Chemring Group PLC
Annual report and accounts 2019
Overview
1
2
4
2019 performance
At a glance
Chairman’s statement
Strategic report
7 Group Chief Executive’s review
9 Q&A with Michael Ord
10 Business model
12 Target markets
14 Our strategy
16 Key performance indicators
20 Focus on Sensors & Information
22 Focus on Countermeasures & Energetics
24 Financial review
28 Risk management
30 Principal risks and uncertainties
37
38 Sustainability
Introduction to sustainability
38 Health & safety
40 Environment
42 People
44 Ethics and business conduct
Governance
46 Board of directors
48 Corporate governance report
60 Audit Committee report
64 Nomination Committee report
66 Directors’ remuneration report
86 Directors’ report
Financial statements
90 Consolidated income statement
91 Consolidated statement of
comprehensive income
92 Consolidated statement of changes in equity
93 Consolidated balance sheet
94 Consolidated cash flow statement
95 Notes to the Group financial statements
121 Parent company balance sheet
122 Parent company statement of
comprehensive income
122 Parent company statement of changes in equity
123 Notes to the parent company
financial statements
127 Accounting policies
134 Independent auditor’s report to the
members of Chemring Group PLC
Other information
141 Corporate information and website
A year of progress
It has been an exceptionally busy year in which we continued
to deliver our current mission of building a stronger business.
We have implemented significant changes to improve safety,
strengthen leadership and corporate governance, and embed
continuous improvement across the Group. We have also
changed the structure of the business and the way in which
we operate. In doing so we are improving the quality of the
business and redefining our purpose. Collectively we are
changing the culture of Chemring to one of close collaboration,
responsible behaviour and belief in our core values of
Safety, Excellence and Innovation.
With a number of significant operational and strategic
milestones achieved this year we have made real progress;
moving away from commoditised product lines to focus on
higher quality, sustainable business areas where we have a
competitive advantage.
As we continue to develop, over time our focus will move
to strategic opportunities that further enhance the Group’s
growth potential and the delivery of positive returns for
all our stakeholders.
Michael Ord
Group Chief Executive
Read more of our strategy
Page 14
Discover more at
chemring.co.uk
2019 performance
Revenue
£335m
(+13%)
Order book
£449m
(+14%)
The increase in revenue principally reflected
the growth in Sensors & Information driven
by the start of the HMDS IDIQ contract in
the year and a strong year at Roke.
Building in the Countermeasures & Energetics
sector in line with strategy. Targeted 2020
revenue from continuing operations
approximately 76% covered by orders in hand.
Underlying operating profit*
Statutory operating profit
£44m
(+42%)
£31m
(2018: £16m loss)
Reflects revenue growth and improving margins
in both sectors as operational gearing and
performance both positively impacted margins.
The difference to underlying operating profit
reflects the amortisation of acquired
intangible assets which is the only item
treated as non-underlying in 2019.
Underlying operating profit (£m)*
Key points
> Overall performance was slightly ahead
of our initial expectations, reflecting
strong Sensors & Information sector
performance; Countermeasures &
Energetics sector impacted by planned
site recommissioning in the UK and
Australia. The UK countermeasures site
has achieved steady state manufacturing.
Results include £15m of insurance
recoveries, offsetting costs of
remediation and site operating costs.
> Safety remains our key priority and,
together with enhancing operational
stability and efficiency, is driving investment
in the Group’s manufacturing infrastructure.
> Sale of Chemring Military Products and
Chemring Defence UK and closure of
Chemring Prime Contracts completed
in the year. The sale of Chemring
Ordnance was announced on
21 November 2019.
> Australian subsidiary, which has been
offline for the majority of the year to
enable the changeover to F-35 Lightning II
countermeasure manufacturing, received
two significant countermeasures
contracts, as previously announced.
44.0
> Continued progress on various US
Group
£44.0m
Sensors & Information
£26.3m
19
18
31.0
Countermeasures
& Energetics
£27.5m
19
18
15.3
26.3
19
18
27.5
23.9
Read more on
Page 20
Read more on
Page 22
Progress
Building a stronger business
approach to ensure solid
foundations are in place
to deliver medium-term
growth opportunities.
Safety
As part of our commitment to
continuous improvement, we
have established three core
values: Safety, as paramount,
Excellence and Innovation.
2020 outlook
Countermeasures & Energetics
order book, opportunities
under the US Programs of
Record and the strong
market for Roke’s services
all support improving
medium-term expectations.
* 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 profit after tax from both
continuing and discontinued operations of £21.9m (2018: £105.8m loss).
Programs of Record. Further delivery
orders received for the next phase of
the HMDS IDIQ, valued at $30m.
Successful critical design review on
AVCAD led to a further 75 unit order.
> Strong order intake in Countermeasures
& Energetics resulted in a Group order
book for the continuing business at year
end of £449m (2018: £394m), £287m
currently due as revenue in FY20,
approximately 76% coverage of FY20
targeted revenue.
> Net debt has decreased year on year,
reflecting the strong operating cash
generation offset by the start of the
investment in the Tennessee facility.
Net debt: EBITDA of 1.24x (2018: 1.64x)
and pension fund in IAS 19 surplus.
> Board recommending a final dividend
of 2.4p per ordinary share, giving a total
dividend of 3.6p per ordinary share
(2018: 3.3p).
> Board’s expectations for FY20 trading
performance remain unchanged,
again with the usual seasonal
H2 weighting.
Chemring Group PLC | Annual report and accounts 2019
1
Overview
At a glance
Relentlessly innovating to protect
Chemring designs and delivers high-tech solutions to solve difficult problems, relentlessly innovating
to protect people, platforms, missions and information against constantly changing threats.
We challenge convention and use our extensive science and engineering expertise to turn ideas into
reality, delivering practical results that protect and safeguard in an uncertain world.
Chemring is organised under two sectors:
Sensors & Information
Innovation is core to solving our clients’
difficult problems. Operating across
commercial, national security and
defence domains, we enable our
clients to deliver competitive advantage,
defend their people, assets and
secrets and defeat their adversaries.
With over 350 scientists, engineers
and consultants, our Sensors &
Information sector continues to invest in technologies that safeguard and
protect in an uncertain world.
Our sensor technologies detect threats with a very high degree of
confidence, be they explosive, biological, chemical, radio or cyber.
Our Roke business draws on a 60-year heritage of innovation in sensors,
communications, cyber and artificial intelligence to secure, combine and
apply these technologies in new ways.
We operate across the whole life cycle providing advice, engineering,
design, research and solutions created from our products and services.
Countermeasures
& Energetics
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.
We combine a deep understanding
of platform signatures, missile seekers and chemical formulations to
develop new decoys against new threats.
Our world-class energetics capabilities include cutting-edge raw materials
to meet unique client product requirements, actuators, air crew safety
systems, and missile and rocket components.
Every day, our products, services and experts assist customers including
NASA to take rockets into orbit, provide demolition stores for militaries
and security forces, and enable navies to ensure their missiles self-destruct.
Revenue
Underlying operating profit
Revenue
Underlying operating profit
£131.9m
(2018: £87.3m)
£26.3m
(2018: £15.3m)
£203.3m
£27.5m
(2018: £210.1m)
(2018: £23.9m)
Where we operate
Our customers are national defence and security agencies, defence prime contractors, and increasingly those in the commercial sector. Our home
markets in the UK, the 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. The percentages below represent the proportion of the Group’s total 2019 revenue (see note 1 on page 95).
US
UK
55%The US maintains the largest
defence budget in the world,
and remains our core market.
Our exposure to key long-term
US programmes, particularly
in the Sensors & Information
segment but also in
Countermeasures & Energetics,
enables us to take advantage
of growing budgets.
27%In the UK we are seeing growing
customer demand for our cyber
and information security solutions
in national security, defence
and to an increasing extent
commercial sectors.
Europe
9%In Europe, our Norwegian
business has achieved record
order intake delivered through
long-term supply agreements and
efforts to enhance capacity.
Asia Pacific and ROW
9%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.
2
Chemring Group PLC | Annual report and accounts 2019
Why invest in Chemring?
In the past eighteen months Chemring has been restructured and repositioned for future growth.
A significant proportion of the Group’s safety procedures, management teams and corporate
governance has been strengthened, and the Group has made excellent progress on our strategy
to exit our commoditised energetics businesses. These actions have been enhanced by a focus
on embedding a culture of safe and continuous improvement across the Group.
We are a business that relentlessly innovates to protect its customers
Well positioned in niche segments
Against the background of renewed future growth in defence budgets, in particular in the
US, Chemring is well positioned in niche segments of the defence market which have the
opportunity to outperform the broader sector over the next few years. These segments
include the Group’s global market-leading position on mission-critical airborne and naval
countermeasures, advanced sensors and software engineering.
Exposure to major international programmes
Chemring is exposed to a substantial pipeline of major international programmes that have
the potential to deliver strong long-term growth. These include being a qualified source for
the F-35 Joint Strike Fighter countermeasure programme, as well as having technologies and
products to address the next-generation US programmes in explosive hazard detection,
biological detection and chemical detection.
Strong growth in consulting, technology and R&D service activities
Chemring’s Roke consulting, technology and R&D service activities are experiencing strong
growth driven principally by information security end markets and growing opportunities in
the commercial sector.
Proven management with momentum
Chemring’s executive management team has significant sector experience with a proven track
record of business restructuring, strategic investment and the delivery of profitable growth.
In the past eighteen months Chemring has been restructured, the portfolio reshaped with the
sale of the commoditised energetics businesses, and significant investment has been made
in the modernisation and automation of our facilities, and these actions provide strong
foundations for future top-line growth and margin expansion.
Balance sheet strength
Chemring has a robust balance sheet and strong ongoing operating cash generation, providing
a platform for future investment in the business and sustainable dividend payments.
Pipeline of attractive opportunities
The Group’s strong order book provides good medium-term visibility. A significant proportion
of our revenue is generated from sole or dual source positions, often from long-term partnering
agreements. Market-leading positions, incumbent supplier status and high barriers to entry
position Chemring well for the future.
Market-leading niche positions
in both sectors
Growing
order book
Significant organic revenue
growth potential
Improving operating margins
Strong operating
cash generation
Sustainable and
growing dividend
Improving quality and value
creation
Chemring Group PLC | Annual report and accounts 2019
3
Overview Chairman’s statement
Positioned for growth
Carl-Peter Forster Chairman
“ Chemring is now
a stronger, more
resilient business,
with market-leading
positions and a
clear strategy.”
Revenue
£335.2m
(2018: £297.4m)
Dividend
3.6p
(2018: 3.3p)
2019 was a year of solid recovery
in which significant changes were
implemented across the Group
and I am pleased with the progress
that has been made. Chemring is
now a stronger, more resilient
business, with market-leading
positions and a clear strategy.
We are now well placed to take
advantage of the growth
opportunities that are
available to us.
Safety
Safety is at the core of our operating philosophy
and the basis of our safety culture that is felt
throughout the business. As a Board we believe
that all injuries are preventable and as such
continue to maintain a healthy sense of unease
that challenges the way we operate and seeks
ways to reduce the risk of harm to our people.
In our commitment to zero harm we continue
to invest in our people, plant and processes so
4
Chemring Group PLC | Annual report and accounts 2019
that our people can operate safely with plant
and processes that are designed and maintained
to reduce people’s exposure to hazardous
situations. Further details on the significant
progress made on safety over the last year are
set out in the Group Chief Executive’s review.
2019 performance
Meaningful progress was made during 2019
to improve the quality of Chemring. It has been
a busy year for the Group in which significant
changes have been implemented in addition to
ongoing operational management. These include
the introduction of a new safety strategic
framework, a Group-wide safety review and
strategic plan, and the introduction of new
frameworks to strengthen risk management
and corporate governance. In addition to a
capability review and strengthening of the senior
management team, a number of key operational
and strategic milestones were achieved.
Following the closure of our UK countermeasures
site after the incident in August 2018, the site
progressed through a phased restart with chaff
and naval decoy lines operational in the first half
of the year. Spectral and MTV lines began
operations in the third quarter and the overall
site reached steady state manufacturing by the
end of the financial year, as planned.
Our Australian countermeasures facility was
closed for the majority of the year to be fitted
and qualified for F-35 flare production, and
in May we were pleased to announce that
the facility had been awarded two significant
contracts from the US DoD in support of
the F-35 and other platforms. This was a key
moment for Chemring and followed a multi-year
effort to establish Chemring Australia as the
second qualified source for F-35 countermeasures,
alongside our US facility in Tennessee.
In order to protect and grow Chemring’s
position as the number one global supplier of
countermeasures, significant investment is being
made over the next two years to modernise
and automate our facilities, and to increase
our capacity to meet expected market demand.
The £50m investment project to upgrade,
automate and increase capacity at the Group’s
countermeasures facility in Tennessee is
progressing to plan. This project is expected
to be completed in 2021 and will mean that
we have fully automated production lines in
all three of our countermeasures businesses
in the US, the UK and Australia. The Board
believes that this investment, together with
the consolidation of the three geographical
countermeasures businesses into a single, global
structure that is aligned to our key customers
and market opportunities, will be a key driver
of the Group’s future prosperity.
each part of the value chain from pre-concept
research and innovation right through to design,
manufacture and in-service support.
In August, Roke was chosen as a prime
industrial partner on the Defence Science and
Technology Laboratory’s SERAPIS framework.
The six-year research framework will focus
on new and mission-critical capabilities for
C4ISR communication systems and networks,
space systems, synthetic environments and
simulation technology to support human
capability development. Roke was awarded
Lot 1 of six capability areas, and will also work
with industrial partners on Lots 3 and 6.
We continue to actively explore opportunities
to expand Roke’s capabilities and offerings,
particularly into commercial and international
markets. As part of this we have recently
established Roke USA, Inc. which provides
the platform from which to transition
technologies created in the UK into the US.
Revenue from continuing operations for the
year was up 13% to £335.2m (2018: £297.4m),
driven by strong performance in the Sensors &
Information segment, as deliveries commenced
on the HMDS IDIQ contract and Roke enjoyed
a strong year.
The underlying operating profit from continuing
operations of £44.0m (2018: £31.0m) resulted
in an underlying operating margin of 13.1%
(2018: 10.4%). The increase in margin primarily
reflects the positive impact of the phased
restart of our Salisbury site and growth in our
niche energetics businesses, combined with a
stronger year in Sensors & Information due to
increased revenues on the HMDS IDIQ contract
and in Roke’s information-security business.
The Group’s order book at 31 October 2019 was
£449m (2018: £394m), of which approximately
£287m is scheduled for delivery during 2020,
representing cover of approximately 76% of
expected FY20 revenue (2018: 70%). The
increase since 31 October 2018 is primarily
attributable to the F-35 countermeasures order
received by our Australian subsidiary and the
continued growth in our niche businesses.
Statutory operating profit from continuing
operations was £31.3m (2018: £15.9m loss)
and after statutory finance expenses of £4.6m
(2018: £6.1m), statutory profit before tax
from continuing operations was £26.7m
(2018: £22.0m loss), giving statutory earnings
per share from continuing operations of 8.2p
(2018: 14.6p loss). The statutory loss from
discontinued operations was £1.2m (2018:
£65.0m loss), including a loss on disposal of
£2.8m relating to the sale of Chemring Military
Products, Inc. and Chemring Defence UK
Limited, giving a statutory profit of £21.9m
(2018: £105.8m loss) from continuing and
discontinued operations.
Elsewhere, the Group made excellent progress
on its strategy to move away from commoditised
product lines to focus on higher margin and
more predictable revenue streams. On
15 November 2018 the Board announced
that it had decided to exit the commoditised
energetics businesses located in Florida and
Derby. These businesses were treated as
discontinued operations and shown as held
for sale in the 2018 annual report and accounts.
The sale of Chemring Military Products, Inc.
and Chemring Defence UK Limited and the
closure of Chemring Prime Contracts were
all completed during the year, and the sale
of Chemring Ordnance, Inc. was announced
on 21 November 2019. This concludes our
programme of disposals which has reduced
the Group’s exposure to a significant amount
of operational and reputational risk, and enables
greater focus on the niche specialist energetic
devices and materials businesses in Chicago
and Scotland, where the Group has strong
intellectual property and high barriers to entry.
These businesses enjoyed a stronger year
driven by favourable market conditions and the
consolidation of our California site into Chicago.
The high-quality high explosives business in
Norway was adversely impacted in the first
half of the year as a result of the failure of aged
manufacturing equipment. This equipment was
replaced and this, together with further investment
plans, is expected to deliver a significant increase
in capacity to meet growing customer demand.
The Sensors & Information sector had a strong
year, with growth being driven by increased
revenues from both US and UK businesses.
The Sensors & Information business in the
US has moved into the delivery phase of the
Husky Mounted Detection System (“HMDS”),
the US Department of Defense’s (“US DoD”)
Explosive Hazard Detection Program of Record,
and received delivery orders of a further $30m
in the year. The transition from R&D progressed
to plan with the ramp-up in production being
achieved and customer deliveries being made on
schedule. This sole-source contract is expected
to provide a recurring level of business over the
next decade.
The Group’s position on the US chemical and
biological detection Programs of Record
continues to progress, with activity focusing on
the engineering, manufacturing and development
(“EMD”) phases, and in ensuring that we have a
technically and commercially winning solution to
the Aerosol and Vapor Chemical Agent Detector
(“AVCAD”). In October 2019, following a
successful critical design review, we received
an order for a further 75 units under the EMD
phase of the program. The DoD’s sourcing
strategy is expected to be determined once
the EMD phase concludes in late 2020.
It was an excellent year for Roke, our
information-security business, where the focus
on investing in its people and in ensuring they
have the right mix of skills to meet market needs
has supported strong revenue growth.
Roke’s data science capabilities, especially
in machine learning, streaming analytics and
autonomous systems, have grown rapidly.
These capabilities are vital to help customers
interpret and exploit the diverse data challenges
that are critical for modern competitive advantage.
Roke and Chemring Technology Solutions
(“CTS”) were restructured in the year, with
CTS’s electronic warfare (“EW”) and individual
electronic countermeasures (“IECM”) capabilities
consolidated into Roke’s existing defence business.
This has both removed cost and created a
business with global reach and one that is
able to support defence customers, whether
government or other defence contractors, at
Chemring Group PLC | Annual report and accounts 2019
5
Overview Chairman’s statement continued
Governance and ethics
We have taken significant steps to strengthen our
governance during the year with the introduction
of the Operational Framework and the issue
of an updated Code of Conduct. These both
underpin our drive to ensure that our employees
always do the right thing and that Chemring
conducts its business in a responsible and
ethical manner.
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.
In a number of our markets we are already
market leader, or one of the market leaders.
This is particularly so in Countermeasures
& Energetics and to a growing extent in
Sensors & Information as a result of our
recent long-term contract wins.
We will maintain and grow our positions
in Countermeasures & Energetics, investing
in modernisation and automation to improve
operational effectiveness and reliability, and
to increase capacity. In Sensors & Information
our focus is on expanding the Group’s product,
service and capability offerings in the areas of
tactical electronic warfare and cyber-security,
and in building a technology-based strategy for
growth beyond current US DoD Programs
of Record.
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.
People
I am delighted that this year our commitment
as a Board to ensuring that we spend time with
employees has led to a different level of interaction
with teams at different sites globally. Meeting
with small groups of people at all levels has
reinforced the Board’s view of the talent within
the business and it is impressive to hear first
hand the commitment and passion of individuals
to meeting the needs of our customers.
Continuous development of our people is
core to the focus on improving the quality
of our business.
Technical training in operations processes
and safety continues to have a high profile and
I am very pleased that the Group has invested
in resources to develop this further, alongside
broader management and leadership skills
in 2019.
On behalf of the Board I thank all employees for
their high level of commitment and enthusiasm.
Nigel Young, who has now served as a
non-executive director for nearly seven
years, has indicated his intention to retire on
30 April 2020, when his current appointment
comes to an end.
Current trading and outlook
Trading since the start of the current financial
year has been in line with expectations across
all businesses.
While we continue to work towards a more
balanced delivery of revenue and profit, the
expected profile of orders, revenue and margins
in 2020, combined with routine seasonality
within the business, means that the Group
expects its trading performance to be weighted
towards the second half of the financial year.
The order book of continuing businesses as at
31 October 2019 was £449m, of which £287m
is currently expected to be recognised as
revenue in 2020.
The Board’s expectations for the Group’s 2020
trading performance from continuing operations
remain unchanged.
The Board is focused on continuing to restructure,
simplify and build a stronger business with a
renewed purpose. With high-technology products
and market-leading positions Chemring has the
platforms for long-term future growth.
Carl-Peter Forster
Chairman
16 December 2019
Dividends
The Board is recommending a final dividend in
respect of the year ended 31 October 2019 of
2.4p (2018: 2.2p) per ordinary share. With the
interim dividend of 1.2p per share (2018: 1.1p),
this results in a total dividend of 3.6p (2018: 3.3p)
per share.
If approved, the final dividend will be paid on
24 April 2020 to shareholders on the register
on 3 April 2020. In accordance with accounting
standards, this final dividend has not been
recorded as a liability as at 31 October 2019.
Board of directors
On 8 August 2018, Daniel Dayan gave notice
of his intention to step down as a non-executive
director of the Board and Chairman of the Group’s
Remuneration Committee. He formally stepped
down from the Board on 30 November 2018.
Andrew Davies assumed the role of Chairman of
the Remuneration Committee on 8 August 2018.
He will be stepping down as Chairman following
the Annual General Meeting in March 2020 but
will remain on the Remuneration Committee.
Stephen King was appointed as a non-executive
director on 1 December 2018 and was appointed
as Chairman of the Audit Committee on
1 August 2019.
Laurie Bowen was appointed as a non-executive
director on 1 August 2019. She will assume
the role of Chairman of the Remuneration
Committee following the Annual General
Meeting in March 2020.
6
Chemring Group PLC | Annual report and accounts 2019
Group Chief Executive’s review
Executing our strategy
Michael Ord Group Chief Executive
Our strategy
01
Target growing niches
02
Win market share
03
Grow our US business
04
Manage the portfolio
Read more on
Pages 14 and 15
Our values
Our values form the foundation of our
organisation and our strategy.
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.
It has been an exceptionally busy year
in which we continued to deliver our
current mission of building a stronger
business. We have implemented
significant changes to improve safety,
strengthen leadership and corporate
governance and embed continuous
improvement across the Group.
We have also changed the structure of the
business and the way in which we operate.
In doing so we are improving the quality
of the business and redefining our purpose.
Collectively we are changing the culture
of Chemring to one of close collaboration,
responsible behaviour and belief in our core
values – Safety, Excellence and Innovation.
Introduction
2019 was my first full year as Chief Executive
of Chemring and I have been heartened by
the positive manner in which our people have
embraced the challenge of building a stronger
and improved business.
Whilst much has changed since I joined the
Group, my initial impressions of our significant
capabilities and strengths remain unchanged.
The depth and spread of our technology and
know-how, the robustness of our market
positions across our home markets of the US,
the UK, Europe and Australia, and the quality
of our people, combine to provide a significant
opportunity for future growth.
To remain competitive and successful we must
relentlessly deliver on our commitments to all
of our stakeholders, be they customers, industry
partners, shareholders or employees; it is through
this that we will continue to forge greater credibility,
trust and belief in the future of Chemring. It was
therefore pleasing to report that, despite some
operational challenges in the first half of the
year, overall performance for the year was in
line with our expectations.
Safety
Our goal remains zero harm which will be achieved
through establishing and embedding a proactive
safety culture which focuses on the control and
interaction of people, plant and process. In the
past year we have invested significant effort on
the journey to achieve this imperative, and this
effort is resulting in the continued improvement
in safety performance globally.
Chemring Group PLC | Annual report and accounts 2019
7
Strategic report Group Chief Executive’s review continued
concluded that we would protect and grow our
positions across defence, security and commercial
sectors and focus on our home markets of the US,
the UK, Europe and Australia.
