
13
72
1
10
89
Total profits and losses that
made up Group profit
before non-underlying
items and tax*
90%
89+
66+
77%
66
23
11
JJFull scope for Group audit purposes
JJSpecified risk-focused audit procedures
JJJResidual components –
Group analytic and inventory count attendance
* Audit coverage has been calculated on the above measures, including all operations
classed as continuing and discontinuing.
Chemring Group PLC Annual Report and Accounts 2018 147
OverviewStrategic reportGovernanceFinancial statementsOther information14
+
17
+
M
13
+
15
+
M
1
+
10
+
M
11
+
23
+
M
Independent auditor’s report to the
members of Chemring Group PLC continued
4. We have nothing to report on going concern
We are required to report to you if:
JJ we have anything material to add or draw attention to in relation
to the directors’ statement in the accounting policies note 1 to the
financial statements on the use of the going concern basis of
accounting with no material uncertainties that may cast significant
doubt over the Group and Company’s use of that basis for a
period of at least 12 months from the date of approval of the
financial statements; or
JJ the related statement under the Listing Rules set out on page 52
is materially inconsistent with our audit knowledge.
We have nothing to report in these respects.
5. We have nothing to report on the other information in
the Annual Report and Accounts
The directors are responsible for the other information presented in
the annual report together with the financial statements. Our opinion
on the financial statements does not cover the other information and,
accordingly, we do not express an audit opinion or, except as explicitly
stated below, any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so,
consider whether, based on our financial statements audit work,
the information therein is materially misstated or inconsistent with
the financial statements or our audit knowledge. Based solely on
that work we have not identified material misstatements in the
other information.
Strategic report and directors’ report
Based solely on our work on the other information:
JJ we have not identified material misstatements in the strategic
report and the directors’ report;
JJ in our opinion the information given in those reports for the
financial year is consistent with the financial statements; and
JJ in our opinion those reports have been prepared in accordance
with the Companies Act 2006.
Directors’ remuneration report
In our opinion the part of the directors’ remuneration report to be
audited has been properly prepared in accordance with the
Companies Act 2006.
Disclosures of principal risks and longer-term viability
Based on the knowledge we acquired during our financial statements audit,
we have nothing material to add or draw attention to in relation to:
JJ the directors’ confirmation within the long-term viability statement
that they have carried out a robust assessment of the principal risks
facing the Group, including those that would threaten its business
model, future performance, solvency and liquidity;
JJ the principal risks disclosures describing these risks and explaining
how they are being managed and mitigated; and
JJ the directors’ explanation in the long-term viability statement of
how they have assessed the prospects of the Group, over what
period they have done so and why they considered that period to
be appropriate, and their statement as to whether they have a
reasonable expectation that the Group will be able to continue in
operation and meet its liabilities as they fall due over the period of
their assessment, including any related disclosures drawing
attention to any necessary qualifications or assumptions.
Under the Listing Rules we are required to review the long-term
viability statement. We have nothing to report in this respect.
Corporate governance disclosures
We are required to report to you if:
JJ we have identified material inconsistencies between the knowledge
we acquired during our financial statements audit and the directors’
statement that they consider that the annual report and financial
statements taken as a whole is fair, balanced and understandable
and provides the information necessary for shareholders to assess
the Group’s position and performance, business model and
strategy; or
JJ the section of the annual report describing the work of the
Audit Committee does not appropriately address matters
communicated by us to the Audit Committee.
We are required to report to you if the corporate governance report does
not properly disclose a departure from the 11 provisions of the UK
Corporate Governance Code specified by the Listing Rules for our review.
We have nothing to report in these respects.
148
Chemring Group PLC Annual Report and Accounts 2018
Financial statements 6. We have nothing to report on the other matters on
which we are required to report by exception
Under the Companies Act 2006, we are required to report to you if,
in our opinion:
JJ adequate accounting records have not been kept by the parent
company, or returns adequate for our audit have not been received
from branches not visited by us; or
JJ the parent company financial statements and the part of the
directors’ remuneration report to be audited are not in agreement
with the accounting records and returns; or
JJ certain disclosures of directors’ remuneration specified by law are
not made; or
JJ we have not received all the information and explanations we
require for our audit.
We have nothing to report in these respects.
7. Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out on page 53, the
directors are responsible for: the preparation of the financial statements
including being satisfied that they give a true and fair view; such internal
control as they determine is necessary to enable the preparation of
financial statements that are free from material misstatement, whether
due to fraud or error; assessing the Group and parent company’s
ability to continue as a going concern, disclosing, as applicable, matters
related to going concern; and using the going concern basis of accounting
unless they either intend to liquidate the Group or the parent company
or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities
Our objectives are to obtain reasonable assurance about whether the
financial statements as a whole are free from material misstatement,
whether due to fraud or other irregularities (see below), or error, and
to issue our opinion in an auditor’s report. Reasonable assurance is a
high level of assurance, but does not guarantee that an audit conducted
in accordance with ISAs (UK) will always detect a material misstatement
when it exists. Misstatements can arise from fraud, other irregularities
or error and are considered material if, individually or in aggregate,
they could reasonably be expected to influence the economic
decisions of users taken on the basis of the financial statements.