Exiting the commoditised energetics sector
was an area of attention during the year and
it is therefore very pleasing to report that
the sales of Chemring Military Products and
Chemring Defence UK and the closure of
Chemring Prime Contracts were all completed
in year. The sale of the remaining business,
Chemring Ordnance, was announced on
21 November 2019 and is expected to complete
by the end of Q2 FY20. These disposals will
enable a greater focus on our niche specialist
energetic devices and materials businesses in
Chicago, Scotland and Norway.
We have already seen the benefits of this
reorganisation in our Sensors & Information sector,
where we have world-leading technologies and
development capabilities. The integration of
Chemring Technology Solutions (“CTS”) capabilities
into Roke’s existing defence business has created
a business with extended reach and one that
is able to support defence customers, whether
government or other defence contractors, at all
stages of technical readiness, from pre-concept
research and innovation, through to design,
manufacture and in-service support. It has also
provided the platform to transition our electronic
warfare technology created in the UK into the
US market. To facilitate this Roke established
a US footprint with the incorporation of
Roke USA, Inc.
There is growing collaboration between our
US and UK businesses and for the first time
Roke and Chemring Sensors & Electronic
Systems (“CSES”) have a single aligned strategy
capturing shared technology development
and shared business winning campaigns. This
provides a strong foundation for our Sensors
& Information sector.
We also have significant opportunities in the
Countermeasures & Energetics sector where we
are investing in safety, automation, modernisation
and capacity expansion in order to meet expected
market demand. We are taking steps to consolidate
our three geographical countermeasures businesses
into a single, global structure that is aligned to
our key customers and market opportunities.
This move will enable us to more effectively
leverage our countermeasures businesses to
improve our strategic growth opportunities
and market competitiveness. The creation of
a single integrated multinational business will
be a significant step forward for the Group.
Culture
The realignment of the sectors has created the
opportunity for greater levels of interaction and
collaboration across the Group which is both
Read more about Sensors & Information
Page 20
delivering positive results in terms of financial
and operational performance, and is assisting
the work being done to embed our values
based Chemring culture.
The new structure is enabling greater focus on
our strategic investments and a more robust
implementation of our Operational Framework,
which was introduced in January 2019 and is
now embedded across the business. This is the
reference source to all mandated policies across
the Group and is the backbone for our values,
behaviours and ways of working, and provides
the necessary governance to enable us to operate
in a safe, consistent and accountable way.
This year, alongside the resetting of the
structure around two sectors, we made further
progress towards the strengthening of the
leadership team in the UK and the US. There
were changes made to the leadership at seven
of the Group’s operating subsidiaries, and I have
assumed the responsibilities previously held by
the centralised role of Group Strategy Director.
In addition, a comprehensive review of the
culture at Chemring, carried out through
face-to-face discussions with over 350 of
our colleagues at all locations and at all levels,
provided insights for each of the business
leaders to enable them to take positive
action in creating a cohesive, supportive and
collaborative values-based culture.
Conclusion
With a number of significant operational and
strategic milestones achieved this year, our
near-term imperative is to continue on the
journey to build a stronger business; however
we will balance our focus and actions on both
short-term performance and long-term
value creation.
I would like to thank all my colleagues at Chemring
for their commitment and sheer hard work over
the past year.
While we are still in the early stages of our
transformation, we have collectively made
significant progress, and I have every confidence
in our future success.
Michael Ord
Group Chief Executive
16 December 2019
Safety continued
We have introduced a new three-year safety
strategy and plan across the Group. This has
progressed well, with all key milestones of the
plan having been met. Revised health, safety and
environmental standards and guidelines have
been implemented, as have our Fundamental
Safety Rules.
The Group KPI of Total Recordable Injury
Frequency (“TRIF”) has tracked reduction in
injuries over the past fourteen months with
the rate dropping from 2.77 to 0.79. This KPI
monitors the number of recordable injuries
per 200,000 man-hours worked over a rolling
twelve-month period. In addition, our process
safety indicators are driving improvement actions
that reduce the potential for an energetic event
that could cause harm to our people and facilities.
As part of the plan, we continue to introduce
stronger HSE assurance processes that ensure
compliance to our standards and benchmarks
the business against best practice. This, in addition
to our facility surveys and our increased focus
on process hazard reviews for both new and
legacy assets, will ensure that we design, maintain
and operate our processes with the highest
levels of integrity.
Strategy and structure
Following a review of the business portfolio the
Board concluded that our future focus should
be on those niche areas of the market where
we have sustainable competitive advantage
through incumbent supplier status and high
barriers to entry, and where our products and
services are underpinned by our rich intellectual
property and know-how.
We therefore announced that we would
exit the commoditised energetics businesses,
located in Derby and Florida, and that we
would be reorganised under two high-quality
business sectors, Sensors & Information and
Countermeasures & Energetics. We also
8
Chemring Group PLC | Annual report and accounts 2019
Q&A with Michael Ord
Can you explain the restructuring
of the business sectors?
Over the last 12 months, we have really looked
at the structure of the business to make sure
that we are organised in a way that makes us as
successful as we can be. Early on, we looked
closely at the businesses that were within the
Company, and determined that some of the
businesses within the commoditised energetics
area would be better owned by someone else.
We have since sold Chemring Ordnance,
Chemring Military Products and Chemring
Defence UK and closed Chemring Prime
Contracts. This will allow us to really focus
on the two new sectors that we have organised
the Company into: Sensors & Information and
Countermeasures & Energetics. Both of these
have unique niche positions. We have great
intellectual property and know-how, and
growth plans in both of these areas. The Board
fully supports the direction of travel with regard
to looking to maximise our opportunities.
How have you determined the
strategic direction of the Company?
The strategic direction of the Company was an
area I was determined to improve when I joined
Chemring. What I wanted to do was to make
sure that all of the leaders of our businesses
across Chemring had a strong voice in the
direction in which we are heading. To that
end, all of the businesses completed a strategic
planning round on an individual and sectorial
basis. We then merged these together to
produce a total business strategy. This was
then reviewed by the Board, which endorsed
the direction of travel. All of the businesses
put down ambitious plans, with growth and
investment for now and the future.
Can we expect any M&A activity
during 2020?
Business restructuring and site consolidation has
been a key element of the Group’s focus over
recent years, as we have sought to integrate
earlier acquisitions and right-size the business
to match current market demand. A lot of heavy
lifting has taken place over the past year as we
have sought to divest non-core activities, realign
the sectors and invest in the opportunities that
are available to us. We’ve always said that we
are open to acquisitions but only if they enhance
shareholder value and fit in with our wider
growth plans. If a suitable acquisition target
presented itself then we would assess it on a
case-by-case basis but there is more than
enough organic growth for us to be pursuing
at present.
What has been the most rewarding
aspect during your first 12 months
as Chief Executive at Chemring?
Working with such a positive team of people
within Chemring has been by far the most
rewarding aspect of the job to date. All meaningful
and lasting change comes from inside to out;
it is never the other way around. We have
some hugely talented and extremely passionate
people across our Company, at all levels, and
I have been impressed by the way that they
have embraced change. In driving excellence
and collaboration I am certain that we will
make a success of Chemring.
What have you done to ensure
that safety is paramount?
Safety is one of our core values. We have
introduced a new health and safety strategy
and plan, in addition to new safety KPIs and
performance monitoring tools. Revised HSE
standards and guidelines have been implemented,
as have our Fundamental Safety Rules which
focus on high-risk behaviour. But what I am
most pleased with is the huge amount of
work that has been done by all of our 2,500
employees across the whole business with
regard to strengthening our approach to safety
in everything we do. That doesn’t just apply to
staff who work at our Countermeasures &
Energetics businesses, but employees who work
in an office environment too. I’m really pleased
to see that people are grasping that everyone
going home safely at the end of the day is our
number one priority.
What is the most immediate
challenge that Chemring faces?
I think that our biggest collective challenge is
around building our credibility and confidence in
our ability to deliver. It’s about making promises,
and keeping them. Whether they be promises
to external customers or shareholders or
internally to colleagues. As a business we have
to generate a track record of people being able
to trust Chemring as a company which is able to
deliver. I see people around the business working
very hard to do this. We have a values framework
within the Company: Safety, Excellence and
Innovation. Performance doesn’t counteract
any of these. I want our staff to feel empowered
to deliver their promises and commitments, but
by doing that safely, with an eye for excellence
and looking at new ideas and what innovation
can be brought into the business.
What has been done to improve
the culture of the Company?
We have worked hard to make sure that the
culture within Chemring is one that our staff
want to work within. Having the ethos of always
doing the right thing is so important to our
business. Two areas that we have used to really
strengthen this across the Company is by rolling
out the Operational Framework. This sets out
all of the policies and procedures by which we
run the Company, to make it far stronger and
more successful. The next part is the Code
of Conduct, which is essentially about our
employee behaviours and the behaviour that is
expected of them. The Code of Conduct sets
out how our employees should do the right
thing in their interactions with colleagues,
customers, suppliers and local communities,
and should take personal responsibility for
their actions. The Code of Conduct provides
guidance on this.
Chemring Group PLC | Annual report and accounts 2019
9
Strategic report Business model
Creating value
We focus on providing innovative solutions that meet our customer requirements efficiently
and on time.
Key strengths Our values
What we do
Employees
Highly skilled workforce
operating in niche
capability areas
Customer
relationships
Long-term, high-quality
customer relations,
often at Tier 1 level with
“Five Eyes” governments
Supplier
collaboration
Key partnerships with
supply chain to deliver
customer value
Facilities
Investment in facilities,
including automation
to deliver quality
and efficiency
Safety
We place safety at the heart
of everything we do.
> We operate safely and manage risk.
> We promote best safety practice across
the business and beyond.
> We ensure we minimise our impact
on the environment.
Invest in people,
processes and products
Chemring is a technology business with approximately
2,500 employees worldwide. We invest in our future
by developing the capabilities of our people, maintaining
safe and efficient operations and developing next-
generation solutions to meet our customers’ current
and emerging needs.
Excellence
We are focused on ensuring we
consistently meet high standards
in all that we do.
> An ethos of continuous improvement
is core to our approach.
> We take actions to ensure that we
maintain and deliver operational
excellence.
> 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 & Energetics, we are the world’s
largest supplier of countermeasures, with our leading
technology and manufacturing position. In Energetics,
we win based on the technical superiority of our
products. In Sensors & Information, we maintain our
technological leadership to meet ever more demanding
customer requirements.
Innovation
We create world-class solutions
and develop world‑class thinking.
> We inspire imaginative solutions.
> We work together to turn ideas
into technologies and solutions.
> 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 2019
Outcomes
Stakeholder value
Investment
Our investment in property, plant and equipment in the year totalled £40.7m.
In addition, we invested £56.2m in product development, of which £47.2m
was customer funded.
Good progress is being made on the capacity expansion project at the Tennessee
countermeasures site and, excluding significant investments such as this, we aim that
investment at least matches depreciation and amortisation each year.
Investment
£96.9m (2018: £64.9m)
Cash flow
We aim to convert 100% of underlying EBITDA to underlying operating cash flow over
the medium term, accepting timing differences will arise at individual period ends.
In 2019, the conversion ratio was 104%, reflecting strong operating cash generation
and the continued focus on managing working capital.
Cash conversion
104% (2018: 89%)
Dividends
For the year ended 31 October 2019, our dividend will be 3.6p per share, an
increase of 9% on the prior year, subject to the approval of the final dividend
at the Annual General Meeting.
Dividend
3.6p
(+9%)
Shareholders
We return money to our
shareholders through dividends
and, through the execution of our
strategy, we grow the value of
their investment over time.
Employees
We provide development
opportunities and a safe and
rewarding working environment
for our employees.
Suppliers
Our suppliers are supported by
the procurement of goods and
services that we require.
Customers
We provide innovative solutions
in response to our customers’
requirements.
Communities
We support local jobs and skills
and contribute to the communities
in which we operate.
Governments
Through paying taxes in the
jurisdictions in which we operate,
we support the development of
public infrastructure and services.
Chemring Group PLC | Annual report and accounts 2019
11
Strategic report Target markets
Building leading positions
Chemring is an international technology company. Our home markets are the US, the UK,
Europe and Australia.
The US is the world’s largest
defence market and our US
businesses are well positioned
to benefit from this growing
defence budget.
The FY20 National Defense Authorization Act
was passed in July 2019 with a base budget for
FY20 of $545bn. The President’s Budget Request
also projects the DoD five-year program to
settle at $747bn in FY24*, providing growth to
sustain personnel increases in all four services,
major equipment programmes such as the F-35
and investments in technology innovation in
electronic warfare, the increased use of unmanned
systems and cyber capabilities, as well as renewed
emphasis on space-based surveillance systems.
Our US businesses are well positioned to
benefit from this increase in budgeted spend:
> F-35 fleet ramp-up will drive a stock build
for its new countermeasures to deliver full
operational capability for the aircraft. This is
expected to continue into the mid-2020s as
the fleet achieves full operating capability.
> HMDS is a Program of Record with a planned
fleet of 369 systems.
> 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.
* Source: US Defense Budget Briefing presentation
March 2019.
UK 26%
US 47%
Europe 11%
Asia Pacific 12%
Rest of the world 4%
Global sales
% of Chemring’s global sales (2015–2019)
26+
US
We are capitalising on our successful
investment in explosive hazard detection
and next-generation chemical and biological
detection technologies where we have won
a number of Programs of Record.
partner nations in the programme,
including both the UK and Australia. Flare
countermeasures are expected to remain
a priority for manned aircraft fleets, and
will continue to be procured alongside
other technologies.
The largest part of our investment is in the
US Countermeasures sector. We are in the
process of expanding capacity at our North
American manufacturing operations in order
to capitalise on the growing F-35 fleets. F-35
will become the primary fighter for the US
Navy, Air Force and Marine Corps, and is
intended to remain in service well beyond
2040, likely creating opportunity for a large,
stable and recurring countermeasures
business in the US as well as with multiple
Technology and innovation
We have world-leading technologies,
incumbent supplier advantage and a depth of
expertise in research, design and engineering
in many fields, most notably chemical and
biological detection, artificial intelligence,
autonomous systems, communications and
network security and data science.
12
Chemring Group PLC | Annual report and accounts 2019
47
+
11
+
12
+
4
+
T
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 in armoured vehicles
and ships, but also the continued acquisition
of new platforms including the F-35 and the
P-8 maritime patrol aircraft.
This pressure on defence spending is likely to
remain for the foreseeable future, despite planned
increases of over 2% to 2021. For Chemring, the
UK MOD accounts for less than 5% of Group
revenues, however it is an important partner
for developing and qualifying new products.
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.
Europe combines modern,
well-equipped forces with
budget-constrained new NATO
members on its Eastern borders.
European defence spending is returning to growth,
with most Western European and Nordic
members increasing 2019 and 2020 budgets and
projecting additional equipment procurement.
The UK, France and Germany remain key
contributors to spend and actively contribute
to growth in NATO Europe defence spending,
with all three investing in aircraft and wider
sensors and electronic warfare. Long-term
co-operative programmes are also making a
resurgence, with the Franco-German-Spanish
Future Combat Air System and the UK-Italian
& Swedish Tempest fighter aircraft expected
to drive R&D spending through the 2020s.
European defence spending currently falls well
short of NATO’s 2% GDP target, with only five
countries in Europe meeting this target in 2018.
Major contributors to spend, such as Germany,
have committed to reaching 1.5% of GDP by
2024, suggesting that most markets will not reach
the NATO mandated targets by the mid-2020s.
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 is potentially more
positive, and there are some niche opportunities
as new NATO members seek to upgrade their
capabilities and begin positioning for next-
generation development programmes.
Australia is Chemring’s fourth
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. Australia is in the
midst of a large-scale equipment and capability
refresh. Its 2019–2020 budget of AUD 38.7bn is
an 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.
Our US businesses
are well positioned
to benefit from
this growing
defence budget.
HMDS is a Program of Record
with a planned fleet of
369
systems
Australia is Chemring’s fourth
home market and it aims to
grow its defence spending to
2%
of GDP by 2021
Chemring Group PLC | Annual report and accounts 2019
13
Strategic report Our strategy
Sustainable growth
Our strategy is to deliver profitable growth by focusing on niche markets where we can be
the world leader, where there are significant barriers to entry, and where we can grow faster
than the wider defence market.
01
02
Target growing niches
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 & Information sector.
Win market share
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
& Energetics sector to expand capacity at our North American
manufacturing operations to capitalise on the surge in demand for
countermeasures driven by the growing F-35 fleets.
Strategy in action
In the US, we are capitalising on our successful investment in next-generation
explosive hazard detection and chemical and biological detection
technologies where we have won the HMDS 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 and Electromagnetic 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.
Strategy in action
The US
The investment in the US manufacturing operations for our
Countermeasures & Energetics 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
Our principal risks are documented on pages 30 to 36.
KPI
Order book
£449m 14%
(2018: £394m)
14
Chemring Group PLC | Annual report and accounts 2019
KPI
Order intake
£411m 14%
(2018: £360m)
03
04
Grow our US business
Our US businesses deliver more than half the Group’s revenue,
and their recent successes in the F-35 countermeasures and Sensors
& Information 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.
Manage the portfolio
We continually review our portfolio to ensure it aligns with our strategy
and medium to long-term goals.
Strategy in action
In Countermeasures & Energetics we are sharing conventional, spectral
and kinematic flare products and processes developed in the UK and
Australia with our US operations and are promoting the benefits of
these capabilities to the US customer.
In Sensors & Information, 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 Cyber and Electromagnetic activity
(“CEMA”) and Electronic Countermeasure (“ECM”) products.
Strategy in action
The Group required reshaping to align with our strategy. We announced
the disposal of our commoditised energetics businesses in November
2018 and this leaves the Group with two sectors, Countermeasures &
Energetics and Sensors & Information. This has simplified the Group
and enabled greater focus on our growing differentiated Sensors &
Information and Countermeasures & Energetics positions, where we
have recently made significant progress.
KPI
Revenue
£335m 13%
(2018: £297m)
KPI
Underlying operating margin
13.1% 2.7%
(2018: 10.4%)
Chemring Group PLC | Annual report and accounts 2019
15
Strategic report
Key performance indicators
Measuring our progress
The Group’s strategy is underpinned by focusing on a number of
key performance indicators (“KPIs”).
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.
Following a Group-wide safety review in 2019, the safety KPIs have been
expanded to include total recordable injuries number and rate and
hazard reports.
The KPIs that the Board and senior management utilise to assess Group
performance are set out below. All financial KPIs refer to continuing
operations and therefore exclude businesses classified as discontinued
and held for sale.
Strategic priority
Safety
Orders
Revenue
KPI
1
Number of energetic
events causing harm
or injury
2
(2018: 6)
2019
2018
2
2
Number of near
miss and potential
hazard reports
2,033
(2018: 2,447)
2019
2,033
3
Lost time injuries
number and
frequency rate
Number 8
(2018: 11)
2019
6
2018
2,447
2018
Rate 0.35
(2018: 0.38)
2019
2018
8
11
0.35
0.38
Total recordable
injuries number and
frequency rate
Number 18
(2018: 65)
Order intake
Group
£411m
(2018: £360m)
Order book
Group
£449m
(2018: £394m)
Revenue
Group
£335m
(2018: £297m)
Sensors & Information
Sensors & Information
Sensors & Information
Rate 0.79
(2018: 2.77)
Countermeasures
Countermeasures
Countermeasures
& Energetics
& Energetics
& Energetics
Description
Number of energetic events
causing harm or injury.
Number of near miss and
potential hazards reported.
Number of lost time injuries per
200,000 man hours worked.
Number of recordable injuries
Order intake is measured at
Order book is measured at
Revenue is measured at sales value
per 200,000 man hours worked.
expected sales value and represents
expected sales value and indicates
less any applicable sales taxes.
the last 12 months’ activity.
future potential.
Why is it a KPI?
A process safety event is one
of the key strategic safety risks
of the business. This indicator
measures those events that
have caused injury or harm.
This indicates employee
awareness of hazards and
the greater the reporting the
more engaged our people are.
Industry standard indicator that
provides a measure of injuries that
result in a person being away from
work for more than one day.
This is the rate for all injuries
including medical treatment,
The trend of order intake gives
The level of order book, in particular
The trend of revenue gives an
an indication of market conditions
for delivery in the next year, gives a
indication of both the state of
restricted workday and lost time
and our competitiveness within
degree of confidence in expected
the end market and our business’
our markets.
future financial performance.
ability to execute orders on time
to satisfy customer needs.
2019 performance
Two events this year compared
to six last year. Neither of these
events caused life-altering injuries.
We will introduce a new indicator
next year which measures
those events with the potential
to cause harm to give a wider
performance indicator.
This level of reporting
demonstrates that the
workforce are engaged and
feel comfortable reporting
near misses and potentially
hazardous situations.
The rate has remained stable.
The total numbers are low and
the wider Total Recordable Injury
Frequency rate provides a better
indicator of performance.
In 2018 the reported Total
Recordable Injury Frequency
Strong order intake in Countermeasures & Energetics resulted in an
order book for the continuing business at year end of £449m (2018:
Group revenue growth was
in line with our expectations,
Rate (“TRIF”) was 2.77, at the end
£394m), £287m currently due as revenue in FY20, approximately 76%
reflecting strong Sensors &
of 2019 this has reduced to 0.79.
coverage of FY20 targeted revenue.
Information sector performance
driven by the start of the HMDS
IDIQ contract and a strong year
at Roke. Countermeasures &
Energetics sector was impacted
by planned site recommissioning
in the UK and Australia.
injuries. It is a more sensitive
indicator of occupational safety
than Lost Time Injury frequency
rates, as more minor events
are captured.
The reduction has been driven
through an increased consistency
in the classification of events
and the reduction of incidents
following the introduction of a
Group-wide HSE Management
System Framework Standard and
HSE Improvement Plan that has
improved risk management and
increased engagement and the
sharing of best practices.
16
Chemring Group PLC | Annual report and accounts 2019
Strategic priority
Safety
KPI
Number of energetic
events causing harm
or injury
2
(2018: 6)
Number of near
miss and potential
hazard reports
2,033
(2018: 2,447)
Lost time injuries
number and
frequency rate
Number 8
(2018: 11)
Rate 0.35
(2018: 0.38)
4
Total recordable
injuries number and
frequency rate
Number 18
(2018: 65)
2019
2018
18
Rate 0.79
(2018: 2.77)
2019
2018
0.79
Orders
5
Order intake
Group
£411m
(2018: £360m)
6
Order book
Group
£449m
(2018: £394m)
Revenue
7
Revenue
Group
£335m
(2018: £297m)
Sensors & Information
2019
£134m
Sensors & Information
2019
£80m
Sensors & Information
2019
£132m
65
2018
£109m
2018
£75m
2018
£87m
Countermeasures
& Energetics
2019
£277m
Countermeasures
& Energetics
2019
£369m
2.77
Countermeasures
& Energetics
2019
2018
£251m
2018
£318m
2018
£203m
£210m
Description
Number of energetic events
causing harm or injury.
Number of near miss and
potential hazards reported.
Number of lost time injuries per
200,000 man hours worked.
Number of recordable injuries
per 200,000 man hours worked.
Order intake is measured at
expected sales value and represents
the last 12 months’ activity.
Order book is measured at
expected sales value and indicates
future potential.
Revenue is measured at sales value
less any applicable sales taxes.
Why is it a KPI?
A process safety event is one
of the key strategic safety risks
of the business. This indicator
measures those events that
have caused injury or harm.
This indicates employee
awareness of hazards and
the greater the reporting the
more engaged our people are.
Industry standard indicator that
provides a measure of injuries that
result in a person being away from
work for more than one day.
2019 performance
Two events this year compared
to six last year. Neither of these
This level of reporting
demonstrates that the
events caused life-altering injuries.
workforce are engaged and
We will introduce a new indicator
next year which measures
those events with the potential
to cause harm to give a wider
performance indicator.
feel comfortable reporting
near misses and potentially
hazardous situations.
The rate has remained stable.
The total numbers are low and
the wider Total Recordable Injury
Frequency rate provides a better
indicator of performance.
The trend of order intake gives
an indication of market conditions
and our competitiveness within
our markets.
The level of order book, in particular
for delivery in the next year, gives a
degree of confidence in expected
future financial performance.
The trend of revenue gives an
indication of both the state of
the end market and our business’
ability to execute orders on time
to satisfy customer needs.
Strong order intake in Countermeasures & Energetics resulted in an
order book for the continuing business at year end of £449m (2018:
£394m), £287m currently due as revenue in FY20, approximately 76%
coverage of FY20 targeted revenue.
Group revenue growth was
in line with our expectations,
reflecting strong Sensors &
Information sector performance
driven by the start of the HMDS
IDIQ contract and a strong year
at Roke. Countermeasures &
Energetics sector was impacted
by planned site recommissioning
in the UK and Australia.
This is the rate for all injuries
including medical treatment,
restricted workday and lost time
injuries. It is a more sensitive
indicator of occupational safety
than Lost Time Injury frequency
rates, as more minor events
are captured.
In 2018 the reported Total
Recordable Injury Frequency
Rate (“TRIF”) was 2.77, at the end
of 2019 this has reduced to 0.79.
The reduction has been driven
through an increased consistency
in the classification of events
and the reduction of incidents
following the introduction of a
Group-wide HSE Management
System Framework Standard and
HSE Improvement Plan that has
improved risk management and
increased engagement and the
sharing of best practices.
Chemring Group PLC | Annual report and accounts 2019
17
Strategic report
Key performance indicators continued
Strategic priority
Underlying operating profit and margin
KPI
8
Underlying operating profit and margin
Underlying operating profit Underlying operating margin
Group
£44.0m
Group
13.1%
(2018: £31.0m)
(2018: 10.4%)
Sensors & Information
2019
£26.3m
Sensors & Information
2019
19.9%
2018
£15.3m
2018
17.5%
Countermeasures
& Energetics
2019
£27.5m
Countermeasures
& Energetics
2019
13.5%
2018
£23.9m
2018
11.4%
Continuing underlying
earnings per share
9
Continuing underlying
earnings per share
11.2p
(2018: 6.9p)
2019
2018
11.2p
6.9p
Change from previous year
up 62%
(2018: up 17%)
2019
2018
17%
62%
Description
Underlying operating profit excludes non-underlying items that could, by their
size or nature, distort the Group’s underlying quality of earnings. Underlying
operating margin is calculated as underlying operating profit divided by revenue.
Calculated as adjusted earnings after
tax divided by the number of shares
in issue.
Why is it a KPI?
Underlying operating profit provides a consistent year-on-year measure
of the trading performance of the Group’s operations. 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 measurement of underlying
EPS reflects all aspects of the
Group’s income statement including
the management of interest and tax.
Working capital and inventory
Net debt and cash flow
10
Working capital
Group
£90.5m
(2018: £83.7m)
11
Inventory
Group
£78.1m
(2018: £71.4m)
12
13
Net debt: continuing
Continuing underlying
underlying EBITDA
operating cash flow
1.24x
(2018: 1.64x)
£63.9m
(2018: £44.7m)
Sensors & Information
Sensors & Information
Countermeasures
Countermeasures
& Energetics
& Energetics
Conversion of EBITDA
into operating cash
104%
(2018: 89%)
Working capital is defined as
inventories, trade and other
receivables, less trade and
other payables.
Inventory is measured at cost.
Measured as net debt divided
by EBITDA for the previous
12 months.
Cash flow from continuing
operating activities before tax
outflows, non-underlying items and
pension payments.
Efficiently turning profit into cash
The primary focus for improvement
This is a measure of leverage
demands a degree of control over
in working capital is inventory.
within the business and is a
This is a key measure to ensure
profit turns into cash in short order.
working capital.
banking covenant.
2019 performance
The continuing underlying operating profit increased by 42% during the
year. The changes in margin of each sector reflect the market conditions,
volume changes and performance improvement actions, as set out in this
strategic report.
Underlying EPS increased by
62% in 2019, driven by increased
underlying operating profit and
lower interest costs.
Working capital as a percentage
Inventory increased as preparation
This has decreased in 2019, as
of revenue improved from
made for Q1 deliveries with all
EBITDA has increased and net
28% to 27%.
sites expected to be operational
debt has decreased.
in H1 FY20.
Operating cash flow increased in
2019 as an increase in operating
profit was supplemented by the
enhanced focus on working capital.
18
Chemring Group PLC | Annual report and accounts 2019
KPI
8
Underlying operating profit and margin
Underlying operating profit Underlying operating margin
Group
£44.0m
(2018: £31.0m)
Group
13.1%
(2018: 10.4%)
Sensors & Information
Sensors & Information
Countermeasures
Countermeasures
& Energetics
& Energetics
Continuing underlying
earnings per share
9
Continuing underlying
earnings per share
11.2p
(2018: 6.9p)
Change from previous year
up 62%
(2018: up 17%)
Strategic priority
Underlying operating profit and margin
Working capital and inventory
Net debt and cash flow
10
Working capital
Group
£90.5m
(2018: £83.7m)
11
Inventory
Group
£78.1m
(2018: £71.4m)
Sensors & Information
2019
£35.2m
Sensors & Information
2019
£19.4m
2018
£28.8m
2018
£16.9m
12
Net debt: continuing
underlying EBITDA
1.24x
(2018: 1.64x)
13
Continuing underlying
operating cash flow
£63.9m
(2018: £44.7m)
2019
2018
1.24x
1.64x
2019
2018
£63.9m
£44.7m
Description
Underlying operating profit excludes non-underlying items that could, by their
Calculated as adjusted earnings after
size or nature, distort the Group’s underlying quality of earnings. Underlying
tax divided by the number of shares
operating margin is calculated as underlying operating profit divided by revenue.
in issue.
Working capital is defined as
inventories, trade and other
receivables, less trade and
other payables.
Countermeasures
& Energetics
2019
2018
£55.3m
£54.9m
Countermeasures
& Energetics
2019
£58.7m
2018
£54.5m
Inventory is measured at cost.
Measured as net debt divided
by EBITDA for the previous
12 months.
Why is it a KPI?
Underlying operating profit provides a consistent year-on-year measure
The measurement of underlying
of the trading performance of the Group’s operations. A focus on operating
EPS reflects all aspects of the
margin allows the impact of changes in revenue and cost base to be
monitored, enabling comparisons to be made of management performance
Group’s income statement including
the management of interest and tax.
and trading effectiveness.
Efficiently turning profit into cash
demands a degree of control over
working capital.
The primary focus for improvement
in working capital is inventory.
This is a measure of leverage
within the business and is a
banking covenant.
2019 performance
The continuing underlying operating profit increased by 42% during the
year. The changes in margin of each sector reflect the market conditions,
volume changes and performance improvement actions, as set out in this
strategic report.
Underlying EPS increased by
62% in 2019, driven by increased
underlying operating profit and
lower interest costs.
Working capital as a percentage
of revenue improved from
28% to 27%.
Inventory increased as preparation
made for Q1 deliveries with all
sites expected to be operational
in H1 FY20.
This has decreased in 2019, as
EBITDA has increased and net
debt has decreased.
Operating cash flow increased in
2019 as an increase in operating
profit was supplemented by the
enhanced focus on working capital.
Chemring Group PLC | Annual report and accounts 2019
19
Conversion of EBITDA
into operating cash
104%
(2018: 89%)
2019
2018
104%
89%
Cash flow from continuing
operating activities before tax
outflows, non-underlying items and
pension payments.
This is a key measure to ensure
profit turns into cash in short order.
Strategic report
Focus on
Sensors & Information
Chemring’s Sensors & Information products include world-leading
systems for detecting improvised explosive devices (“IEDs”), chemical
and biological agents, and 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 mission-critical issues.
Operating across commercial, national security and defence domains,
the Sensors & Information sector is constantly innovating and evolving
to enable customers to deliver competitive advantage, and to defend
their people, assets and information.
Key facts
Revenue
£131.9m
(2018: £87.3m)
Underlying operating profit
£26.3m
(2018: £15.3m)
Order book
£80m
(2018: £75m)
Underlying operating margin
19.9%
(2018: 17.5%)
Statutory operating profit
£19.7m
(2018: £5.2m)
Sensors & Information
in action
Within the electronic warfare sector we
deliver complete Signal Intelligence (“SIGINT”)
capabilities, from tactical mounted and
dismounted systems through to strategic
signals intelligence and monitoring.
Roke has expanded its offerings in national
security resulting in recent contract wins with
the National Crime Agency and the National
Cyber Security Centre to increase resilience
of critical national infrastructure.
20
20
Chemring Group PLC | Annual report and accounts 2019
Chemring Group PLC | Annual report and accounts 2019
Strategy
The Sensors & Information sector remains
Chemring’s principal area of focus for long-term
growth, reflecting customer demand and
opportunities in this area.
We continue to focus on expanding the Group’s
product, service and capability offerings in the
areas of electronic warfare, cyber-security and
data science, and in building a technology-based
strategy for growth beyond current DoD
Programs of Record in the areas of IED,
chemical and biological threat detection.
The Group’s specialist contract research and
development business, Roke, operates in the
advanced 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.
Roke’s data science capabilities, especially in machine
learning, streaming analytics and autonomous
systems, have grown rapidly. These capabilities
are vital to help customers interpret and exploit
the diverse data challenges that are critical for
modern competitive advantage.
We continue to actively explore opportunities
to expand Roke’s capabilities and offerings,
particularly into commercial and international
markets. As part of this we have recently
established Roke USA, Inc. in the US which
provides the platform from which to transition
the electronic warfare and other technologies
created in the UK and commercialise it in
the US.
There is growing collaboration between our
US, UK and Australian businesses and for the
first time Roke and CSES have a single aligned
strategy which captures the individual businesses’
focus areas and also their shared campaigns.
Markets
Customer budgets are rising, as are research
and development efforts in support of US
Programs of Record in the counter-IED,
chemical and biological detection markets.
The increasing threat to information security,
together with the proliferation of autonomous
systems and artificial intelligence, is resulting in
customer budgets for Roke’s services continuing
to improve. Continued investment in capability
in this area is ongoing to optimise the
opportunity for Chemring.
Performance
Revenue for Sensors & Information increased
significantly by 51% to £131.9m (2018: £87.3m)
and underlying operating profit increased by
71.9% to £26.3m (2018: £15.3m), as underlying
operating margin improved to 19.9% (2018: 17.5%).
The Sensors & Information business in the US
has moved into the delivery phase of the HMDS
Program of Record and continues to focus on the
engineering, manufacturing and development
(“EMD”) and testing phases of the biological
and chemical detection Programs of Record.
Roke’s information security business continues
to grow.
On a constant currency basis revenue would have
risen 47% to £128.3m and underlying operating
profit would have been up 67% to £25.6m.
The statutory operating profit for the year was
£19.7m (2018: £5.2m).
Key developments in the year on the major
US Programs of Record are summarised below.
The US DoD’s Explosive Hazard Detection
(“EHD”) program, through the Husky Mounted
Detection System (“HMDS”) program, which is
a spiral development program, with concurrent
development, trialling, and manufacturing to be
undertaken, continues to progress as expected.
Under the previously awarded IDIQ sole-source
contract vehicles, further delivery orders of $30m
were received in the year. The ramp-up to
production progressed as planned and customer
deliveries were made on schedule in the year.
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 is undertaking testing of our product,
after which we expect a production decision in
early 2020.
In 2018, we bid and won a second biological
program, the Enhanced Maritime Biological
Detection System (“EMBD”), where the customer
is the US Navy. Our initial contract award for
Engineering Manufacturing Development (“EMD”)
and LRIP was in the form of a $24m IDIQ, against
which we received delivery orders of $5m in 2018
and a further delivery order in this year of $9m.
The program is expected to be worth up to $100m
over five to ten years once in full rate production.
The Aerosol and Vapor Chemical Agent Detector
(“AVCAD”) is progressing through the EMD
phase as expected. The EMD and LRIP phases
are expected to be worth approximately $18m
in the period to 2022. Following this the customer
is expected to have a requirement of up to
$800m. Chemring is currently one of two
contractors selected for this competitive program.
In October 2019, following a successful critical
design review, we received an order for a
further 75 units under the EMD phase of the
program. The next customer procurement
decision point is expected to be at the
conclusion of the EMD phase in early 2021.
The markets for electronic warfare, cyber-security
and data science capabilities, in which Roke is a
leading participant, have been buoyant in the
year. Roke has expanded its offerings resulting
in recent wins with the National Crime Agency
to tackle child abuse and sexual exploitation, the
National Cyber Security Centre to increase
resilience of critical national infrastructure and
the Defence Science and Technology Laboratory
(“DSTL”) to research and develop new
capabilities through the SERAPIS framework.
This has driven double digit growth in both
revenue and underlying operating profit.
Opportunities and outlook
The focus for Sensors & Information continues
to be on expanding the Group’s product, service
and capability offerings in the areas of electronic
warfare, cyber-security and data science, and
securing positions on the US DoD Programs
of Record.
In the US, focus has turned to the execution phase
on contracts. Mobilisation has started, with
strong initial deliveries in 2019 on the HMDS
program and the focus continues to 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
communications, cyber, automation and data
science, Roke will deliver research, engineering
and advisory services using its expert people
and capabilities. Concurrently, Roke is seeking
to expand its capabilities into commercial and
international markets over the medium term.
The order book for Sensors & Information at
31 October 2019 was £80.0m (2018: £75.4m),
of which £68m is expected to be delivered
in 2020, providing 52% cover of expected
2020 revenue.
2020 trading performance for Sensors &
Information is expected to show a continuation
of the levels of business seen in 2019. No new US
Programs are expected to commence in the year.
We continue to
focus on expanding
the Group’s
product, service
and capability
offerings.
Chemring Group PLC | Annual report and accounts 2019
21
Strategic report Focus on
Countermeasures
& Energetics
Chemring is the world leader in the design, development
and manufacture of advanced expendable countermeasures
and countermeasures suites for protecting air, sea and land
platforms against the growing threat of guided missiles.
Our niche, world-class energetic systems provide safety-critical
components for missiles, aircraft and space launch systems.
Our high‑reliability, single‑use devices perform key functions
including satellite deployment, aircrew egress and safety systems.
Key facts
Revenue
£203.3m
(2018: £210.1m)
Underlying operating profit
£27.5m
(2018: £23.9m)
Order book
£369m
(2018: £318m)
Underlying operating margin
13.5%
(2018: 11.4%)
Statutory operating profit
£22.0m
(2018: £2.8m)
Countermeasures &
Energetics in action
We are the #1 global supplier of
countermeasures, including sole-source
positions on the F-35.
We provide mission-critical devices for launch
vehicles such as Atlas V and Delta IV, space
exploration vehicles such as the Mars Rover,
and satellites such as MUOS and Galileo.
22
22
Chemring Group PLC | Annual report and accounts 2019
Chemring Group PLC | Annual report and accounts 2019
Strategy
The Countermeasures & Energetics 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 needs.
Investment in the sector will principally be
directed towards safety, automation and the
enhancement of current facilities including
capacity and capabilities. We also see great
opportunity through partnering with our
customer base and other partners on future
technological developments.
Having exited our commoditised energetics
businesses in Florida and Derby, the Group is
now able to place even greater focus on our
niche specialist energetic devices and materials
businesses. The Group will seek to secure
the position of our 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
The countermeasures market continues to show
positive momentum with an increase in solicitation,
bid activity and the receipt of orders 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.
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.
Performance –
continuing operations
Order intake in the year of £276.5m
(2018: £250.8m) has continued to be strong,
particularly in the significant US market.
Revenue decreased 3% to £203.3m
(2018: £210.1m) and the segment reported
a 15.1% increase in underlying operating profit
to £27.5m (2018: £23.9m). On a constant
currency basis revenue would have decreased
by 6% to £197.9m and underlying operating
profit would have been £26.7m.
The statutory operating profit for the year
was £22.0m (2018: £2.8m), the year being
impacted by the phased restart of the Salisbury
site and the completion of the Australia F-35
production refit.
The phased restart of our UK countermeasures
site has progressed as planned with chaff and
naval decoy lines operational in the first half
of the year. Spectral and MTV lines began to
operate in the third quarter as planned, with
the overall site at steady state manufacturing at
the end of the financial year. The site contributed
£21m of revenue and approximately broke
even after accounting for insurance recoveries
of £15m and remediation costs in 2019, in line
with our previous expectations.
Our Australian facility was closed for the majority
of the year to be fitted and qualified for F-35
production. The facility upgrade was completed
on schedule and to budget. We were pleased
to announce that our Australian subsidiary had
been awarded two significant contracts: an
Undefinitised Contract Action with a Not To
Exceed value of US$60.4m and a further (Directed
Sole Source) award for US$6.5m. The contracts
are from the US DoD to supply countermeasures
to the Royal Australian Air Force, US Navy
and Foreign Military Sales in support of the F-35
Joint Strike Fighter and other platforms. This
award follows a multi-year effort to establish
Chemring Australia as a qualified supplier for
F-35 countermeasures. The first deliveries
against these contracts occurred at the end of
our 2019 financial year.
Our niche energetics devices businesses enjoyed
a strong year driven by favourable market
conditions and the consolidation of our
California site into Chicago.
Significant investment is planned over the next
two years in our Countermeasures & Energetics
businesses to both recapitalise and modernise
facilities and invest in capacity to address
expected market demand, the most significant
investment being the Tennessee capacity
expansion programme. The cost of this is currently
expected to be approximately £50m and is
focused on delivering capacity to meet expected
F-35 demand from the US Government.
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 positive. The 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.
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 completed phased restart of our UK
countermeasures site and completion of the
Australia F-35 production refit is expected to
increase revenue and operational performance
of the segment in 2020.
Countermeasures & Energetics’ order book
at 31 October 2019 was £368.7m (2018:
£318.3m). Of the 31 October 2019 order
book, approximately £219m is currently
expected to be delivered in 2020, providing
89% cover of expected 2020 revenue.
With a strong order book in place, 2020 trading
performance for Countermeasures & Energetics
is expected to be positive, albeit with a significant
bias towards the second half consistent with
historical revenue trends.
The outlook for
the sector is
increasingly
positive.
Chemring Group PLC | Annual report and accounts 2019
23
Strategic report Financial review
Our focus has been on
improving the quality
of the business
Andrew Lewis Group Finance Director
“ Strong working
capital management
throughout the year
has reduced volatility
and significantly
decreased interest
costs.”
Working capital
£90.5m
(2018: £83.7m)
Interest expense
£4.6m
(2018: £6.1m)
In 2019 we have maintained
our focus on “building a stronger
business” to ensure the Group has
solid foundations from which to
deliver the medium-term growth
opportunities in both sectors.
In Countermeasures & Energetics, we have
focused on the phased restart of our Salisbury
site, following the incident in August 2018, the
fit-out and qualification of our Australian site for
F-35 and the capacity expansion project at our
Tennessee facility, again in preparation for
expected F-35 demand from the US DoD.
In Sensors & Information the execution of the
first stage of the HMDS Program of Record
commenced successfully and Roke continued
to grow in a buoyant cyber-security market.
Our focus has been on improving the quality
of the business. We have improved the quality
of the balance sheet as expensive private
placement loan note debt has been refinanced
with a market rate revolving credit facility, the
pension scheme no longer requires material
cash contributions from the Group and working
capital has become much less volatile. All this,
together with increased market visibility and
a better quality order book, has allowed us to
commit to invest in the business. This investment
24
Chemring Group PLC | Annual report and accounts 2019
in capacity, infrastructure and systems will continue
at an elevated level for three years and is a key
enabler to delivering a stronger business capable
of delivering on the opportunities.
Group financial performance
Order intake for continuing operations for 2019
was up 14.1% to £410.6m (2018: £360.0m),
driven by the release of further delivery orders
on the HMDS IDIQ contract, orders in Australia
for F-35 countermeasures and growth in our
niche energetics businesses.
Revenue from continuing operations for the
year was up 12.7% to £335.2m (2018: £297.4m),
driven by strong performance in the Sensors &
Information segment, as deliveries commenced
on the HMDS IDIQ contract and Roke enjoyed
a strong year.
The underlying operating profit from continuing
operations of £44.0m (2018: £31.0m) resulted
in an underlying operating margin of 13.1%
(2018: 10.4%). The increase in margin primarily
reflects the positive impact of the phased
restart of our Salisbury site and growth in our
niche energetics businesses, combined with a
stronger year in Sensors & Information due to
increased revenues on the HMDS IDIQ contract
and in Roke’s information security business.
Insurance recoveries of £15m are included within
the result for the year in relation to the incident
in 2018 at the Salisbury site. This income offsets
site operating costs and the costs of remediation,
leaving the UK countermeasures business
approximately break-even for the year. The site
is expected to operate at a more normal level
of activity in 2020.
Foreign exchange translation has provided a minor
tailwind on revenue and profit. While exchange
rates have been volatile in the year, there has
been a strengthening of the US dollar against
sterling compared to 2018 with the average rate
moving from $1.34 to $1.26. On a continuing
constant currency basis, restating the current
year at the FY18 average exchange rate, revenue
would have been £326.2m and underlying
operating profit would have been £42.6m, being
a tailwind of £1.4m on 2019’s underlying
operating profit.
Total finance expense fell significantly to £4.6m
(2018: £6.1m). This was driven by the continued
focus on reducing intra-period working capital
volatility, thus maintaining net debt stability.
This left an underlying profit before tax from
continuing operations of £39.4m (2018: £24.9m).
The effective tax rate on the underlying profit
before tax from continuing operations was
20.1% (2018: 22.9%). The underlying earnings
from continuing operations per share was
11.2p (2018: 6.9p).
Statutory operating profit from continuing
operations was £31.3m (2018: £15.9m loss)
and after statutory finance expenses of £4.6m
(2018: £6.1m), statutory profit before tax from
continuing operations was £26.7m (2018:
£22.0m loss), giving statutory earnings per share
from continuing operations of 8.2p (2018: 14.6p
loss). The statutory loss from discontinued
operations was £1.2m (2018: £65.0m loss),
including a loss on disposal of £2.8m relating to
the sale of Chemring Military Products, Inc. and
Chemring Defence UK Limited, giving a statutory
profit of £21.9m (2018: £105.8m loss) 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 and the tax credit associated with this.
Revenue from discontinued operations fell to
£43.4m (2018: £138.6m) and underlying operating
loss fell to £3.5m (2018: £8.0m profit) primarily
as a result of the disposals made in the year.
Finance expenses
Total finance expenses of £4.6m were down
24.6% from £6.1m in 2018 driven by the increased
focus on reducing intra-period net debt volatility.
The total included interest costs on private
placement loan notes and the revolving credit
facility of £4.9m (2018: £4.7m), amortisation of
debt finance costs of £0.2m (2018: £1.3m) and
other non-cash finance credits associated with
the defined benefit pension scheme of £0.2m
(2018: £0.1m expense). £0.3m (2018: £nil)
of interest was capitalised in relation to the
Tennessee capacity expansion programme.
Tax
The continuing underlying tax charge totalled
£7.9m (2018: £5.7m) on a continuing underlying
profit before tax of £39.4m (2018: £24.9m).
The effective tax rate on underlying profit
before tax for the year was a charge of 20.1%
(2018: 22.9%). We expect the effective tax rate
to remain in the low twenties, notwithstanding
any changes to the UK rate which the new
government may make.