A fuller description of our responsibilities is provided on the FRC’s
website at www.frc.org.uk/auditorsresponsibilities.
Irregularities – ability to detect
We identified areas of laws and regulations that could reasonably be
expected to have a material effect on the financial statements from
our sector experience, through discussion with the directors and
other management (as required by auditing standards), and from
inspection of the Group’s regulatory and legal correspondence.
We had regard to laws and regulations in areas that directly affect
the financial statements including financial reporting (including related
company legislation) and taxation legislation. We considered the
extent of compliance with those laws and regulations as part of
our procedures on the related financial statement items.
In addition we considered the impact of laws and regulations in the
specific areas of health and safety, environmental and anti-bribery and
corruption. With the exception of any known or possible non-
compliance, and as required by auditing standards, our work in respect
of these was limited to enquiry of the directors and other
management and inspection of regulatory and legal correspondence.
We considered the effect of any known or possible non-compliance in
these areas as part of our procedures on the related financial
statement items.
We communicated identified laws and regulations throughout our
team and remained alert to any indications of non-compliance
throughout the audit. This included a request to component audit
teams to report on any indications of potential existence of
non-compliance with relevant laws and regulations (irregularities).
As with any audit, there remained a higher risk of non-detection
of irregularities, as these may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal controls.
8. The purpose of our audit work and to whom we owe
our responsibilities
This report is made solely to the Company’s members, as a body, in
accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the
Company’s members those matters we are required to state to them
in an auditor’s report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone
other than the Company and the Company’s members, as a body, for
our audit work, for this report, or for the opinions we have formed.
Andrew Campbell-Orde (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
Gateway House
Tollgate
Chandlers Ford
Southampton
SO53 3TG
17 January 2019
Chemring Group PLC Annual Report and Accounts 2018 149
OverviewStrategic reportGovernanceFinancial statementsOther information
Corporate information and website
Headquarters and registered office
Roke Manor
Old Salisbury Lane
Romsey
Hampshire
SO51 0ZN
T: +44 (0)1794 833901
F: +44 (0)1794 833955
E: info@chemring.co.uk
Website: www.chemring.co.uk
Registered offices
Subsidiary undertaking in Australia:
230 Staceys Road
Lara
Victoria
Australia
3212
Subsidiary undertakings in England:
Roke Manor
Old Salisbury Lane
Romsey
Hampshire
SO51 0ZN
Subsidiary undertakings in Luxembourg:
1, rue Jean Piret
L-2350 Luxembourg
Grand Duchy of Luxembourg
Registered number
86662
Registrars
Computershare Investor Services plc
The Pavilions
Bridgwater Road
Bristol
BS13 8AE
Subsidiary undertaking in Scotland:
Troon House
Ardeer Site
Stevenston
Ayrshire
KA20 3LN
Subsidiary undertaking in Norway:
Engeneveien 7
N-3475 Sætre
Norway
Subsidiary undertakings in the US:
23031 Ladbrook Drive
Dulles
Virginia
20166
Find out more online
For more information about Chemring Group PLC, please visit www.chemring.co.uk where the latest shareholder information
can be accessed, including:
JJ Current share price
JJ Shareholder services and notices
JJ Analysts’ forecasts
JJ Key financial information
JJ Corporate governance
JJ Regulatory news
JJ Financial calendar
JJ Results and presentations
Chemring Group PLC’s Annual Report and Accounts 2018 and the Notice for the Annual General Meeting can also be viewed and downloaded
at www.chemring.co.uk/investors.
© Chemring Group PLC 2019
The information in this document is the property of Chemring Group PLC and may not be copied or communicated to a third party or used
for any purpose, other than that for which it is supplied, without the express written consent of Chemring Group PLC. This information is given
in good faith based upon the latest information available to Chemring Group PLC; no warranty or representation is given concerning such
information, which must not be taken as establishing any contractual or other commitment binding upon Chemring Group PLC or any of its
subsidiary or associated companies.
150
Chemring Group PLC Annual Report and Accounts 2018
Other information Chemring’s commitment to environmental issues is reflected in this Annual Report which
has been printed on Galerie Satin, an FSC® certified material. This document was printed
by Park Communications using their environmental print technology, which minimises the
impact of printing on the environment with 99 per cent of dry waste is diverted from landfill.
Both the printer and the paper mill are registered to ISO 14001.
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CHEMRING GROUP PLC
ROKE MANOR
OLD SALISBURY LANE
ROMSEY
HAMPSHIRE SO51 0ZN
TEL: +44 (0)1794 833901
EMAIL: INFO@CHEMRING.CO.UK