The continuing statutory tax charge totalled
£3.6m (2018: £18.8m) on a continuing statutory
profit before tax of £26.7m (2018: £22.0m loss).
The decrease in the continuing effective rate of
tax on the results of the Group is primarily due
to utilisation of tax losses where a deferred tax
asset had not been previously recognised.
The discontinued underlying tax credit was £6.2m
(2018: £1.8m charge) on an underlying loss
before tax of £3.5m (2018: £8.0m profit).
m
£
Earnings per share
Underlying earnings per share from continuing
operations were 11.2p (2018: 6.9p) and diluted
underlying earnings from continuing operations
per share were 11.0p (2018: 6.7p).
Total underlying basic earnings per share was
12.2p (2018: 9.1p) and the statutory basic
earnings per share was 7.8p (2018: 37.8p loss).
Debt facilities
The Group’s principal debt facilities comprised
$83.6m of private placement loan notes, a
£136.7m revolving credit facility and a $10.0m
overdraft. In November 2019 the $83.6m of
private placement loan notes were repaid in
line with the term of the loans. The revolving
credit facility was established in October 2018,
is with a syndicate of five banks and runs until
October 2022. The Group had £130.2m
(2018: £68.1m) 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 net 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 was in compliance
with the covenants throughout the year.
Retirement benefit obligations
The surplus on the Group’s defined benefit
pension schemes was £9.6m (2018: £7.5m),
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 2019, using the projected unit credit
method. This valuation showed a surplus of
£9.6m (2018: £7.5m). The improvement reflects
the effect of changes in actuarial assumptions.
Group financial position
Net debt and cash flow
The Group’s net debt at 31 October 2019 was
£75.7m (2018: £81.8m), representing a net debt
to underlying EBITDA (continuing) ratio of 1.24x
(2018: 1.64x).
The financial health of the Group has improved
in a number of aspects during the year. Working
capital practices were improved to reduce
intra-period volatility and following the defined
benefit pension scheme valuation, it was agreed
that no further contributions are required until
April 2021 when the position will be reassessed.
The Group is working to achieve further
improvements over the medium term.
Underlying operating activities generated cash of
£77.6m (2018: £56.9m), split between continuing
£63.9m (2018: £44.7m) and discontinued £13.7m
(2018: £12.2m). Continuing cash conversion
was 104% (2018: 89%) of continuing
underlying EBITDA.
Subsequent to the year end, the Group repaid
the remaining $83.6m of private placement
loan notes via the use of the £136.7m revolving
credit facility which runs to October 2022.
This is expected to reduce interest costs in
2020 and beyond.
Working capital
Working capital relating to the continuing
businesses was £90.5m (2018: £83.7m), an
increase of £6.8m. The increase is mainly as a
result of the timing of activity in the final quarter
of the year, driving a £6.7m increase in inventory,
as preparation was made for Q1 deliveries with
all sites expected to be operational in H1 FY20.
Trade receivables decreased by £15.1m and
trade payables decreased by £5.4m as a result
of the timing of activity in the final quarter of
the year. Advance receipts from customers
increased by £9.6m reflecting improved
commercial contracting focus.
Weekly net debt
230
210
190
170
150
130
110
90
70
50
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sept
Oct
FY 2019
FY 2018
FY 2017
FY 2016
Chemring Group PLC | Annual report and accounts 2019
25
Strategic report Financial review continued
Retirement benefit obligations
continued
The 6 April 2018 triennial valuation shows a
technical provisions deficit of £5.8m, which
represents a funding level of 94% of liabilities.
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, were made prior to
31 December 2018. Of this, £0.4m was paid
in 2019. After this, the Group agreed with the
trustees that no further deficit recovery
payments are required and the Group was
released from the bank guarantee of £7.2m
given 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 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
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 was expected to take
approximately two years to issue its decision
in relation to this matter, but at this time we
have not yet been informed of its decision
and therefore it is too early to predict
the outcome of the hearing. The range
of possible outcomes is between £nil and
£12.0m. A provision of £1.0m (2018: £1.0m)
exists to cover estimated legal costs for the
Group with regard to this issue.
> Since 2013, the Group has benefited from the
UK’s Controlled Foreign Company (“CFC”)
Finance Company exemption. On 2 April 2019
the European Commission delivered a judgement
which concluded in some circumstances the
UK’s CFC exemption may breach state aid
rules. The UK Government disagrees with
the conclusion that the UK’s CFC rules were
partially in breach of EU law, and has therefore
applied to the EU courts for annulment of the
Commission’s decision. Given the early stage
of this process, it is too early to determine
whether a tax liability is probable. The range
of possible outcomes is between £nil and
£15m, plus interest.
> In accordance with the Serious Fraud Office
(“SFO”) News Release dated 18 January 2018,
an investigation was opened by the SFO
into Chemring Group PLC (“CHG”) and its
subsidiary, Chemring Technology Solutions
Limited (“CTSL”), following a self-report
made by CTSL. The investigation relates
to bribery, corruption and money laundering
arising from the conduct of business by CHG
and CTSL including any officers, employees,
agents and persons associated with them. It is
too early to predict the outcome of the SFO’s
investigation, in which the Group continues to
co-operate fully.
> On 10 August 2018 an incident occurred
at the Group’s countermeasures facility in
Salisbury. The Group responded immediately
to support those who were injured, and
maintains appropriate employee 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.
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
£40.7m (2018: £21.1m) was spent on property,
plant and equipment.
Significant investment is planned over the next
two years in our Countermeasures & Energetics
businesses to both recapitalise and modernise
facilities and invest in capacity to address
expected market demand, the most significant
investment being the Tennessee capacity
expansion programme. The cost of this is
expected to be approximately £50m and is
focused on delivering capacity to meet expected
F-35 demand from the US Government.
Research and development
R&D expenditure was £56.2m (2018: £43.8m).
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 & Information. An
analysis of R&D expenditure is set out below:
Customer-funded R&D
Internally funded R&D
– expensed to the
income statement
– capitalised
2019
£m
47.2
2018
£m
36.2
5.0
4.0
4.6
3.0
Amortisation of development and patent costs
was £1.4m (2018: £3.7m), with the decrease
reflecting projects that were fully amortised at
the end of 2018 and that a number of Sensors
& Information projects have not yet
entered production.
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, underlying operating profit and revenue on
a constant currency basis 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 and accounts 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 pages 99 and 100.
We present a measure of constant currency revenue and operating profit. This is calculated by
translating our results for the year ended 31 October 2019 at the average exchange rates for the
comparative year ended 31 October 2018.
Revenue
Effect of using prior period FX translation rates
2019
£m
2018
£m
Growth
%
335.2
(9.0)
297.4
13%
Revenue at constant currency
326.2
297.4
Underlying operating profit
Effect of using prior period FX translation rates
Underlying operating profit at constant currency
44.0
(1.4)
42.6
10%
42%
31.0
31.0
37%
26
Chemring Group PLC | Annual report and accounts 2019
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:
Sensors & Information EBITDA (£m)
Sensors & Information operating profit (£m)
Countermeasures & Energetics EBITDA (£m)
Countermeasures & Energetics operating profit (£m)
2019
Non-
underlying
Underlying
Statutory
Underlying
2018
Non-
underlying
Statutory
61.2
44.0
39.4
(7.9)
31.5
11.2
11.0
(0.6)
(12.7)
(12.7)
4.3
(8.4)
(3.0)
(2.9)
60.6
31.3
26.7
(3.6)
23.1
8.2
8.1
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)
2.7
(3.9)
(1.2)
6.2
(71.2)
(65.0)
29.3
26.3
41.7
27.5
—
(6.6)
—
(5.5)
29.3
19.7
41.7
22.0
18.5
15.3
39.6
23.9
(0.7)
(10.1)
(10.8)
(21.1)
17.8
5.2
28.8
2.8
performance indicators used within the business
to measure performance. 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.
Further details are provided in note 3.
> impact of US Tax Cuts and Jobs Act and tax
credit on adjustments £nil (2018: £13.1m).
The discontinued operations loss after tax
primarily relates to the four businesses which
were “held for sale” at 31 October 2018, two
of which have subsequently been divested from
the Group and one closed during the year, while
the sale of the remaining business was announced
post year end:
The adjustments to continuing operations comprise:
> operating loss of £3.5m (2018: £8.0m profit);
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.
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.
> amortisation of acquired intangibles of £12.1m
(2018: £11.6m); and
> loss on the movement in the fair value of
derivative financial instruments of £0.6m
(2018: £0.4m).
The following exceptional items were considered
material and one-off in nature in 2018 but have
not recurred in 2019:
> exceptional items of £nil (2018: £4.1m) relating
Management considers non-underlying items to be:
to acquisition and disposal-related costs;
> amortisation of acquired intangibles;
> exceptional items of £nil (2018: £8.1m)
> discontinued operations;
> exceptional items, for example relating to
acquisitions and disposals, restructuring costs,
impairment charges and legal costs;
> gains or losses on the movement in the fair
value of derivative financial instruments; and
> the tax impact of all of the above.
relating to business restructuring costs, the
majority of which relates to the Tennessee
site transformation;
> exceptional items of £nil (2018: £12.8m) relating
to legal costs in relation to ongoing investigations;
> exceptional items of £nil (2018: £7.4m)
relating to the impairment of product
development costs;
Our use of APMs is consistent with the prior
year and we provide comparatives alongside all
current year figures.
> exceptional items of £nil (2018: £1.7m)
relating to the costs associated with the
change of Chief Executive;
The directors believe that these APMs improve
the comparability of information between
reporting periods as well as reflect the key
> exceptional items of £nil (2018: £0.8m)
associated with the GMP pension equalisation
court ruling; and
> exceptional items of £3.8m (2018: £69.3m).
In FY19 the exceptional items relate to the
increase of provisions in respect of previously
disposed businesses and a loss on disposal
relating to the sale of Chemring Military
Products, Inc. and Chemring Defence UK
Limited. In FY18 the exceptional items relate
to the impairment of the carrying value of
discontinued businesses now held for sale
to their expected realisable values less costs
to sell;
> amortisation of acquired intangibles of £nil
(2018: £2.7m); and
> tax credit on the above of £6.1m
(2018: £1.0m charge).
Andrew Lewis
Group Finance Director
16 December 2019
Chemring Group PLC | Annual report and accounts 2019
27
Strategic report Risk management
Key roles and responsibilities for the
Group’s risk management strategy
The Board
> Overall responsibility for risk management
> Defines the Group’s risk appetite
Audit
Committee
> Reviews the effectiveness of the Group’s risk
management framework and systems of internal control
> Oversees the effectiveness of the Group’s
internal audit arrangements
Risk Management
Committee
> Oversees the implementation of the Group’s risk
management framework
> Monitors compliance with the Group’s internal
control systems
> Maintains the Group risk register
Business
Management
> Responsible for the implementation of the Group’s risk
management framework at the operational level
> Maintains business unit risk registers and provides input
to the Risk Management Committee
> Responsible for compliance with internal controls
28
Chemring Group PLC | Annual report and accounts 2019
Risk management organisation
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.
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 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 Audit
Committee also reviews the effectiveness of
the Group’s internal audit arrangements.
The Risk Management Committee is responsible
for overseeing the implementation of the
Group’s risk management framework, and is
also 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 registers on
a regular basis and considers input from the
US Risk Management Committee which has
been constituted to oversee risk within the
US operations.
The current members of the Risk Management
Committee are:
> Michael Ord (Group Chief Executive)
> Bill Currer (President, US)
> Sarah Ellard (Group Legal Director
& Company Secretary)
> Andrew Lewis (Group Finance Director)
> Clancy Murphy (Chief People Officer)
> Mark Taylor (Group Health & Safety Director)
We have
adopted a new
HSE Management
System Framework
Standard during
the year.
In addition, we have continued to reinforce
the accountability and responsibility for risk
management in a number of key areas such
as safety at all levels of the organisation.
Risk review
As required by the UK Corporate Governance
Code, the Board has carried out a review of the
effectiveness of the Group’s systems of internal
control and risk management systems which
operated during the year. The Board confirms
that there is an ongoing process for identifying,
evaluating and managing the principal risks faced
by the business, and robust systems of internal
control and risk management were in place
throughout the year and have remained in
place up to the date of approval of these
financial statements.
The Board acknowledges, however, that the
internal control systems can only provide
reasonable, not absolute, assurance against
mismanagement or loss of the Group’s assets.
The Board therefore continues to take steps
to embed internal control and risk management
further into the operations of the Group, and
to address any areas for potential improvement
which come to the attention of management
and the Board.
Principal risks
The current Group risk register comprises risks
in seven key risk areas, covering health, safety,
security and environment risks, strategic risks,
financial risks, operational risks, people risks,
legal and compliance risks, and reputational
risks. Details of the principal risks are set out
on pages 30 to 36.
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, which reports
directly to the Audit Committee.
Approach to risk management
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 US Risk Management Committee also
reviews the risk registers for the US businesses,
considers US corporate-level risks and maintains
a consolidated US risk register.
The Risk Management Committee meets
quarterly and, utilising the input from the
business risk registers and the US risk register,
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.
In January 2019, the Group adopted a new
Operational Framework, incorporating a broad
range of policies and procedures which are
required to be adopted by all businesses.
A half-yearly operational assurance process
was also introduced as part of the Operational
Framework, which provides an assessment of
compliance with the Operational Framework
policies across the Group. The output of the
operational assurance process provides
additional visibility on risks across the Group and
is utilised by the Risk Management Committee
as a further input to the Group risk register.
The operational assurance process also provides
assurance to the Board that the Group’s internal
systems and controls are operating effectively.
The full Group risk register is reviewed by the
Board on a half-yearly basis and key individual
risks are reviewed at every Board meeting.
Key areas of focus during the year
During the past year, we have continued to
improve our risk management systems, with
specific focus in the following areas:
> we have adopted a new HSE Management
System Framework Standard, which sets out
new high-level standards for HSE management
systems across the Group and includes an HSE
“Second Line of Defence” assurance process;
> as referred to above, a new Operational
Framework and operational assurance
process was introduced in January 2019;
> we have enhanced our anti-bribery and
corruption procedures, in order to further
mitigate the potential risk associated with the
engagement of third party sales partners and
service providers;
> we have undertaken a review of the potential
impact of Brexit on the Group and developed
mitigation plans;
> a new crisis management and incident
management plan has been adopted; and
> we have taken steps to ensure that our internal
audit programme is more aligned to the key
risks on the Group risk register going forward.
Chemring Group PLC | Annual report and accounts 2019
29
Strategic report Principal risks and uncertainties
Risk management in action
Details of the principal risks and uncertainties which could have a material impact on the Group’s business model, future performance
or reputation are set out below. The 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.
In addition to the risks disclosed below, the Risk Management Committee monitors and manages a wide range of other risks to which
the Group may be exposed. All the principal risks to which the Group is exposed are linked to the Group’s strategy. Details on the
Group’s strategy are set out on pages 14 and 15.
Impact
Increase
No change
Decrease
Probability
Increase
No change
Decrease
Health, safety, security and environment risks
Occupational and process safety
Risk and potential impacts
Mitigation actions/factors
Change during the year and outlook
The Group’s operations involve energetic materials
that by their nature have inherent safety risks.
> Incidents may occur which could result in harm
to employees, the temporary shutdown of
facilities or other disruption to manufacturing
processes.
> The Group may be exposed to financial loss,
regulatory action and potential liabilities for
workplace injuries and fatalities.
> Safety reinforced as a core value.
> Continued emphasis on the promotion of a
culture which puts safety first and encourages
employees to take personal responsibility for
their actions.
> HSE Strategy and HSE Management System
Framework Standard adopted in 2018, which is
now being fully implemented within the
businesses.
> Introduction of a more robust major accident
hazards analysis process across the Group.
> New HSE “Second Line of Defence” assurance
process established, supplemented by an audit
by external consultants of higher risk sites.
> Fundamental Safety Rules issued to all employees
Group-wide.
> New incident investigation and crisis
management standards adopted.
> Increased capital investment in legacy facilities
to improve safety and reliability.
Our lost time incident rate reduced to 0.35 during
the year and our total recordable injury frequency
rate reduced from 2.77 to 0.79, demonstrating a
marked improvement in the management of
occupational safety. There was also a reduction in
the number of incidents resulting from energetic
ignitions during the year, with one recordable
injury requiring medical treatment and one
non-recordable incident requiring first aid,
compared to six incidents in the prior year.
We hope to see further improvements in process
safety in FY20, as we implement the second year
of our three-year HSE Strategy and continue with
our capital investment programme.
Health and security
Risk and potential impacts
Mitigation actions/factors
Change during the year and outlook
The Group’s employees are required to travel to
overseas locations.
> Group-wide security policy and standard
established.
> Employees may become involved in security
incidents or may be targets of crime, as a
result of political and security instability in
a host country.
> Employees may be exposed to health risks,
such as airborne diseases.
> Guidance on health and safety associated
with overseas travel issued to all employees.
> Third party engaged to provide employees
with access to advice and assistance in
emergency situations.
There were no reported security or health events
associated with overseas travel during the year.
30
Chemring Group PLC | Annual report and accounts 2019
Environmental laws and regulations
Risk and potential impacts
Mitigation actions/factors
Change during the year and outlook
The Group’s operations and ownership or use of
real property are subject to a number of federal,
state and local environmental laws and regulations.
At certain sites currently or formerly owned
or operated by the Group, there is known or
potential contamination for which there is, or
may be, a requirement to remediate or provide
resource restoration.
> The Group could incur substantial costs, including
remediation costs, resource restoration costs,
fines and penalties, or be exposed to third party
property damage or personal injury claims, as a
result of liabilities associated with past practices
or violations of environmental laws or
non-compliance with environmental permits.
Strategic risks
Market-related
> All businesses certified to the environmental
management system ISO 14001.
> Monitoring programmes established at certain
sites and appropriate financial provisions held.
> Environmental liability insurance procured for
certain risks.
The sale or closure of several sites during the year
has reduced the Group’s exposure to
environmental risks.
A new wastewater treatment facility became
operational at the Chemring Nobel site during
the year, which will significantly reduce its future
environmental impact.
See also: Sustainability
Page 40
Risk and potential impacts
Mitigation actions/factors
Change during the year and outlook
We have benefitted from the recovery in defence
budgets in our core markets, particularly in the US.
Exiting the commoditised energetics businesses has
reduced the Group’s exposure to volatile Middle
East markets and highly-competitive contracts, the
timing of which is often difficult to predict.
Closer collaboration between our Countermeasures
businesses is creating a joined-up customer
approach which will enable to us better promote
our global capabilities in future.
> Continual assessment of alignment of planned
organic growth strategies and technology
roadmaps against government priorities for
future funding.
> Increased focus on the development of
commercial products and services.
> Ongoing restructuring to “right-size” the
businesses and reduce overheads, to increase
resilience in difficult market conditions.
> Continued focus on order intake as a key
performance indicator.
> Pursuit of long-term, multi-year contracts with
major customers wherever possible.
> Global business development capabilities
established in the Countermeasures and
Sensors & Information businesses.
> Increased collaboration between businesses
across the Group on establishing shared routes
to market.
Defence spending depends on a complex mix of
political considerations, budgetary constraints and
the requirements of the armed forces to address
specific threats and perform certain missions.
Overall defence spending may therefore be subject
to significant yearly fluctuations and there may also
be downward pressure on defence budgets in
certain key programme areas.
The Group’s profits and cash flows are dependent,
to a significant extent, on the timing of award of
defence contracts. In general, the majority of the
Group’s contracts are of a relatively short duration
and, with the exception of framework contracts with
key customers, do not cover multi-year requirements.
> The Group’s financial performance may be
adversely impacted by lower defence spending by
its major customers, either generally or in
relation to certain programmes.
> Short-term trading and cash constraints may
impact on the Group’s ability to invest
in longer-term technologies and capabilities.
> Unmitigated delays in the receipt of orders or
cancellation of existing contracts could affect the
Group’s financial performance. 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.
Chemring Group PLC | Annual report and accounts 2019
31
Strategic report
Principal risks and uncertainties continued
Strategic risks continued
Political
Risk and potential impacts
Mitigation actions/factors
Change during the year and outlook
The Group is active in several countries that are
suffering from political, social and economic instability.
In addition, there is a significant risk of political
unrest and changes in the political structure in
certain non-NATO countries to which the Group
currently sells.
> The Group’s business in certain countries may
be adversely affected in a way that is material to
the Group’s financial position and the results of
its operations.
> Political changes could impact future defence
expenditure strategy and the Group’s ability
to export products to certain countries.
Contract-related
> Relationships maintained at political level in key
countries and with senior customer representatives.
> Financing arrangements implemented, including
letters of credit and advance payments, for
contracts with high-risk customers.
> Political risks insurance procured in
certain circumstances.
> Continued focus on the development of
commercial business across the Group,
particularly in key home territories.
We have refocused our business development
and marketing activities in our key home markets
in the niche segments in which we operate. The
sale of the commoditised energetics businesses
has also reduced our exposure to more
challenging territories.
Risk and potential impacts
Mitigation actions/factors
Change during the year and outlook
The Group’s government contracts may be
terminated at any time and may contain other
unfavourable provisions.
> New Commercial Policy introduced within the
Operational Framework, requiring central
approval for certain contractual risk exposures.
> Commercial and contract risk management
training programme introduced.
> Stage payments negotiated with customers
wherever possible, in order to improve
working capital management.
The implementation of the Operational
Framework has increased our visibility on
commercial and contracting practices across
the Group, and is enabling us to manage
contractual risk exposures more effectively.
The Group may need to commit resources in
advance of contracts becoming fully-effective, to
ensure prompt fulfilment of orders or to enable
conditions precedent to be met.
> The Group may suffer financial loss if its
contracts are terminated by customers, or a
termination arising out of the Group’s default
may have an adverse effect on its ability to
re-compete for future contracts and orders.
> Unfavourable commercial contract terms may
adversely impact the Group’s working capital
position, particularly if the receipt of payments
by the Group is delayed.
Technology
Risk and potential impacts
Mitigation actions/factors
Change during the year and outlook
> Close relationships maintained with customers
on all key future programmes.
> New Product Development Policy and
procedures adopted, to align the approach to
future technology investment across the Group.
> Technology investments aligned with the
five-year plan.
> Working groups established to drive and
co-ordinate technology growth in certain key
areas within Countermeasures & Energetics
and Sensors & Information.
Innovation is now one of our core values.
Good progress was made on the US Programs of
Record during the year and this will continue to be
a major area of focus in the year ahead.
Roke is experiencing strength growth in its R&D
service activities and is positioning itself to exploit
growing opportunities in the commercial sector.
The Group may fail to maintain its position on
key future programmes due to issues with
capability development, technology transfer
or cost-effective manufacture.
The Group needs to continually add new products
to its current range, through innovation and
continuing emphasis on research and development.
New product development may be subject to
delays, or may fail to achieve the requisite standards
to satisfy volume manufacturing requirements and
the production of products against high reliability
and safety criteria to meet customer specifications.
> Failure to obtain production contracts on major
development programmes may significantly
impact the future performance and value of
individual businesses.
> Failure to complete planned product development
and upgrades successfully may have financial and
reputational impacts, and may result in obsolescence
or loss of future business.
32
Chemring Group PLC | Annual report and accounts 2019
Brexit
Risk and potential impacts
Mitigation actions/factors
Change during the year and outlook
The Group could be adversely impacted by the
UK’s exit from the EU, particularly in the event
that the UK Government fails to negotiate an
acceptable exit arrangement.
> An adverse Brexit 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.
> 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.
Financial risks
> Assessment carried out in relation to the
potential impact of a “no-deal” Brexit on supply
chain arrangements, people, financing, licensing,
and legal and compliance arrangements, and
mitigation actions identified where appropriate.
> Business continuity plans updated to mitigate the
impact of Brexit as far as possible.
Action has been taken to mitigate the potential
impact of a “no-deal” Brexit where possible,
based on the information we have available to us.
However, the full impact of Brexit remains subject
to a high level of uncertainty.
See also: Target markets and sector reviews
Pages 12, 20 and 22
Risk and potential impacts
Mitigation actions/factors
Change during the year and outlook
The Group is exposed to a range of financial risks,
both externally driven, such as an unexpected
movement in foreign exchange rates, and 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 defaults on
payments of debts.
The Group may also face an increased funding
requirement for its legacy UK defined benefit
pension scheme.
(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.)
> 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.
> Operational results may be impacted by
unexpected financial losses or increased costs.
> Committed banking facilities in place to
October 2022 and increased facilities
secured in April 2019.
> Regular monitoring of actual and forecast
financing covenants.
> Capital approval processes in place, requiring
Board approval for significant projects.
> Hedging policy applied for significant
foreign transactions.
> Advance payments and letters of credit required
from customers with a heightened payment risk.
> Close dialogue maintained with the trustees
of the pension scheme on investment and
funding matters.
Our revolving credit facility was extended to
£136.7m during the year, to ensure sufficient
liquidity to meet the private placement loan note
repayment of $83.6m made in November 2019.
The year end bank covenant of net debt: EBITDA
was 1.24x, well within the covenant limit of 3.
At the year end, the legacy UK defined benefit
pension scheme was 111% funded (on an IAS 19
basis) and in accordance with the agreed funding
plan, no contributions are required in 2020.
See also: Financial review
Page 24
Chemring Group PLC | Annual report and accounts 2019
33
Strategic report
Principal risks and uncertainties continued
Operational risks
Risk and potential impacts
Mitigation actions/factors
Change during the year and outlook
The Group’s manufacturing activities may be
exposed to business continuity risks, arising
from plant failures, supplier interruptions or
quality issues.
Planned new facility developments may be
delayed as a result of operational issues.
> Interruptions to production and sales could
result in financial loss, reputational damage
and loss of future business.
> A delay in completing new manufacturing
facilities, such as those being built at Kilgore,
could constrain capacity and limit future
business growth.
> Major accident hazards analysis process
implemented across the Group.
> Upset condition management standard introduced.
> Key performance indicators adopted, to provide
better visibility on operational performance and
to facilitate early identification of potential
production and quality issues.
> Review instigated of business continuity plans
across the Group.
> Business interruption risks insured where
appropriate.
> Increased capital investment in legacy facilities
to improve safety and reliability.
A three-year capital investment programme was
initiated in 2019. This is designed to mitigate a
number of operational risks through a plant
automation and modernisation programme across
the Group.
Following the establishment of improved project
management capabilities, good progress was made
on the new automated manufacturing facilities at
Kilgore during the year and the project is now
proceeding broadly in line with plan.
> Detailed plans developed for all significant capital
investment projects and additional dedicated
resource employed to oversee key projects.
See also: Group Chief Executive’s review
and Sustainability
Pages 7 and 38
People risks
Risk and potential impacts
Mitigation actions/factors
Change during the year and outlook
There is a risk that the market for talent in key
areas of expertise becomes more challenging.
Allied to this there is a risk of loss of key personnel.
As the shape of the Group’s business changes
and with an increased focus in high technology
areas, the Group may fail to build and retain
an appropriate skill base to facilitate successful
competition in new markets and product areas.
Employees may not be fully-engaged with the
Chemring journey, purpose, products, customers
and values.
> 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.
> Failure to build and retain key skills will lead to a
reduction in the ability to innovate or to win and
deliver new contracts.
> If key personnel are not fully engaged with the
business purpose, values and products, and are
not appropriately incentivised, the ability of the
Group to retain them will be compromised. This
could result in loss of management expertise and
knowledge, and the Group’s operations may
suffer as a consequence.
> Chemring values of Safety, Excellence and
Innovation established.
> Leadership team strengthened across the Group.
> Development framework implemented across
the Group, focusing on developing management
and leadership skills.
> Ongoing review of capability requirements
against the business strategy.
> Culture review completed, facilitating the
development of a framework to support the
evolution of a new Chemring culture.
> Improved employee engagement initiatives
instigated.
> Incentive arrangements refreshed to encourage
collaboration and to create a Group focus at
senior level.
During the year we strengthened the leadership
at a significant number of our businesses, as well
as formalising the leadership approach for the
US operations with the appointment of a new
President for the region.
The review of culture and the subsequent hosting
of employee forums in every part of the business
has significantly changed the level of communication
in each business with increased opportunity to
discuss issues and share ideas. This was designed
to improve engagement and the introduction in
November 2019 of a new online tool which will
gather regular data on sentiment across the Group
is further evidence of how important this is to
the business.
See also: Sustainability
Page 42
34
Chemring Group PLC | Annual report and accounts 2019
Legal and compliance risks
Compliance and corruption risks
Risk and potential impacts
Mitigation actions/factors
Change during the year and outlook
> New Operational Framework introduced,
mandating compliance with a number of new
policies and enhanced procedures covering a
wide range of legal and regulatory requirements.
> Half-yearly operational assurance process
established as part of the Operational Framework.
> Central legal and compliance function assists and
monitors all Group businesses, supported by
dedicated internal legal resource in the US.
> New Code of Conduct introduced, stipulating
the standards of acceptable business conduct
required from all employees and third parties
acting on the Group’s behalf.
> Updated Bribery Act Compliance Manual issued,
incorporating enhanced anti-bribery policies
and procedures.
The Group operates in over fifty countries
worldwide, in a highly-regulated environment, and
is subject to the applicable laws and regulations of
each of these jurisdictions. The Group must ensure
that all of its businesses, its employees and third
parties providing services on its behalf comply with
all relevant legal and regulatory obligations. 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.
The Group requires a significant number of
permits, licences and approvals to operate its
business, which may be subject to non-renewal
or revocation.
> Non-compliance could result in administrative,
civil or criminal liabilities, and could expose the
Group to fines, penalties, suspension or
debarment, and reputational damage.
> Loss of key operating permits and approvals
could result in temporary or permanent site
closures, and loss of business.
The introduction of the Operational Framework
and the associated operational assurance process
has fundamentally changed the management of
legal and compliance risks across the Group. We
are working with the Group’s internal auditors
to further develop the assurance process and
to ensure that it becomes a key aspect of the
internal audit programme going forward.
The assurance process has already identified a
number of areas in which we could improve our
training and this will be addressed in the current
financial year.
See also: Sustainability
Page 44
Product liability and other customer claims
Risk and potential impacts
Mitigation actions/factors
Change during the year and outlook
> Rigorous production processes adopted,
monitoring critical parameters on a batch or
unit basis.
> Quality control techniques, including statistical
process control and Six Sigma, applied and, where
appropriate, automated processes introduced.
> Detailed assessments of incoming components
and materials conducted to ensure compliance
with specifications.
> Product liability claims from third parties for
damage to property or persons generally
covered by insurance.
We have taken steps to establish a continuous
improvement culture across the Group and to
promote customer focus and contract delivery as
required behaviours at all levels of the organisation.
This approach, together with our investment in
updated manufacturing facilities and increased
focus on contractual risk management, will help
to further mitigate risks in this area in future.
The Group may be subject to product liability
and other claims from customers or third parties,
in connection with: (i) the non-compliance of
products or services with the customer’s
requirements, due to faults in design or production;
(ii) the delay or failed supply of the products or the
services indicated in the contract; or (iii) possible
malfunction or misuse of products. The Group
may also be required to undertake a product recall
in certain circumstances.
As many of the Group’s products are single-use
devices, it is often impossible to conduct functional
testing without destroying the product, and this
increases the risk of possible product failure, either
in use or during customers’ own sample-based
functional tests.
> Substantial claims could harm the Group’s
business and its financial position. In addition,
any accident, product failure, incident or liability,
even if fully insured, could negatively affect the
Group’s reputation among customers and the
public, thereby making it more difficult for the
Group to compete effectively.
> Material breaches in the performance
of contractual obligations may also lead
to contract termination and the calling
of performance bonds.
Chemring Group PLC | Annual report and accounts 2019
35
Strategic report
Principal risks and uncertainties continued
Reputational risks
Cyber-related risks
Risk and potential impacts
Mitigation actions/factors
Change during the year and outlook
Cyber-security and related risks are key emergent
areas of critical importance for all businesses,
particularly for those involved in the defence and
security sector. Threats can emanate from a wide
variety of sources and could target various systems
for a wide range of purposes, making response
particularly difficult.
The data and systems which need to be protected
include customer-classified or sensitive information,
commercially-sensitive information, employee-related
data and safety-critical manufacturing systems.
> The Group may suffer from critical systems
failures, or its intellectual property, or that of its
customers, may fall into the hands of third parties.
> In addition to business interruption and financial
loss, the Group may suffer reputational damage,
and its business of providing cyber-security services
to customers may be irreparably damaged.
> Threat assessment completed and an action
plan to counter the Group’s identified major
threats implemented.
> A number of cyber-security defence measures
adopted, 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 obtained
in support of the overall cyber-security programme.
> All UK businesses achieved “Cyber Essentials”
accreditation as a minimum standard, and US
businesses either achieved, or are working towards,
compliance with the US DFARS standard.
> IT and security systems review included within
the internal audit programme.
We have an ongoing programme to address
IT and cyber security but the threats in this area
continue to evolve and we therefore need to
ensure that our security arrangements evolve
appropriately in response. This will be a specific
area of focus for our internal audit programme
in 2020.
36
Chemring Group PLC | Annual report and accounts 2019
Introduction to sustainability
Contributing to a
sustainable future
As a Group, we have a strong
and recognised obligation to
ensure the responsible operation
of our business. We are fully
committed to safe, sound and
ethical business conduct at all
times at all of our locations.
Our approach
The long-term success of the Chemring
business can only be enhanced by a positive
interaction with all of our stakeholders and
therefore a positive and engaged approach
to corporate responsibility and sustainability
is important to us.
Our approach is focused around the
following key areas:
> health & safety;
> environment;
> people; and
> ethics and business conduct.
Our approach to corporate responsibility
and sustainability is embedded within the
business units and all senior leaders have
specific objectives around these areas identified
and are linked to their incentive plans.
Chemring’s Science, Technology, Engineering and Maths (“STEM”) village
at the National Armed Forces Day.
Key facts
Health & safety
People
TRIF rate down to 0.79 from 2.77 in 2018
Environment
14% reduction in waste
76 new graduates and apprentices hired
in 2019
Ethics and business conduct
Implementation of Operational Framework
on 1 January 2019
The Group
acknowledges its
responsibilities
to contribute to
a sustainable
future.
Chemring Group PLC | Annual report and accounts 2019
37
Strategic report Sustainability
Health & safety
Our goal is zero harm, not as a statistical target but as a moral imperative that will be
achieved by establishing a strong proactive safety culture.
Our approach
Our approach is to establish a strong proactive
safety culture through the interaction between
people, plant and process. This will be delivered
through a Group Strategic HSE Improvement
Plan that has three themes:
> the control of major accident hazards;
> injury prevention; and
> HSE risk management.
To inform our approach we commissioned
an independent safety review to benchmark
the business against other major accident
hazard industry sectors.
Achievements
2019 has been a year of reflection that has
resulted in a step change in safety and risk
management to ensure the safe delivery of our
business. Our key milestone achievements:
> implementation of Group Strategic HSE
Improvement Plan;
> new HSE Management System Framework
Standard;
> implementation of Fundamental Safety Rules;
> stronger assurance and risk management
processes;
> improved learning from HSE events across
the Group; and
> executive leadership HSE meetings.
Control of major accident hazards
Parts of our business involve managing the risk
of major accident hazards. These hazards are
different from managing the hazards associated
with personal injuries and require the proactive
management of process safety to ensure that
we design, maintain and operate with integrity.
We continue to invest in both new processes
and in the remediation of legacy processes, the
design of which are subject to rigorous process
hazard reviews. These reduce the likelihood of
energetic events and remove the requirement
for people to be exposed to energetic material.
We recognise that process safety is not only
achieved through design, but also through the
maintenance of barriers designed to prevent
and mitigate energetic events.
As such, we have introduced new requirements
for all our major accident hazard facilities to
conduct regular reviews to identify potential
process safety events and ensure that barriers
are proactively managed and maintained.
Injury prevention
Injury prevention focuses on the reduction of
injuries through the adoption of safety as an
inherent part of everything we do. This is enacted
through safety leadership, clear expectations,
accountability and establishing a safety culture
that drives learning and improvement, not blame.
In the last year we have introduced regular HSE
leadership meetings to review, challenge and
inform the Group HSE plan. These are attended
by all business leaders and chaired by the Group
Chief Executive. Further to this we recognised
that applying basic controls at the point of risk
can reduce the exposure of our people to serious
harm. For this reason we have introduced our
Group-wide “Fundamental Safety Rules”. These
are a set of non-negotiable rules, which reinforce
individual accountability at both front-line and
leadership levels, and clearly set out our behavioural
expectations to protect our people from harm.
We know that occupational injuries are often
the symptom of systemic issues. It is therefore
important to go beyond immediate “active failures”
to create and embed a learning culture that identifies
and addresses the underlying “root causes”.
Taking a learning approach that goes beyond the
individual we have established monthly learning
review panels that maximise and share our
learnings from incidents, near misses and best
practices across the Group to drive continual
improvement and the prevention of incidents.
Our philosophy of injury prevention goes beyond
physical harm and looks towards the prevention
of psychological harm. This year we have started
a journey on addressing mental health through
our “It’s OK to say, you are not OK” campaign.
Moving forward we are conducting pilot work
to examine the management of workplace stress
that will then be implemented across the Group.
HSE risk management
Safe delivery of our business is achieved through
the management of risk and is built around
understanding our risks, establishing clear
expectations and consistency. To evolve this we
have retired the Group Safety Policy Manual and
replaced it with the HSE Management System
Framework Standard. This framework puts our
HSE Policy into practice by setting standards on
eight core elements across the Group to drive a
more robust and common approach to the
management of HSE. Each business is audited
at least every two years to ensure compliance,
with high-priority non-compliances being
reported and monitored at Executive
Committee level.
We have invested significant effort over the last
twelve months in order to realise our goal of
zero harm, strengthening the foundations for
improvement; we are now starting to see
improvement in our safety performance.
Policies 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 & Safety Director reports
directly to the Group Chief Executive, and
is responsible for the effective administration
and implementation of the Group’s health,
safety, security 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
38
Chemring Group PLC | Annual report and accounts 2019
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 continuous 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.
Our HSE performance
We measure our HSE performance to reflect
both occupational safety and process safety.
Occupational safety
Occupational safety is measured through lost
time injury rates (“LTI”) and total recordable
injury frequency rates (“TRIF”) in line with OSHA
reporting based on 200,000 working hours.
In 2019 our lost time injury rate was 0.35 compared
to 0.38 in 2018 showing a slight improvement.
This reflected eleven injuries that resulted in
people being away from work for more than
one day. We are pleased to report there were
no fatalities or life-changing injuries. Our total
recordable injury frequency rate was 0.79
compared to 2.77 in 2018, showing a significant
reduction; this represented a total of eighteen
injuries. The reduction in the TRIF rate was the
result of improvements in reporting and an
increased focus on recordable injury reduction.
In addition to our incident frequency rates we
proactively measure safety through near miss
reporting. More specifically we monitor High
Potential Near Miss events; these are near miss
events that have the potential for serious injury.
These are investigated and prioritised as if the
serious injury had occurred and the lessons learnt
are shared across the Group. In 2019 we had a
total of five High Potential Near Miss events.
Process safety
Process safety is measured through both reactive
and proactive indicators, namely the number of
energetic events that caused harm or injury and
process safety near miss events. In 2019 a total
of two energetic events were reported compared
to six in 2018. There were no life-altering injuries
as a result of these events. One of the incidents
occurred at our flare manufacturing facility in
Kilgore in the US. A full investigation has been
conducted and actions have been taken to prevent
the incident from occurring again in the future.
In addition to our reactive metrics we also
measure process safety near miss events, with
a total of 901 recorded in 2019 compared
to 1,154 in 2018.
During 2019 we trialled a new leading indicator
that classifies the near miss energetic events
based on their potential to cause harm. This
type of event is a precursor to people being
harmed by a process event and tracking this
metric allows the organisation to focus on
and learn from these precursor events before
anyone is exposed to harm. Having completed
the trials during 2019, we will introduce this as
a performance indicator for our businesses
during the current financial year.
UK countermeasures incident –
August 2018
In August 2018, an incident occurred at our
UK countermeasures facility that resulted in the
death of one of our colleagues. The incident was
subject to extensive investigation both internally
and by the Health and Safety Executive. Lessons
learnt from the incident have been shared
across the Group.
0.35
LTI rate
(2018: 0.38)
0.79
TRIF rate
(2018: 2.77)
2
Injuries from energetic events
(2018: 6)
Chemring Group PLC | Annual report and accounts 2019
39
Strategic report Sustainability continued
Environment
Our goal of zero harm goes beyond the management of safety. We are committed to
environmental sustainability, both globally and in our local communities, and reducing our
environmental impact.
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
2019. The Group is not required to report on
its Scope 3 emissions.
We are actively
seeking ways to
reduce our
impact on the
environment.
Our approach
We are actively seeking ways to reduce our
impact on the environment through the
reduction of energy consumption and waste
through local projects and the setting of
improvement goals.
Policy and practice
Our goal of zero harm goes beyond the
management of safety and recognises our
impact on the environment. All of the Group
businesses are certified to the environmental
management system ISO 14001, which requires
the setting of environmental goals and objectives
within our businesses to deliver local
improvements with performance monitored
at Group level. As we move forward we
will be setting Group milestones, focusing
on energy usage and waste generation, to
drive further improvements in this area.
In the UK we have taken the decision to
source our electricity supply from renewable
energy suppliers.
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 (2018: £3.2m) provision in respect of
environmental liabilities, which the Board
considers to be adequate (see note 22).
Environmental incidents
There were no significant environmental
incidents in the year.
40
Chemring Group PLC | Annual report and accounts 2019
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)
Conversion
factor
33,264
10,288
1,075
0.184
0.268
0.214
CO2e
(tonnes)
6,116
2,755
230
Quantity
(tonnes)
Conversion
factor
CO2e
(tonnes)
45
66
91
3.088
2.937
2.998
139
193
273
CO2e
(tonnes)
1,834
11,540
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
1,108
46,931
17,983
24,916
0.750
0.008
0.279
0.435
2019
28,591
378.6
76
CO2e
(tonnes)
831
375
5,012
10,833
17,051
2018
30,589
436.0
70
The UK businesses participate in the CRC Energy Efficiency Scheme, with the exception of Chemring Energetics UK, which operates under a
Climate Change Agreement.
Waste
Recycled, non-hazardous
Recycled, hazardous
Not recycled, non-hazardous
Not recycled, hazardous
Total
Water
2019
(tonnes)
2018
(tonnes)
2017
(tonnes)
2016
(tonnes)
2015
(tonnes)
474
154
537
795
700
393
716
478
1,960
2,287
2019
m3
2018
m3
945
652
1,343
321
3,261
2017
m3
956
64
782
942
968
287
748
696
2,744
2,699
2016
m3
2015
m3
Total water consumption
790,286
802,776
663,917
682,185
721,401
Chemring Group PLC | Annual report and accounts 2019
41
Strategic report Sustainability continued
People
Chemring people are at the heart of our business. It is through our people that we will
progress our strategy and ensure that we realise the potential for growth within each sector.
Our approach
Our focus on people capability continued
in 2019 with the introduction of new
leaders into many parts of the business and
a comprehensive review of culture in
every location.
Continuous improvement is our core
ethos, underpinned by our values of Safety,
Excellence and Innovation. Our people
approach focuses on the core areas of talent
and culture, investing in our people in
support of business growth.
Our future is predicated on our
ability to attract, develop and retain
talented individuals.
Leadership
During the year we refreshed the leaders at a
significant number of our business units as well
as formalising our leadership approach within
the US with the appointment of a President
for the region. Two key leadership events were
hosted in the year, bringing together the senior
leaders and their teams, from all our businesses.
These events had a common theme – Building
a Stronger Business. The focus was on creating
a strong and cohesive leadership team, with
clear expectations and accountability.
Investing in our people
Development and training at all levels is a
cornerstone of the drive to continuously
improve the quality of our business. The
addition of a senior role overseeing people
development across the Group, and the creation
of a Development Framework for the business
are key indicators of our commitment to
employee development.
In 2019 there has been renewed focus on the
development of a network of Early Careers
employees. The Group continues to target and
attract increasing numbers of early careers
joiners, both direct from school or following
degree-level study.
The annual UK Early Careers Conference was
established, bringing together all current graduates
from the UK and Norway. In the US, a similar
conference for those employees who are graduates
in the early stages of their career was hosted in
April 2019. These two events have created a
global network of graduate calibre employees.
The Board also reviews future management
requirements and succession plans on a regular basis.
Future talent
The inaugural Emerging Leaders Programme
was completed in the year. Twenty-two high
potential future leaders from around the Group
commenced this multi-faceted programme in
August 2018. The programme included learning
modules, one-to-one coaching, live business projects
run by senior level sponsors and group work on
specific work challenges. Twenty participants
successfully completed the programme which
will now form part of a wider development
approach across the Group.
Our culture
In 2019, a programme of discussion around the
culture at Chemring saw over 350 colleagues
meeting in small groups to discuss what it is like
to work at Chemring, and their thoughts on
how this could be developed. Culture is a key
part of progressing our strategy and preparing
ourselves for future growth.
There are elements of our current culture,
especially our pride in the work we do and how
this supports our customers and end users, and
our sense of purpose, which we must nurture
and enhance. There are also some areas of our
culture that must evolve. We will continue to do
this by focusing on governance, and by embedding
our core values of Safety, Excellence and Innovation.
This will ensure that all our colleagues can enjoy
the same standards of leadership, work environment
and support across the organisation.
Particular areas of focus in 2019 have been around
communication, wellbeing and development.
42
Chemring Group PLC | Annual report and accounts 2019
Talent“The acquisition, development and retention of talent for Chemring today and tomorrow.”Culture“How we behave and the environment we create to enable our talent, processes and brand to flourish.” 76
Graduates and apprentices hired in 2019
Graduates and apprentices
80%
Male
Female
20%80+
Business support 6%94+
Technical
94%
Graduates and apprentices
Internal communications
and engagement
Highlighted in many areas of the culture review
was the importance of how we communicate
both within and across the business.
We are actively encouraging participation and
engagement across Chemring. Our aim is to
provide a number of different channels for
knowledge sharing, engagement and listening,
and to allow employees to hear about and discuss
key developments, business performance and
to contribute their views.
There are a range of formal and informal
channels including all-hands meetings, smaller
team briefings, employee forums, direct email
addresses and the CEO’s vlog, with active Q&A
encouraging anyone from across the business
to ask a question, and through the Chemring
magazine, Cheming-i.
Towards the end of 2019, and in response to
feedback from the culture review, we launched
a real-time engagement tool which provides
dashboard information on employee sentiment
across the Group on a continuous basis, and
enables employees to provide immediate
feedback to changes.
Diversity and inclusion
We are committed to ensuring that we have an
inclusive and diverse culture across the Group
which reflects the communities we operate in,
as well as providing an environment where all
our people are able to be their best at work.
The Group’s policy is to provide equal
opportunities for all employees, irrespective of
race, nationality, gender, sexual orientation, marital
status, religious or political belief, disability or
age. As a Group we are committed to meeting,
at a minimum, the labour rights and legislation
requirements in each country in which we
operate. In practice, we often exceed these
requirements. Our employment practices and
policies are introduced at newly acquired
businesses at the earliest opportunity after
they join the Group.
We have a number of formal and informal
groups around the business who support and
connect people with shared characteristics or
interests. These include Women in Engineering
groups, Women and Gender Diversity groups,
LGBT+ groups and faith based groups.
The Group makes no distinction between disabled
and able-bodied persons in recruitment,
employment and training, career development
and promotion, provided that any disability does
not make the particular employment impractical
or impossible under the stringent regulatory
requirements under which the Group operates.
Employee wellbeing
Throughout 2019 we have focused on raising
awareness of wellbeing at work through a
number of initiatives across the organisation.
The Healthy Workplaces working group focuses
on key initiatives to promote wellbeing at work
and mental health has been a focus this year.
A booklet on mental health and how individuals
can help themselves to develop healthy habits
has been distributed company wide. Alongside
this we have piloted the training of mental health
champions in the Roke business and are working
with other business units to share these initiatives.
In the community
We recognise that each of the Group’s businesses
has an important role to play in its local
community. We have a recognised community
investment policy, which confirms our 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 by the Executive Committee.
In June this year, a large number of Chemring
UK employees supported the Armed Forces
Day event in Salisbury. This event took place
over three days and saw school children and the
wider local community enjoying demonstrations
of Chemring’s capability and technology as part
of a Science, Technology, Engineering and Maths
(“STEM”) village set up for the event.
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.
Across the business, our people are involved
with a number of educational initiatives and
as a business we have relationships with several
universities, whereby funding is provided for
students’ research activities.
We are aware that on occasion our manufacturing
activities can impact on the local community.
This impact may be due to product proofing
or testing for example. In these instances, the
businesses seek to actively liaise with local
residents and community groups 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.
Chemring Group PLC | Annual report and accounts 2019
43
Strategic report
20
+
U
6
+
U
Sustainability continued
Ethics and business conduct
Chemring is committed to conducting its business in an ethical and responsible manner
at all times, and in full compliance with all applicable laws and regulations.
Our approach
We are committed to developing a culture
within Chemring where everyone does the
right thing and takes personal responsibility
for their actions. Our Operational Framework
and Code of Conduct set out the standards
of business conduct and behaviours we expect
of all of our businesses, our employees and
all third parties who act on our behalf.
We require all employees and third parties
who act on our behalf to conduct business
honestly and with integrity, and to take
personal responsibility for ensuring that our
commitment to sound and ethical business
conduct is delivered.
Operational Framework
Our Operational Framework, which was
implemented on 1 January 2019, incorporates
a broad range of more than thirty five new
and revised policies and procedures which
have now been adopted by all of our businesses.
The Operational Framework implements an
enhanced governance and compliance framework
to enable us to operate in a safe, consistent and
accountable way. As part of this enhanced
governance framework, we have introduced
a requirement for all businesses to complete an
operational assurance statement on a half-yearly
basis, providing a detailed assessment of their
compliance with the Operational Framework.
The output from the operational assurance process
will enable us to drive continuous improvement
in our governance and compliance framework.
It will allow us to monitor and address the
evolution of a number of the key risks we face
and will become an important area of focus
for our internal audit activities in future, as
detailed below.
Code of Conduct
During the year the Group adopted an updated
Code of Conduct. The Code of Conduct, which
sits alongside our Operational Framework,
embraces our fundamental values of Safety,
Excellence and Innovation. It provides direction
to all employees on legal, ethical and risk issues
that they may encounter in their day-to-day
activities. All employees and all third parties
who act on the Group’s behalf are required to
comply with the Group’s standards of behaviour
and business conduct, as set out within the
Code, and applicable laws and regulations in
all of the countries in which the Group operates.
All employees, current and new, are provided
with a copy of the Code of Conduct, and
receive training on its application to their
role within the business.
Our Chemring culture embraces transparency
and openness, and we encourage all employees
to speak up if they have any concerns. We have
a whistleblowing policy and associated procedures
Operational
assurance process
Continuous
improvements to
the Operational
Framework
Identification of
risks and areas for
improvement
Internal audit
review and
consideration of
findings
Implementation
of new procedures
and training
programmes
44
Chemring Group PLC | Annual report and accounts 2019
A statement of the Group’s compliance
with the Modern Slavery Act 2015 can
be found on the Group’s website at
www.chemring.co.uk
We are committed
to developing a
culture within
Chemring where
everyone does
the right thing.
in place which enable all employees to raise
concerns, in confidence, about possible
improprieties or wrongdoing within the business,
without fear of reprisal or retaliation. Employees
are able to raise issues by contacting our 24-hour
ethics reporting service by phone, email or an
external website. All issues reported by employees
are taken seriously and investigated appropriately
in a confidential manner.
Anti-bribery and corruption
The Group has well-established anti-corruption
policies, which are included within our Operational
Framework. Specifically, these cover bribery and
corruption, gifts and hospitality, and facilitation
payments. Our detailed anti-corruption procedures
are incorporated within our Bribery Act
Compliance Manual (“BACM”), which has been
updated this year, and include requirements for:
> each business to routinely conduct informed
bribery risk assessments as part of normal
operating procedures, to determine the
nature and extent of the Group’s exposure
to potential internal and external risks of
bribery and corruption on its behalf by
persons associated with it;
> the appointment of all sales partners and other
third party advisers, which in all circumstances
requires the completion of risk-based due
diligence, appropriate management approvals,
use of standard form contracts, and ongoing
monitoring and review;
> regular mandatory training on BACM and its
application to their role for management,
supervisors and all employees working within
commercial, business development, sales and
marketing, finance, procurement, quality and
human resource functions;
> the giving and receiving of reasonable,
proportionate and appropriate gifts and
hospitality in the normal course of business; and
> completion of a BACM Compliance
Certificate by each business bi-annually,
confirming that all policies and procedures
within BACM have been complied with.
During the year, the Group terminated the
appointment of a significant number of third
party sales partners as part of an initiative to
reduce the risk to which the businesses are
exposed by virtue of the use of third parties in
our routes to market. We have also enhanced
our anti-corruption policies and procedures
relating to the engagement of sales partners
where it is necessary to use them by mandating:
> restrictions on the number of sales partners
to be engaged in each territory;
> the preparation of a full business case to justify
the appointment of all new third party sales
partners in future, including a two-stage
bribery risk assessment incorporating the
requisite level of risk-based due diligence,
which must be approved by the Group Chief
Executive before the sales partner is appointed;
Our Code of
Conduct embraces
our fundamental
values of Safety,
Excellence and
Innovation.
> a full annual reappointment process for all
retained sales partners, including recommissioning
of the appropriate risk-based due diligence
and resubmission of a full business case for
approval by the Group Chief Executive; and
> increased reporting requirements for all
payments made to third party sales partners
and higher risk service providers.
Relevant employees completed updated on-line
training on BACM during the year and BACM
compliance was a specific area of focus of our
internal audit programme.
Human rights
The Group is committed to respecting human
rights in the countries in which we do business.
Our Code of Conduct and other applicable
policies under the Operational Framework
support our commitment to ensuring, as far as
we are able, that there is no slavery or human
trafficking in any part of our business or in our
supply chain. All suppliers are provided with a
copy of our Supplier Code of Conduct, which
requires them to adhere to our ethical standards
and expectations, including in relation to human
rights. We do not knowingly support or do business
with any suppliers who are involved in slavery.
A statement of the Group’s compliance with the
Modern Slavery Act 2015 can be found on the
Group’s website at www.chemring.co.uk.
We fully adhere to all relevant government
guidelines designed to ensure that our products
are not knowingly incorporated into weapons,
or other equipment, used for the purposes of
terrorism, international repression or the abuse
of human rights.
Chemring Group PLC | Annual report and accounts 2019
45
Strategic report Board of directors
Chairman
Executive directors
Carl-Peter Forster N R
Non-Executive Chairman
Michael Ord
Group Chief Executive
Andrew Lewis
Group Finance Director
Sarah Ellard
Group Legal Director
& Company Secretary
Board length of service
(as at 16 December 2019):
3 years, 7 months
Board length of service
(as at 16 December 2019):
1 year, 6 months
Board length of service
(as at 16 December 2019):
2 years, 11 months
Board length of service
(as at 16 December 2019):
8 years, 3 months
Experience:
> Board experience at Chairman
and Chief Executive level
Experience:
> Extensive senior management
Experience:
> Extensive international experience
experience in the defence sector
in the defence sector
Experience:
> Legal, compliance and
governance expertise
> Chartered Secretary
> International experience in both
> Board experience at Finance
service and manufacturing industries
Director level
> Chartered Accountant
> Extensive international experience
within the industrial goods and
engineering sectors
> 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
was previously a non-executive
director of Rexam PLC, Rolls-Royce
plc and Cosworth Ltd. He is also
Chairman of Hella KGaA and
Kinexon GmbH, a member of the
Board of Envisics Ltd, and a member
of the Advisory Boards of Rock
Lithium, Inc. and PwC. He previously
served as Chairman of The London
Electric Vehicle Company Ltd and
Friedola Tech GmbH, and as a
member of the Boards of Volvo
Cars Corporation and Geely
Automobile Holdings.
Michael Ord was appointed to
the Board on 1 June 2018, and
appointed as Group Chief Executive
on 1 July 2018.
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.
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 the Group, Sarah
trained and worked at Ernst &
Young LLP. She is a Fellow of the
Institute of Chartered Secretaries
and Administrators.
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.
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.
46
Chemring Group PLC | Annual report and accounts 2019
Committee membership
A Audit Committee
N Nomination Committee
R Remuneration Committee
Denotes Chairman
Non-executive directors
Laurie Bowen A N R
Non-Executive Director
Andrew Davies A N R
Non-Executive Director
Stephen King A N R
Non-Executive Director
Nigel Young A N R
Senior Independent
Non-Executive Director
Board length of service
(as at 16 December 2019):
0 years, 5 months
Board length of service
(as at 16 December 2019):
3 years, 7 months
Board length of service
(as at 16 December 2019):
1 year, 1 month
Board length of service
(as at 16 December 2019):
6 years, 8 months
Experience:
> Board experience at Chief
Executive level
Experience:
> Board experience at Chief
Executive level
> International experience in the
> Extensive knowledge of the
Experience:
> Executive and non-executive
board experience in public and
private companies
Experience:
> Previously Interim Chief Financial
Officer of the Group from August
2012 to January 2013
technology sector
international defence industry
> Chartered Accountant
> 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 is currently Chief Executive
of Kier Group PLC. He 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.
Laurie Bowen was appointed as
an independent non-executive
director on 1 August 2019. She is
also a non-executive director of
Ricardo plc.
Laurie has over thirty years of
leadership experience at large
multinational telecommunications
and technology companies including
Cable & Wireless Communications plc,
Tata Communications, BT Group plc
and IBM. Most recently she was Chief
Executive of Telecom Italia Sparkle
in the Americas, a subsidiary of the
international wholesale arm of
Telecom Italia.
Laurie was previously a non-executive
director at customer experience
technology provider, Transcom
Worldwide AB.
CFO positions
> Chartered Accountant
Nigel Young became a non-executive
director 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 and served
as Chairman of the Audit Committee
from 1 May 2013 to 31 July 2019.
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 and as Chairman
of the Audit Committee on 1 August
2019. 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 2019
47
Governance Corporate governance report
Carl-Peter Forster Chairman
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.
On behalf of the Board, I am pleased to present the corporate governance
report for the year ended 31 October 2019. The report explains how the
Board operates and how corporate governance is addressed in Chemring.
UK Corporate Governance Code 2018
In the year under review, Chemring remained subject to the UK Corporate
Governance Code issued in April 2016 by the Financial Reporting Council
(the “2016 Code”) and this year’s report therefore sets out how we have
complied with the 2016 Code. The new UK Corporate Governance Code
published in July 2018 (the “2018 Code”) became effective for Chemring
on I November 2019 and we will report on our compliance with the 2018
Code in the 2020 annual report and accounts.
During the year, we developed a plan to address the new requirements
of the 2018 Code and took a number of actions to ensure that we would
be compliant in the current financial year. Stakeholder engagement is a
key theme of the 2018 Code and we therefore instigated our Board-level
employee engagement programme during the year, further details of
which are set out below. In developing the new directors’ remuneration
policy which was approved by shareholders in March 2019, the Remuneration
Committee also addressed a number of recommendations included in the
2018 Code on executive remuneration arrangements. Further details on
the Remuneration Committee’s approach to the 2018 Code are set out
on pages 68 and 69. I look forward to reporting on our full compliance
with the 2018 Code next year.
48
Chemring Group PLC | Annual report and accounts 2019
Board changes
We welcomed two new non-executive directors to the Board during the
year. Stephen King joined the Board on 1 December 2018 and Laurie Bowen
joined the Board on 1 August 2019.
Stephen has previously served as Finance Director of a number of
substantial public companies and on 1 August 2019 he assumed the
Chairmanship of the Audit Committee from Nigel Young. Nigel, who has
served on the Board as a non-executive director for nearly seven years
and has been the Senior Independent Director since March 2016, has
indicated that he will retire on 30 April 2020, when his current
appointment comes to an end. We thank him for his significant
contribution to the Board over the last seven years.
Laurie Bowen, who is a US citizen, brings with her a wealth of experience
in technology and engineering businesses, and her international experience
is already proving very valuable to the Board. Laurie will assume the
Chairmanship of the Remuneration Committee from Andrew Davies
following the Annual General Meeting in March 2020. Andrew will
continue as a member of the Committee and we thank him for his
contribution as Chairman over the last eighteen months.
Details of the appointment process followed for the appointment of
the two non-executive directors during the year are set out in the
Nomination Committee report on pages 64 and 65.
With Nigel Young’s planned retirement, we have instigated a search
for another non-executive director and I hope that this will enable
us to further enhance the diversity of the Board.
Board effectiveness
The Board as a collective visited several sites during the year and each of
the non-executive directors also independently visited a number of our
businesses. Our interactions with the management and other employees
during these visits are very beneficial to improving the Board’s understanding
of both the challenges and opportunities within our businesses, and site
visits will remain an important part of the Board’s annual agenda.
We have continued to build on the strong relationship established with
our US Board in recent years, and we held a joint meeting of the two
Boards in October, which was also attended by the Presidents of our
three US businesses. The President and Chairman of the US Board also
attended two of our Board meetings in the UK. Given the importance
of our US businesses, it is vital that we strive to maintain positive
interactions with the US Board and this will continue to be an area
of focus in the year ahead.
Board performance evaluation
In progressing the new Board appointments during the year, we considered
on a number of occasions how we could improve our effectiveness by
complementing and strengthening the existing range of skills and experience
on the Board. We supplemented this with a more formal performance
evaluation in the latter part of the year, which is described in detail on
page 54. The suggestions made during the evaluation process will be taken
into consideration as we continue to improve the effectiveness of the Board.
Governance and Operational Framework
Our new Operational Framework was implemented on 1 January 2019
and provides an enhanced governance framework to enable us to operate
in a safe, consistent and accountable way. The first operational assurance
statements under the new framework were also received during the year,
and these will provide input into our risk management and internal audit
activities in future.
Culture and values
The Board recognises its role in establishing the purpose and values of
the Group, and embedding these throughout the business. Our core
values of Safety, Excellence and Innovation now form the foundation for
our organisation and our future strategy, and are reflected in the updated
Code of Conduct which we issued during the year.
Our Code of Conduct sets out the standards of behaviour and business
conduct we expect of all Chemring employees and all third parties acting
on our behalf. It also reinforces the culture the Board wishes to embrace
within Chemring of always doing the right thing and taking personal
responsibility for our actions. We firmly believe that developing a
Chemring culture which embraces responsible behaviour will contribute
to the long-term success of the business and all of our stakeholders.
A comprehensive review of the culture within Chemring was carried out
in the year through face-to-face discussions with over 350 employees at all
businesses and at all levels of the organisation. This provides an important
benchmark against which the Board will monitor changes in culture in
future using the various engagement mechanisms which we now have in
place across the Group.
Employee engagement
In recognition of the requirement under the 2018 Code for the Board
to establish a mechanism for engaging directly with our employees,
Andrew Davies has been designated as the non-executive director who
will engage on behalf of the Board. Andrew held a number of meetings
with employees in the UK and in the US during the year, at which he
shared with employees a perspective on the role of the Board and
provided an opportunity for them to ask questions of him. Further details
are provided later in the report. Feedback from the meetings has been
very positive, with employees welcoming the opportunity to meet with
a non-executive member of the Board, and the insights from these
interactions will provide valuable input to the Board’s deliberations
in future.
Carl-Peter Forster
Chairman
16 December 2019
Compliance with the UK Corporate Governance Code 2016
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 “2016 Code”). The Company was in compliance
with the provisions of the 2016 Code throughout the year ended
31 October 2019.
Further details on how the Company applied the principles of the
2016 Code during the year can be found as follows:
See page
Leadership
The role of the Board
Division of responsibilities
The Chairman
Non-executive directors
Effectiveness
The composition of the Board
Appointments to the Board
Commitment
Development
Information and support
Evaluation
Re-election
Accountability
Financial and business reporting
Risk management and internal control
Audit Committee and auditors
Remuneration
The level and components of remuneration
Procedure
Relations with shareholders
Dialogue with shareholders
Constructive use of general meetings
50
51
51
51
50
64
54
55
55
54
54
56
56
60
71
66
57
57
Chemring Group PLC | Annual report and accounts 2019
49
Governance Corporate governance report continued
Leadership
Governance framework
The Board is responsible for ensuring leadership of the Group through effective oversight and review, and aims to deliver the long-term sustainable
success of the business. The Board discharges some of its responsibilities directly in accordance with the formal schedule of matters reserved to it for
approval, and discharges others through Board committees and the executive management.
The key responsibilities of the Board, its committees and the executive management are set out below.
The schedule of matters reserved to the Board and the terms of reference of the Board committees are published on the Company’s website
(www.chemring.co.uk/investors/corporate-governance). The schedule of matters reserved and the terms of reference have been updated to reflect
the requirements of the 2018 Code.
The Board
Responsible for promoting the long-term sustainable success of the Group; directing its purpose, values and strategy; oversight of financial and
organisational control; ensuring that the Group’s businesses have appropriate and effective internal control and risk management systems; and
ensuring effective engagement with stakeholders.
Audit Committee
Monitors the integrity of the financial
statements, and the effectiveness of the
external and internal audit processes.
Nomination Committee
Evaluates the size, structure and
composition of the Board, and oversees
Board appointments.
See page 60
See page 64
(Audit Committee report)
(Nomination Committee report)
Remuneration Committee
Sets and reviews the directors’
remuneration policy, and oversees
remuneration arrangements for
the senior leadership.
See page 66
(Directors’ remuneration report)
The Chief Executive
Responsible for the leadership and day-to-day management of the business, and development and implementation of the Group’s strategy.
Executive Committee
Oversees the delivery of the Group’s strategy; monitors the operational and financial performance of the businesses; allocates resources across the
Group; manages risk; and implements the Group’s Operational Framework and governance policies.
The Group Chief Executive chairs the Executive Committee, which meets monthly. The members of the Committee are the executive directors, the
President of the Group’s US operations, the Group Health & Safety Director, the Chief People Officer and the Group Director of Corporate Affairs.
Full details of the Executive Committee members can be found on the Group’s website (www.chemring.co.uk).
Risk Management Committee
Oversees the implementation of the risk management policy and framework; identifies the principal risks to which the Group is exposed; monitors
risk mitigation plans; and maintains the Group risk register.
Composition of the Board and independence
The Board currently comprises three executive directors and five
non-executive directors (including the Chairman). The biographical
details of individual directors, including details of their other business
commitments, are set out on pages 46 and 47.
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 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.
50
Chemring Group PLC | Annual report and accounts 2019
Experience of the Board
The members of the Board also maintain the appropriate balance of
experience and knowledge of the business to enable them to discharge
their duties and responsibilities effectively.
Number of directors with applicable specific experience
7
Defence
Manufacturing
518+
International
Governance
Technology
Marketing
Strategy
4
3
6
6
8
15
+
15
+
21
+
8
+
10
+
13
+
U
Board roles
The roles of Chairman, Chief Executive and Senior Independent Director are separate and clearly defined in accordance with the requirements of the
2016 Code, with the division of responsibilities set out in writing and agreed by the Board.
The key responsibilities of the Board members are set out below.
Chairman
> Responsible for the leadership of the Board and ensuring its overall effectiveness in directing the Group
> Ensures that the Board is kept properly informed and is consulted in a timely manner on all decisions reserved to it
> Promotes a culture of openness and debate, and facilitates constructive relations between the executive and non-executive directors
> Ensures that the training and development needs of directors are identified
Chief Executive
> Responsible for the leadership and day-to-day management of the business
> Develops strategy for Board approval and ensures that the agreed strategy is implemented successfully
> Presents the annual budget and five-year plan to the Board for approval and delivers agreed objectives
> Identifies new business opportunities, and potential acquisitions and disposals
> Manages the Group’s risk profile, including the management of health and safety
> Ensures that the Board is fully informed of all key matters
Finance Director
> Supports the Chief Executive in developing and implementing the global finance function
> Oversees the finance functions across the Group
> Ensures effective financial controls and financial reporting processes are in place
> Ensures the Group has adequate bank facilities and financial resources
Senior Independent Director
> Provides support to the Chairman and acts as a trusted sounding board
> Reviews the Chairman’s performance with the other non-executive directors
> Available to meet shareholders if they have concerns which cannot be resolved through the normal channels
Non‑executive directors
> Participate in the development of strategic objectives, provide constructive challenge and monitor the performance of executive management in
achieving the agreed objectives
> Monitor the Group’s financial performance
> Consider the integrity of the Group’s financial information, and whether the financial controls and risk management systems are robust and defensible
> Determine the appropriate remuneration policy for the executive directors
> Meet periodically with the Group’s senior management and visit operations
> Meet regularly without the executive directors being present
Legal Director & Company Secretary
> Oversees legal matters and compliance across the Group
> Secretary to the Board and its committees
> Under the direction of the Chairman, responsible for maintaining good information flows within the Board and its committees
> Develops Board and committee agendas, and collates and distributes papers
> Assists with the induction of new directors
> Keeps directors informed about changes to their duties and responsibilities
> Provides advice on legal, regulatory and corporate governance matters
Chemring Group PLC | Annual report and accounts 2019
51
Governance Corporate governance report continued
Effectiveness
Board meetings and attendance
The Board convenes for scheduled meetings at least seven times a year. The Board receives a report from the Executive Committee, covering health
and safety performance, operational and financial performance, legal, people and investor relations related issues, as a standing agenda item at every
scheduled meeting. Members of the senior leadership team, representatives of the US Board and external advisers attend Board meetings by invitation,
as appropriate.
The Board aims to meet jointly with the Group’s US Board, further details of which are set out on page 54, at least once a year.
Board and committee meetings held during the year
4
3
2
1
0
November
December
January
Board
March
April
May
June
July
October
Audit
Nomination
Remuneration
The following table shows the attendance of all directors who served during the year at the meetings of the Board and its committees:
Board member
Carl-Peter Forster
Laurie Bowen
Andrew Davies
Daniel Dayan
Sarah Ellard
Stephen King
Andrew Lewis
Michael Ord
Nigel Young
Board
(7 scheduled
meetings and
7 ad hoc meetings)
14 (14)
1 (1)
14 (14)
2 (2)
14 (14)
11 (12)
14 (14)
14 (14)
14 (14)
Audit Committee
(4 scheduled
meetings)
—
1 (1)
4 (4)
—
—
4 (4)
—
—
4 (4)
Nomination
Committee
(4 scheduled
meetings)
4 (4)
—
4 (4)
—
—
3 (3)
—
—
4 (4)
Remuneration
Committee
(3 scheduled
meetings)
3 (3)
—
3 (3)
—
—
3 (3)
—
—
3 (3)
The maximum number of meetings which each director could have attended is shown in brackets.
In addition to the scheduled meetings, seven ad hoc Board 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.
52
Chemring Group PLC | Annual report and accounts 2019
Board focus during the year
Leadership
Financial
> Approved new appointments to the Board
> Monitored performance of the businesses against the 2019 budget
> Completed annual Board performance evaluation
> Approved the 2020 budget
> Reviewed proposed changes to the senior leadership team across
> Approved additional bank facilities
the Group
> Met jointly with the US Board
> Approved the half year results, and the annual report and accounts
> Approved the interim dividend and made a recommendation for the
final dividend
> Reviewed the potential tax implications of the EU State Aid judgement
on legacy financing arrangements
Strategy
People and culture
> Approved the updated five-year plan and strategy for the Group
> Approved the disposal of Chemring Military Products, Inc., Chemring
> Approved the appointment of Andrew Davies as the non-executive
director designated to engage with employees on the Board’s behalf
Defence UK Limited and Chemring Ordnance, Inc.
> Reviewed the results of the Group-wide culture review
> Developed a capital investment plan for the Group for the next three
years and approved the investment in new facilities at the Kilgore site
in Tennessee
> Considered future capacity requirements for the Group’s
countermeasures businesses against market and customer projections
> Reviewed progress on the US Programs of Record
> Reviewed bid defence strategy for the Group
> Reviewed future employee development plans
Safety and operations
Governance, risk and regulatory
> Monitored the health and safety performance of the businesses on a
> Approved the Operational Framework and the new Code of Conduct
> Developed the action plan for achieving compliance with the 2018 Code
> Reviewed the Group’s risk register, and completed the annual assessment
of the Group’s internal control and risk management systems
> Considered potential impacts on the Group of a no-deal Brexit
> Received updates on key legal issues and regulatory matters impacting
the Group
> Approved the Group’s Modern Slavery Act statement for 2019
monthly basis
> Considered the findings of the Group-wide safety review carried out
by ERM
> Approved the new Group HSE Strategy and HSE Management
System Framework Standard
> Visited the UK countermeasures site to review the remedial actions
taken following the August 2018 incident
> Reviewed operational key performance indicators for the businesses
throughout the year
> Received briefings on plant shutdowns and associated restart plans
> Approved the plan and associated investment for the implementation
of new ERP systems across the Group
Shareholders
> Reviewed feedback from the results presentations and institutional
investor meetings
> Received updates from advisers and the Group Director of Corporate
Affairs on current shareholder views on the Group
Chemring Group PLC | Annual report and accounts 2019
53
Governance
Corporate governance report continued
Effectiveness continued
Board site visits
During the year, the Board as a collective visited Chemring Countermeasures
UK and Chemring Sensors & Electronics Systems in the US. Site visits enable
the Board to obtain a deeper understanding of the business operations,
establish relationships with the wider management team and engage
directly with employees. The Board generally receives a presentation
from management on their business performance, future strategy, and key
opportunities and challenges. During the Chemring Countermeasures UK
visit, the Board reviewed the remedial action taken following the August
2018 incident and also visited the new thrusted flare facility. At Chemring
Sensors & Electronics Systems, the Board reviewed progress on
technology developments under the US Programs of Record.
Interaction with the US Board
Whilst in the US, the Board held a joint meeting with our US Board,
which was also attended by the Presidents of our three US businesses.
The US Board is established under our Special Security Agreement (“SSA”)
with the US Government and includes three independent US 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 that we are fulfilling our own governance
obligations. The Group Chief Executive and Group Finance Director are
both members of the US Board. Our broader interaction with the US
Board has increased in the last few years, and the increased collaboration
is proving very beneficial from both an operational and governance perspective.
Board appointments and re-election of directors
New appointments to the Board and its committees are made by the
Board on the recommendation of the Nomination Committee. Further
details of the appointment process are set out in the Nomination
Committee report on pages 64 and 65.
In accordance with the Company’s Articles of Association, all directors
are required to submit themselves for re-election at each Annual General
Meeting. 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.
In order to ensure that all directors are able to devote sufficient time to
fulfilment of their duties, Board approval was sought for new outside
appointments during the year, in accordance with the 2018 Code.
Diversity
The Board recognises the importance of promoting diversity in its
broadest sense, both at the Board level and across the entire business.
The Board currently includes two female members and is cognisant of
the voluntary targets set out in the Hampton-Alexander Review that by
2020 at least 33% of Board and Executive Committee members, and their
direct reports, should be female. We remain committed to further improving
the diversity of the Board when appropriate opportunities arise.
Further details on the Board’s approach to diversity are set out in the
Nomination Committee report on pages 64 and 65.
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.
Case study on induction of Stephen King
On joining the Board as a non-executive director in December 2018,
Stephen King was provided with a tailored induction programme
designed to ensure that he gained a full understanding of the Group,
including our business, strategy, culture and values, governance and
financial position.
As part of this process, Stephen met with key members of the UK
and US head office teams, who provided briefings on various aspects
of the Group’s business and operations, and he also met with the
Group’s principal advisers, including the external auditor.
Within a few months following his appointment, Stephen visited sites
in both the UK and the US, which provided a deeper understanding
of our manufacturing operations, particularly within
Countermeasures & Energetics, and also enabled Stephen to meet
members of the senior leadership team and various other employees
within the business.
Performance evaluation
During the year, the Board conducted an evaluation of its performance
led by the Chairman and the Company Secretary. A questionnaire was
developed which was intended to evaluate how the Board was performing
against the Financial Reporting Council’s Guidance on Board Effectiveness
published in July 2018, and to establish whether there were any other
specific improvements to the composition and operation of the Board and
its committees which individual directors considered would be beneficial.
The individual responses to the questionnaires were consolidated into a
report which was considered by the Chairman prior to submission to the
Board. The Board concluded that it had worked well together during the
year and, with the most recent appointments, the balance of skills and
experience on the Board had improved. The Board identified certain
actions to further improve its effectiveness, based on the key conclusions
of the evaluation process, and these will be addressed in the year ahead.
Priorities for the year ahead include:
> Increasing focus on future strategic growth.
> Strengthening the Board’s interactions with key stakeholders.
> Board meeting structure and agendas to be reviewed to ensure that
sufficient time is allocated to strategic matters, including market and
technology developments, and to allow for deeper discussion.
> Ensuring a greater emphasis on culture and values.
> Developing the Board and Nomination Committee’s focus on
succession planning.
In addition to the formal performance evaluation, the Chairman and
non-executive directors also reviewed the individual performance of the
executive directors as part of the annual remuneration review.
54
Chemring Group PLC | Annual report and accounts 2019
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 Group Legal
Director & 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. The Company has procedures in place to deal with situations
where directors may have any such conflicts, which require the Board to:
> consider each conflict situation separately on its particular facts;
> consider the conflict situation in conjunction with the rest of their
duties under the 2006 Act;
> keep records and Board minutes as to authorisations granted by
directors and the scope of any approvals given; and
> regularly review conflict authorisation.
Chemring Group PLC | Annual report and accounts 2019
55
Governance Corporate governance report continued
Accountability
Operational Framework
Our Operational Framework, which was implemented on 1 January 2019,
incorporates a broad range of policies and procedures which have now been
adopted by all of our businesses, and provides an enhanced governance
structure to enable us to operate in a safe, consistent and accountable way.
As part of this enhanced governance structure, we have also introduced a
requirement for all businesses to complete a detailed operational assurance
statement on a half-yearly basis, providing an assessment of their
compliance with the Operational Framework.
The output from the operational assurance process provides assurance
to the Board that our internal systems and controls are operating
effectively, and will become an important focus for our internal audit
and risk management activities in future.
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 2019 are
set out on page 29.
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 pages 88 and 89.
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 2019,
taken as a whole, is fair, balanced and understandable. Furthermore, the
Board believes that the disclosures set out on pages 4 to 45 provide the
information necessary to assess the Company’s performance, business
model and strategy.
Going concern
The Group’s business activities, key performance indicators, and principal
risks and uncertainties are set out within the strategic report on pages 4
to 45. 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 2021, being at least twelve months after the date of approval
of the financial statements. This is in addition to the Group’s longer-term
strategic planning process. In assessing the forecast, the directors
have considered:
> trading risks presented by the current economic conditions in the defence
market, particularly in relation to government budgets and expenditure;
> the timing of delivery of key contracts;
> the availability of mitigating actions should business activities fall behind
current expectations, including the deferral of discretionary overheads
and restricting cash flows; and
> the long-term nature of the Group’s business which, taken together
with the Group’s order book, provides a satisfactory level of confidence
to the Board in respect of trading.
Additional detailed sensitivity analysis has been performed on the
forecasts to consider the impact of severe, but plausible, reasonable
worst 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. These sensitised scenarios show headroom on all covenant
test dates for the foreseeable future.
The directors have acknowledged the latest guidance on going concern.
The directors have considered the latest forecasts available to them and
additional sensitivity analysis has been prepared on the covenant forecasts
to consider the impact on covenants of any reduction in anticipated levels
of EBITDA. This sensitised scenario shows headroom on all covenant test
dates. After consideration of the above, the directors have a reasonable
expectation that the Group has adequate resources to continue in
operational existence for the foreseeable future. Thus, they continue to
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 2022 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 2022.
The directors have chosen a three-year period to assess viability to reflect
the characteristics of the Group’s end markets. These range from multi-year
contracts such as the US Programs of Record to shorter-term orders such
as those awarded to Roke.
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 improve operational performance, 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.
> the impact of macro-economic factors, particularly interest rates and
foreign exchange rates;
> the status of the Group’s existing financial arrangements and associated
covenant requirements;
> progress made in developing and implementing cost reduction
programmes and operational improvements;
Indemnities and insurance
The Company maintains directors’ and officers’ liability insurance in respect
of legal action against its directors and officers. The Company has also
granted indemnities to its directors to the extent provided by law (which
are qualifying third party indemnities within the meaning of section 236
of the Companies Act 2006). Neither the insurance nor the indemnities
provide cover in the event of proven fraudulent or dishonest activity.
56
Chemring Group PLC | Annual report and accounts 2019
Stakeholder engagement
The Board recognises that the long-term success of Chemring will be enhanced by a positive interaction with all of its stakeholders. Effective engagement
allows the Board to understand relevant stakeholder views on material issues which may impact the business, and helps to inform the Board’s decision
making and the discharge of directors’ duties under section 172 of the Companies Act 2006.
Stakeholder engagement takes place at all levels within the Chemring organisation. The table below identifies some of our key stakeholders, and explains
how the Board and our businesses engage with them.
Shareholders
The continued support of shareholders is vital to the long‑term
success of the Group. We aim to ensure that shareholders, both
institutional investors and individual shareholders, have a good
understanding of the Group’s strategy, performance and future
prospects, and that shareholder views are taken into consideration
in relation to major developments in the business.
How we engage
We maintain 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.
Our 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 Group Legal Director
& Company Secretary about changes to significant shareholdings.
Employees
People are at the heart of our business, and are critical to the
delivery of our strategy and the future growth of the business.
We wish to ensure that all employees feel valued, and can perform
to their full potential in a safe and inclusive environment. This will
enable us to maintain a competent and committed workforce,
and to develop and retain talent.
How we engage
We engage with employees through a range of formal and informal
channels, including all-hands meetings and team briefings, and through
works councils, representative bodies and trade unions. “Chemring-i”, our
in-house magazine, is distributed to all employees twice a year, and provides
an overview of key developments and activities across all of the businesses.
The Group Chief Executive produces a monthly vlog, which is accessible
on our intranet and is also screened more broadly within our facilities.
All employees are encouraged to submit questions to the Group Chief
Executive and propose topics for discussion in the monthly vlog.
Following the Group-wide culture review which was carried out during
the year, in which over 350 employees participated, we have launched
a real-time employee engagement tool which will provide much greater
visibility on business sentiment in future and will help to shape our future
people focus.
All directors are required to attend and make themselves available to take
questions from shareholders or address any concerns at the Annual General
Meeting, and at other times of the year, the directors can be contacted at
the UK 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.
We are encouraging increased networking across the Group, and the two
events which were held during the year for graduates and other employees
in the early part of their careers were very successful.
At the Board level and in accordance with the requirements of the 2018
Code, Andrew Davies has been designated as the non-executive director
who will engage with employees on behalf of the Board. During the year,
Andrew met with employees at businesses both in the UK and the US.
Chemring Group PLC | Annual report and accounts 2019
57
Governance Corporate governance report continued
Stakeholder engagement continued
Employees continued
How we engage continued
Whilst each meeting was different due to the nature of the businesses,
Andrew has sought to cover the following key topics at each meeting:
> An explanation of the role of the Board and each of the Board members,
and, where appropriate, how the UK and US Boards work together.
> An explanation of how his discussions built on the discussions already
held with groups of employees on safety, culture and operational excellence.
> A discussion on how employees are able to share their views within
the organisation.
> Consideration of how employees are encouraged to live the Chemring
values, and how they observe others around them doing the same.
> Arrangements by which employees can contact Andrew again should
they wish to do so.
More broadly, the Board takes the opportunity to speak with a wide
range of employees during collective and individual site visits. The Group
Chief Executive and other executives regularly attend all-hands meetings
when visiting the businesses. The Chairman meets regularly with members
of the senior leadership team and also attended the Emerging Leaders
Programme during the year. The Chief People Officer briefs the Board
on people-related issues throughout the year.
We participate in industry forums and events. We also exhibit at selected
trade shows which facilitate a high-level of interaction with a wide range
of customers and provide an opportunity for us to brief customers on
our broad range of capabilities across the Group.
Customers
Our business is focused on providing innovative solutions that
meet our customer requirements efficiently and on time.
Understanding the needs of our customers is crucial to the
delivery of reliable and effective products and services, which
underpins the performance and success of our business.
How we engage
Our businesses develop and maintain close relationships with customers
through regular meetings, teaming arrangements and engagement at all
levels of the customer organisation. The Group Chief Executive and
President of our US operations support the businesses through regular
interactions with senior customer representatives, and feedback is
provided to the Board on key customer engagement on a regular basis.
We also regularly partner with customers on technology development
programmes, which ensures that future product and capability
development aligns with customer requirements.
Suppliers
We rely on our suppliers to provide us with products and services
which meet our stringent safety, quality and performance
requirements, which in turn allows us to fulfil our commitments
to our customers. Effective management of our supply chain is
critical to ensuring the continuity of our business and reliable
operational performance.
How we engage
Our businesses engage with a broad range of suppliers on a day-to-day
basis, to ensure that our expectations are met from a quality and delivery
perspective, and to ensure that our suppliers are conducting their business
in line with our own standards.
Long-term agreements are entered into with key suppliers where
appropriate, and performance targets are regularly agreed with suppliers
to assist with our drive for continuous improvement.
Our Supplier Code of Conduct is issued to all suppliers and sets out the
standards of business conduct we expect of them, including in relation to
human rights.
58
Chemring Group PLC | Annual report and accounts 2019
Communities
We recognise that each of our businesses has an important role
to play in its local community. We also acknowledge the impact
of our business on wider society.
How we engage
Our businesses each engage with their local communities in a wide variety
of ways, and support local community projects from sponsorship of local
sports teams to providing assistance to neighbouring schools and other
educational establishments.
Our community investment policy confirms our commitment to support
selected charitable causes with a focus on the military and the armed
forces, our local communities and STEM-related initiatives. In addition
to making cash donations, we also encourage and support employees
who undertake voluntary work in the local community.
During the year, our UK businesses participated in the Armed Forces Day
event in Salisbury, with a significant presence in the STEM village.
We are cognisant that our manufacturing activities can on occasion impact
on the local community, for example when we are proofing products, and
we liaise with our neighbours to minimise the impact. We also seek to
ensure that our operations do not cause harm to the local environment,
in accordance with our environmental strategy.
Governing bodies and regulators
Our businesses operate in highly‑regulated environments, and
we need to ensure that we maintain our licences to operate
and continue to run our business in full compliance with all laws
and regulations.
How we engage
We maintain a regular dialogue with governments and regulators, and
participate in various industry working groups and trade representative
bodies. This enables us to engage in discussions regarding future policy
development and planned regulatory changes, and to identify potential
opportunities and risks for the business. Where significant investment
is planned on one of our facilities, we engage with local governing bodies
to ensure their support.
In the US, our Government Security Committee works closely with
the US Defense Counterintelligence and Security Agency to ensure that
we are operating in full compliance with our Special Security Agreement
with the US Government.
Compliance with our Operating Framework, which includes a wide range
of legal and compliance policies, is reviewed on a half-yearly basis in
accordance with our operational assurance process and the output is
reviewed by the Board. The Board receives a regular update on changes
to laws and regulations which may impact the business.
Chemring Group PLC | Annual report and accounts 2019
59
Governance Audit Committee report
Stephen King Chairman of the Audit Committee
Audit Committee members
Stephen King (Chairman) (appointed December 2018, appointed Chair
August 2019)
Laurie Bowen (appointed August 2019)
Andrew Davies
Nigel Young
Introduction
I am pleased to present my first report as Chairman of the Audit Committee,
having taken over the appointment from Nigel Young on 1 August 2019.
Nigel served as Chairman of the Committee for more than six years and
I would like to convey the Board’s thanks for his significant contribution
to the Committee during this period.
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. The report provides an overview of the operation
of the Committee and its activities during the year. During the early part
of the year, the Committee was focused on matters relating to the 2018
financial statements, which were covered in detail in last year’s report.
The report this year therefore focuses on the Committee’s activities in
relation to the 2019 half year and full year results, and the external and
internal audit activity during 2019.
This was the first full financial year for both our external and internal
auditors, following their appointments in 2018. I am pleased to report
that KPMG and PwC are fully engaged in their respective roles, and
their fresh perspective has been very valuable to the Committee.
60
Chemring Group PLC | Annual report and accounts 2019
Membership of the Committee
The Audit Committee has been established by the Board and is responsible
for monitoring the integrity of the Group’s financial statements and the
effectiveness of the internal and external audit process.
All members of the Committee are independent non-executive
directors, and each brings a broad range of financial and business
expertise. I have previously served as the finance director of substantial
public companies, and therefore possess recent and relevant financial
experience. The Board considers that the Committee members possess
an appropriate level of independence and offer a depth of financial and
commercial experience across various industries, in particular within the
defence and technology sectors.
Key responsibilities of the Audit Committee
> Making recommendations on the appointment, reappointment and
remuneration of the internal and external auditors.
> Ensuring that an appropriate relationship between the Group and
the external auditor is maintained, and overseeing the provision
of non-audit services.
> Reviewing and monitoring the external auditor’s independence
and objectivity.
> Reviewing the effectiveness of the Group’s internal controls and
risk management systems.
> Considering the effectiveness of the Group’s internal audit function
and monitoring internal audit activities.
> Reviewing arrangements by which the Group’s employees may
confidentially raise concerns about possible improprieties.
> Providing guidance to the Board in its consideration of whether the
annual report and accounts are fair, balanced and understandable.
Operation of the Committee
The Committee’s responsibilities are set out in its terms of reference,
which are available on the Company’s website. The Committee reviews
its terms of reference and its effectiveness annually, and recommends to
the Board any changes required as a result of the review.
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 Group Legal Director & Company Secretary acts as
secretary to the Committee and minutes of meetings are circulated to all
Board members. Details of attendance of members of the Committee at
the four meetings held during the year are shown on page 52.
A verbal report on key issues discussed by the Committee is provided to
the Board after every meeting.
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.
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’s activities during the year
Areas of focus
Matters considered
Financial reporting
> Content of the Group’s interim and
preliminary results announcements and
the annual report, and in particular,
whether the annual report was fair,
balanced and understandable
> Appropriateness and disclosure of
accounting policies, key judgements and
key estimates, including a focus on:
> accounting for discontinued operations
and assets held for sale, including
associated impairments;
> use of Alternative Performance
Measures; and
receivables. The Group does not apply hedge accounting but a detailed
assessment was carried out of expected credit losses on trade receivables
not containing a significant financing component, using the simplified
approach set out in IFRS 9. The Committee concluded that the impact
of IFRS 9 was not material in this respect given the nature of the Group’s
customer base, and agreed that the Group would continue with its current
policy on provisioning for specific or significantly aged trade receivables.
IFRIC 23 Uncertainty over Income Tax Treatments addresses the accounting
for income taxes when tax treatments involve uncertainty that affects the
application of IAS 12 Income Taxes and is effective for accounting periods
beginning on or after 1 January 2019. The Committee reviewed the tax
provisions held by the Group at 31 October 2018 and 30 April 2019, and
concluded that IFRIC 23 will have no material impact on the Group’s
current tax provisions.
Significant issues considered by the Committee
in relation to the financial statements
> impact of IFRS 16, IFRS 9 and IFRIC 23
Revenue recognition policies and procedures
Risk and control
environment
> Effectiveness of the Group’s systems of
internal control
> The Group’s going concern status and
viability statements
> Implementation of new ERP systems
across the Group
External audit
> Interim review and full year audit plans
> Effectiveness and independence of the
external auditor
> Non-audit services provided by the
external auditor
> External auditor’s reports on the half year
and full year results, and consideration of
points raised by the auditor
Internal audit
> Internal audit plan
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.
Recoverability of goodwill, other intangible assets, and the
parent company’s investments in, and intergroup receivable
balances with, subsidiaries
The Committee considered the carrying value of goodwill, intangible
assets and the parent company’s investments in, and intergroup
receivable balances with, subsidiaries held on the balance sheet as
at 30 April 2019 and 31 October 2019, against the latest forecasts for
the businesses concerned and the future strategic plan for the Group.
Held for sale/discontinued operations
The Committee agreed the presentation of the results of businesses
held for sale/discontinued operations.
> Effectiveness of the internal auditors
Capitalised development costs
and their key findings
Financial reporting
A summary of the significant issues considered in relation to the 2019
financial statements is set out below.
IFRS 16 Leases is effective for accounting periods beginning on or after
1 January 2019. The new standard requires lessees to recognise nearly
all leases on the balance sheet to reflect their right to use an asset for a
period of time and the associated liability for payments. The Committee
reviewed the potential impact of the new standard on the Group during
the year, and considered the judgements and key assumptions used in the
assessment of the impact. The Committee agreed that the Group would
account for leases with a minimum value of £50,000 under IFRS 16.
The Group’s 2020 financial statements will be prepared under the new
standard but disclosure of the potential impact has also been included
in the 2019 financial statements.
IFRS 9 Financial Instruments impacts the recognition and measurement of
assets and liabilities in relation to accounting for hedging instruments and
introduces the concept of expected credit losses on trading and other
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 most significant
research and development projects, and their associated capitalised
development costs, were undertaken by the Committee in June 2019
and November 2019. It was concluded that no impairment charges
were required in 2019.
Alternative Performance Measures
The Committee reviewed the use of Alternative Performance Measures
in the interim report and the annual report. The Committee concluded
that the use of Alternative Performance Measures did enhance a
reader’s understanding of the accounts and were presented in a fair,
balanced and understandable manner.
Accounting for insurance claim recoveries
The Committee considered the appropriate accounting treatment
of insurance claim recoveries received in respect of the 2018 incident
at the UK countermeasures site, £15m of which was included in the
results for the year.
Chemring Group PLC | Annual report and accounts 2019
61
Governance Audit Committee report continued
The Committee is required to consider whether it is appropriate to
adopt the going concern basis in preparing the interim and full year results.
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 during the year and discussions with
the external auditor, the Committee recommended to the Board the
adoption of the going concern basis for the preparation of the interim
and full year results.
The Group is also required to make a statement on its long-term viability
in the 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.
Since the year end, the Committee has reviewed the form and content of
the 2019 annual report and accounts, and confirmed to the Board that,
taken as a whole, the annual report and accounts is fair, balanced and
understandable. The Committee also concluded that the annual report
and accounts provides the information necessary to assess the Group’s
position and performance, business model and strategy.
In making this assessment, the Committee considered:
Is the report fair?
> Is the narrative in the strategic report consistent with the financial
statements?
> Have any significant matters been omitted?
Is the report balanced?
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.
Audit effectiveness
The Committee assesses the effectiveness of the external auditor on an
ongoing basis, with particular reference to:
> the arrangements for ensuring the external auditor’s independence
and objectivity;
> the external auditor’s fulfilment of the agreed audit plan and any
variations from the plan;
> the robustness and perceptiveness of the auditor in their handling
of the key accounting and audit judgements;
> the content of the external auditor’s reports and internal control
recommendations; and
> 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.
KPMG was appointed as the Group’s external auditor in March 2018,
following a tender process, and Andrew Campbell-Orde has acted as
audit partner since the appointment. The Committee reviewed KPMG’s
effectiveness in fulfilling the external audit during the year and concluded
that KPMG had conducted a comprehensive, appropriate and effective
audit. The Committee discussed with KPMG how their interaction with
and reporting to the Committee could be improved, and this was
addressed in the 2019 audit plan.
> Has appropriate prominence been given to both positive and
negative aspects of performance during the year?
The Committee has recommended to the Board that KPMG be reappointed
as the Group’s auditor at the 2020 Annual General Meeting.
> Is there an appropriate balance between the disclosure of statutory
measures of performance and Alternative Performance Measures
(“APMs”)?
Is the report understandable?
> Is the presentation of performance clear, with consistent use of key
performance indicators?
> Is there clarity around the use of APMs?
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:
> whether the provision of the proposed services might compromise
the auditor’s independence or objectivity;
> whether the non-audit services will have a direct or material effect
on the Group’s audited financial statements;
> whether the skills and experience of the external auditor make it the
most suitable supplier of the non-audit services; and
> the level of fees proposed for the non-audit services relative to the
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.
62
Chemring Group PLC | Annual report and accounts 2019
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.
Details of the amounts paid to the external auditor during the year for
audit and non-audit services are set out in note 4 to the Group financial
statements. Total fees of £39,000 were paid to KPMG during the year in
respect of non-audit services, which related to the review of the interim
results, a government grant audit for Chemring Australia and an audit
report for Chemring Nobel’s tax return as is required from the auditor
under Norwegian law. The Committee concluded that neither the nature
or scope of these services gave rise to any concerns regarding the
objectivity or independence of KPMG.
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.
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 a review of all sites
on a two or three-year rotational basis, 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.
The internal audit programme is managed by PwC, who were appointed
by the Committee in 2018. The programme covers financial and commercial
processes, governance issues, and key corporate risks. Where appropriate,
suitably-qualified employees of the Group participate in internal audits on
other Group businesses in which they have no direct involvement, with
oversight from PwC. This facilitates sharing of best practice across the Group
and contributes to the development of employees involved in the audits.
The internal audit plan for 2019 included specific focus on:
> the key financial and operating controls within the business;
> IT controls; and
> adherence to the Group’s Bribery Act Compliance Manual.
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 meet the Company’s requirements, and PwC has
therefore been reappointed to provide internal audit services for the
Group in 2020. The Committee also reviewed the level of utilisation of
Group employees on individual audits with PwC to ensure that the overall
degree of independence on the internal audit programme remained
appropriate. In 2020 the work programme for internal audit will continue
on a site rotation basis and PwC will create bespoke risk-based testing
plans for each site.
Stephen King
Chairman of the Audit Committee
16 December 2019
Chemring Group PLC | Annual report and accounts 2019
63
Governance Nomination Committee report
Carl-Peter Forster Chairman of the Nomination Committee
Nomination Committee members
Carl-Peter Forster (Chairman)
Laurie Bowen (appointed August 2019)
Andrew Davies
Stephen King (appointed December 2018)
Nigel Young
Introduction
I am pleased to present the Nomination Committee’s report for the year
ended 31 October 2019.
The main focus of the Committee during the year was on the appointment
of another independent non-executive director, to further strengthen
the Board following the appointment of Stephen King as a non-executive
director in December 2018. As the result of this process, Laurie Bowen
joined the Board on 1 August 2019. Further details of the appointment
process are set out below.
During the year the Committee also reviewed its operation against the
new UK Corporate Governance Code published in July 2018 and we have
identified the actions required to ensure we are fully compliant in the
current financial year.
64
Chemring Group PLC | Annual report and accounts 2019
Membership of the Committee
The Nomination Committee’s key role is to ensure that the Board has the
appropriate skills, knowledge and experience to operate effectively and
deliver the Group’s strategy.
All members of the Committee are independent non-executive directors.
I chair the Committee but will not do so where the Committee is dealing
with my own reappointment or replacement as Chairman of the Board.
Key responsibilities of the Nomination Committee
> Reviewing the structure, size and composition of the Board, and
making recommendations on appointments to the Board and to
Board committees
> Reviewing the overall leadership needs of the organisation
> Succession planning for the Board and the Executive Committee
Operation of the Committee
The Committee’s responsibilities are set out in its terms of reference,
which are available on the Company’s website. The Committee reviews
its terms of reference and its effectiveness annually, and recommends to
the Board any changes required as a result of the review.
Meetings of the Committee are attended, at the invitation of the
Chairman, by the Group Chief Executive when considered appropriate.
Members of the Committee do not participate in any discussions relating
to their own reappointment or replacement. The Group Legal Director
& Company Secretary acts as secretary to the Committee and minutes
of meetings are circulated to all Board members. Details of attendance
of members of the Committee at the four meetings held during the year
are shown on page 52.
Board composition
The Committee regularly reviews the composition and balance of the Board
and its committees, and considers non-executive directors’ independence,
whether the balance between non-executive and executive directors
remains appropriate, and whether the Board has the requisite skills and
experience to oversee delivery of the agreed strategy for the Group.
As referred to above, Stephen King and Laurie Bowen were appointed to
the Board as independent non-executive directors during the year on the
recommendation of the Committee.
The Committee also recommended my reappointment and the
reappointment of Andrew Davies as a non-executive director for our
second three-year terms, and the reappointment of Nigel Young, who
had served two three-year terms, for an additional one-year term. Nigel,
who has now served as a non-executive director for nearly seven years,
has indicated his intention to retire on 30 April 2020, when his current
appointment comes to an end. The Committee has prepared a brief for
Nigel’s replacement and has engaged Russell Reynolds to assist with the
search for a new non-executive director.
Appointments to the Board
The Committee is responsible for reviewing and recommending new
appointments to the Board, and oversaw the processes which resulted
in the appointment of Stephen King and Laurie Bowen during the year.
Stephen King joined the Board as a non-executive director on
1 December 2018 as the result of a search process which was initiated
following the announcement by Daniel Dayan in August 2018 that he
5
Executive Committee
Male
Female
271+
81969+
All employees
Female
Male
1,797
Diversity
Board
6
Male
Female
Senior managers
275+
78+
78+
Ethnic diversity
Non-white 599
Female
White
Male
2,017
66
19
would be stepping down as a non-executive director. Russell Reynolds
was appointed by the Committee to assist with the search and the appointment
process proceeded in line with the process adopted for the subsequent
appointment of Laurie Bowen detailed below. Russell Reynolds, which has
no other connection with the Group, is a signatory to the Voluntary Code
of Conduct for Executive Search Firms and has made a commitment to
promoting diversity.
During the appointment process for Stephen, the Committee
recommended to the Board that it would be beneficial to appoint a
second new non-executive director. A candidate brief was drawn-up,
with emphasis on the requirement for increased diversity of gender
and/or nationality on the Board. Russell Reynolds was again selected by
the Committee to facilitate the search, given their recent knowledge of
the Group and understanding of the Board’s requirements.
Russell Reynolds provided an initial long-list of potential candidates,
following which members of the Committee met with four short-listed
candidates and reviewed their respective skills and experience against
the initial brief. The Committee also considered how each of the candidates
would complement the Board. The Committee then selected two preferred
candidates to meet the rest of the Board and having considered feedback
from all of the directors, the Committee made a recommendation to the
Board to appoint Laurie Bowen.
Succession planning
The Committee is responsible for promoting effective succession planning
for the Board and the Executive Committee, to ensure that the leadership
of the business remains aligned to the Group’s strategy.
Following the appointment of a Chief People Officer in 2018, we have
increased our focus on leadership and future talent development and
succession planning across the entire business. Developing and retaining
employees at all levels of the organisation is vital to delivery of our strategy,
and this will be an increased area of focus for the Committee in the
year ahead.
Diversity
The Committee recognises the importance of diversity and inclusion
to the effective performance of the Board, and to our wider business
operations. We are committed to promoting diversity across the Group
in all forms, including diversity of gender, race, age, disability, sexual
orientation, cultural background and belief.
The Committee is cognisant of the voluntary targets set out in the
Hampton-Alexander Review that by 2020 at least 33% of Board and
Executive Committee members, and their direct reports, should be
female. We have made progress towards this target with the appointment
of Laurie Bowen to the Board during the year, and we will aspire to
further improving female representation on the Board and across the
broader senior leadership team over the next few years. The Committee
will also have regard to the recommendations set out in the Parker Review
on ethnic diversity when recommending future appointments to the Board.
The charts opposite illustrate the current gender diversity of the Board,
the Executive Committee and our senior managers, and the gender and
ethnic diversity of all employees across the Group. Senior managers are
generally directors and functional heads within head office and the
business units.
Carl-Peter Forster
Chairman of the Nomination Committee
16 December 2019
Chemring Group PLC | Annual report and accounts 2019
65
Governance
22
+
U
22
+
U
31
+
U
29
+
U
25
+
U
Membership and operation of the
Remuneration Committee
The Remuneration Committee has been established by the Board and is
responsible for the remuneration of the executive directors, the Chairman
and the leadership team at the next level. All members of the Committee
are independent non-executive directors, save for Mr Forster who was
independent on appointment to the Board.
The Committee’s responsibilities are set out in its terms of reference,
which are available on the Company’s website. The terms of reference
were updated in the year to reflect the requirements of the new UK
Corporate Governance Code published by the Financial Reporting
Council in July 2018 (the “2018 Code”).
Details of the attendance of members of the Committee at meetings held
during the year are shown on page 52. The Group Legal Director &
Company Secretary acts as secretary to the Committee, and the Group
Chief Executive, the Group Finance Director and the Chief People Officer
attend meetings by invitation, but no executive director or other employee
is present during discussions relating directly to their own remuneration.
I will be stepping down as Chairman of the Committee following the
Annual General Meeting in March 2020 but will remain on the Committee
to give my full support to Laurie Bowen when she assumes the Chair.
The Remuneration Committee’s activities during
the year
The table opposite sets out a summary of the Committee’s key
remuneration considerations during the year and the decisions it has
made.
The Committee focused much of its attention during the year on
the application of the 2018 Code and this is explained in detail
in the section below.
A more specific consideration for the Committee in the year was the
2019 Performance Share Plan (“PSP”) award. When approving the award
levels, the Committee was mindful of the lower share price at the grant
date and took the decision to reduce the award value from the normal
level of 150% of salary to 140% of salary for the executive directors. As
noted in last year’s report this award was subject to two equally-weighted
metrics, namely adjusted earnings per share (“EPS”) growth and relative
total shareholder return (“TSR”). The target range for the adjusted EPS
measure was set in accordance with our long-term views of performance
but the baseline position was adjusted upwards to take account of the fact
that the reported EPS for 2018 was at a depressed level. This adjustment
ensures the EPS target growth range is challenging, yet realistic.
Directors’ remuneration report
Remuneration overview
Andrew Davies Chairman of the Remuneration Committee
Remuneration Committee members
Andrew Davies (Chairman)
Laurie Bowen (appointed August 2019)
Carl-Peter Forster
Stephen King (appointed December 2018)
Nigel Young
Introduction
I am pleased to present the directors’ remuneration report for the year
ended 31 October 2019.
The report comprises:
> my annual report on the activities of the Remuneration Committee
during the year;
> the annual report on remuneration, which explains how the directors’
remuneration policy was implemented in 2019;
> additional statutory information on remuneration arrangements;
> a summary of the directors’ remuneration policy; and
> an overview of how the policy will be implemented in 2020.
Our current directors’ remuneration policy was approved by shareholders
at the 2019 Annual General Meeting, with 90.7% of shareholders having
voted in favour. A summary of the approved policy which applied during
the year is set out on pages 81 to 83. The full policy can be found in the
2018 directors’ remuneration report in the 2018 annual report and
accounts, which is published on the Company’s website.
66
Chemring Group PLC | Annual report and accounts 2019
Summary of major activities and decisions of the
Committee in 2019
Salary
> 2019 salary reviews for the executive directors
and members of the senior leadership team
Annual bonus
> Consideration of the 2018 annual bonus
plan outturn
Performance
Share Plan
(“PSP”)
> Approval of the 2019 annual bonus plan
financial targets and personal objectives for the
executive directors
> Approval of changes to the structure of the
2019 annual bonus plan for the business unit
management teams
> Approval of the 2019 annual bonus
plan payments
> Consideration of vesting outcomes for PSP
awards made in 2016 and 2017
> Approval of 2019 PSP awards and performance
conditions, including changes to the TSR
comparator group
> Consideration of “good leaver” status for
certain participants on cessation of employment
> Consideration of adjustments to performance
targets following disposal of the commoditised
energetics businesses
Governance
> Consultation on the remuneration policy
submitted for approval to the 2019 Annual
General Meeting and consideration of feedback
received from shareholders and shareholder
representative bodies
> Review of new governance and reporting
requirements in relation to directors’
remuneration
Other
> Review of annual directors’
remuneration report
Performance outcomes
As set out in the strategic review, this has been a year of strong
performance for the Group, with a number of positive achievements
against our short and longer-term objectives.
Performance against the 2019 annual bonus and PSP targets is explained
in more detail on pages 72 to 75 but in summary:
> Annual bonus: The EPS and operating cash flow targets within the annual
bonus plan were fully achieved and hence 80% of bonus entitlement is
payable to the executive directors in respect of financial performance.
Personal objectives were deemed 90% satisfied and the total bonus
payable is therefore 98% of maximum.
> PSP awards (subject to performance in the year ended 31 October 2019):
The EPS performance condition was fully satisfied and the TSR
performance condition was partially satisfied, and awards granted in
March 2017 will therefore vest at 69.95% of total award value on
24 March 2020 subject to continued employment.
The Committee considered the outcomes in the context of broader
performance indicators and was satisfied that no discretion was required.
Implementation for 2020
Base salaries were reviewed in December 2019 and the Committee
approved an increase of 2.5% for all executive directors to take effect
from 1 January 2020. The increase is below the average budgeted salary
increase for UK employees.
No changes will be made to the structure of the annual bonus plan for
the executive directors for 2020.
With regards to the PSP, a change will be made to the comparator
group for the relative TSR performance condition for future awards.
The comparator group previously comprised a small group of peer
companies operating in the defence and technology sectors but with
increasing consolidation in these sectors, we have seen a number of
companies delist in the last few years, which has reduced the size of
the meaningful comparator group. Against this background, relative
TSR will be measured against the FTSE All-Share (excluding investment
trusts) for future PSP awards.
No other changes are proposed to the implementation of the directors’
remuneration policy for 2020.
Chemring Group PLC | Annual report and accounts 2019
67
Governance Directors’ remuneration report continued
Remuneration overview continued
Compliance with the 2018 UK Corporate Governance Code
We have reviewed the operation of the Remuneration Committee against the 2018 Code, and the compliance of our current directors’ remuneration
policy and its application with the 2018 Code. Whilst the Company was not required to comply with the 2018 Code during the year under review, the
following table demonstrates where we are currently compliant and the actions which we are taking to ensure full compliance in the current financial year.
Code provision
Current position
Chair of Remuneration Committee to have twelve
months’ service on a remuneration committee
Remuneration Committee to set remuneration
for senior management
Remuneration Committee to review workforce
remuneration and related policies
Total vesting and holding period of five years
or more for share awards
Formal policy for post-employment
shareholding requirements
> The terms of reference for the Remuneration Committee have been updated to
reflect this requirement. The current Chairman had served on the Remuneration
Committee for more than twelve months when he took up his appointment and
Laurie Bowen will also have served on another Remuneration Committee for more
than twelve months when she takes up the Chair.
> The Remuneration Committee has set remuneration arrangements for the
senior management of the Group’s businesses outside the US for a number
of years. In the US, the US Board has established a Compensation Committee
to set the remuneration arrangements for the senior management of the
US businesses, in accordance with the requirements of our Special Security
Agreement with the US Government. The US Compensation Committee
consults with the Remuneration Committee where appropriate.
> The Remuneration Committee reviewed incentive arrangements for the
business unit leaders and their direct reports during the year, and agreed
changes to align the arrangements with those of the executive directors.
The Committee will review workforce remuneration arrangements more
widely in 2020.
> The current remuneration policy includes a provision that all shares vesting
under PSP awards granted from March 2019 onwards will be subject to an
additional two-year holding period. This condition was applied to all awards
made under the PSP in 2019.
> The introduction of a further two-year holding period for PSP awards and
the treatment of deferred shares for leavers, which will normally only vest
on their normal vesting date, is considered to be a sufficient formal policy
to address this requirement. The Committee will consider whether there
is a need to introduce any further provisions during the course of 2020,
as market practice evolves in this area.
Discretion to override formulaic outcomes
> The annual bonus plan and PSP documentation was updated during the year
to reflect this provision.
Alignment of pension contributions
> The current remuneration policy provides for a maximum pension contribution
of 10% of base salary for new executive director appointments, which more
closely aligns with the current average contribution rate for UK employees.
This provision was enacted on the appointment of Michael Ord in June 2018.
The pension level for Andrew Lewis and Sarah Ellard remains unchanged,
reflecting these were legacy arrangements agreed at their appointment. For
information, pension arrangements across the UK workforce range from 4%
to 20% of salary.
Extended malus and clawback provisions
> The annual bonus plan and PSP rules were updated during the year to include
wider malus and clawback provisions.
68
Chemring Group PLC | Annual report and accounts 2019
When developing the current directors’ remuneration policy for the executive directors, the Remuneration Committee also addressed the following
factors outlined in the 2018 Code:
Factor
How this has been addressed
Clarity
Remuneration arrangements should be transparent and promote
effective engagement with shareholders and the workforce
Simplicity
Remuneration structures should avoid complexity and their
rationale and operation should be easy to understand
Risk
Remuneration arrangements should ensure reputational and
other risks from excessive rewards, and behavioural risks that
can arise from target-based incentive plans, are identified
and mitigated
> The Chairman of the Remuneration Committee consults with major
shareholders on the directors’ remuneration policy, which is subject to
shareholder approval every three years, and on any significant proposed
changes to the policy.
> The employee engagement initiatives introduced by the Board will provide an
opportunity for employees to express their views on a wide range of topics,
including directors’ remuneration arrangements, in future.
> The Company operates only two incentive plans for the executive directors –
an annual bonus plan to incentivise and reward short-term performance and
the PSP, which incentivises long-term performance and aligns management’s
interests with shareholder interests. The annual bonus plan structure for the
executive directors is broadly replicated in the bonus arrangements for the
business unit leaders and their direct reports.
> The annual bonus plan includes non-financial personal objectives covering
the management of risks in areas such as safety and compliance, as well as
requiring bonus deferral.
> The inclusion of broad malus and clawback provisions in the incentive
arrangements and the discretion reserved by the Committee to override
formulaic outcomes also mitigate the risk of inappropriate rewards.
Predictability
The range of possible values of rewards to individual
directors and any other limits of discretions should be
identified and explained at the time of approving the policy
> The directors’ remuneration policy imposes maximum levels for annual bonus
payments and PSP awards, and sets out the potential remuneration scenarios
for executive directors at differing levels of performance. The Remuneration
Committee’s discretions are also detailed in the policy.
Proportionality
The link between individual awards, the delivery of strategy
and the long-term performance of the company should be clear
Outcomes should not reward poor performance
Alignment to culture
Incentive schemes should drive behaviours consistent with
company purpose, values and strategy
> The annual bonus plan targets and performance conditions associated with
PSP awards provide a direct link between individuals’ incentive rewards and
delivery of strategic objectives which underpin the long-term performance
of the Company.
> The annual bonus plan and the PSP require threshold levels of performance
before any payments are made or awards vest, and the Remuneration
Committee retains discretion to override formulaic outcomes if
deemed appropriate.
> The annual bonus plan includes non-financial personal objectives which
embrace the Company’s values of Safety, Excellence and Innovation, and which
are also aligned to the delivery of agreed strategic objectives. The performance
conditions under the PSP also incentivise long-term performance through the
delivery of strategy and shareholder value.
Conclusion
I hope you will find this report helpful and informative and look forward to receiving your support for the resolution on the annual report 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
16 December 2019
Chemring Group PLC | Annual report and accounts 2019
69
Governance Directors’ remuneration report continued
2019 remuneration at a glance
2019 remuneration year in summary
Salary
Salary increases for Andrew Lewis and Sarah Ellard of 3%, in line with the average budgeted salary increase for UK employees.
No increase for Michael Ord in view of his recent appointment.
Annual bonus
Bonuses payable for 2019 performance as follows:
Michael Ord – 122.5% of salary (£526,750)
Andrew Lewis – 98% of salary (£336,257)
Sarah Ellard – 98% of salary (£216,275)
Performance
Share Plan
Awards granted
Awards made in March 2019, valued at 140% of salary, with earnings per share and total shareholder return performance
conditions measured over a three-year period, and a two-year holding period post vesting.
Awards vesting
Awards made in March 2017, which were subject to performance conditions measured over the three years ended
31 October 2019, will vest at 69.95% of award value on 24 March 2020.
Shareholding
Shareholding guideline of 200% of base salary.
Chairman and
non-executive
director fees
No change to the fees for the Chairman and non-executive directors.
Executive directors’ total pay
This chart illustrates the total remuneration received by the executive directors in 2019.
Michael Ord
Michael Ord
Andrew Lewis
Michael Ord
Andrew Lewis
Sarah Ellard
Sarah Ellard
Andrew Lewis
Sarah Ellard
£0.0m
£0.0m
£0.2m
£0.4m
£0.6m
£0.8m
£0.2m
Salary
£0.4m
Pension and benefits
£0.6m
£0.8m
Annual bonus
£1.0m
£1.0m
PSP
£1.2m
£1.2m
£1,021
£1,159
£753
£753
£1,159
£753
Total pay (£’000)
£1,021
Total pay (£’000)
£1,021
Total pay (£’000)
£1,159
£0.0m
Salary
£0.2m
Pension and benefits
£0.4m
£0.6m
Annual bonus
£0.8m
PSP
£1.0m
£1.2m
Annual bonus plan outcome
Annual bonus
This chart illustrates the bonuses payable for performance in 2019. 60% of the bonus amount is payable in cash and 40% will be satisfied by way of an
award of shares deferred for three years.
Michael Ord
Pension and benefits
Total bonus (£’000)
£527
Total bonus (£’000)
Salary
PSP
122.5% 125%
75%
Michael Ord
Andrew Lewis
Michael Ord
Andrew Lewis
Sarah Ellard
Sarah Ellard
Andrew Lewis
Sarah Ellard
£0.0m
£0.0m
£0.0m
60%
60%
60%
75%
75%
98% 100%
98% 100%
£0.2m
98% 100%
98% 100%
98% 100%
£0.3m
122.5% 125%
122.5% 125%
£0.4m
£0.4m
£0.5m
Maximum (% of salary)
£0.5m
Target (% of salary)
98% 100%
£0.2m
Actual (% of salary)
£0.3m
60%
60%
£0.1m
60%
£0.1m
Target (% of salary)
£0.1m
£0.2m
Actual (% of salary)
£0.3m
£0.4m
Maximum (% of salary)
£0.5m
Target (% of salary)
Actual (% of salary)
Maximum (% of salary)
£527
Total bonus (£’000)
£336
£527
£336
£216
£216
£336
£216
£0.6m
£0.6m
£0.6m
Performance share plan outcome
This chart illustrates the total value of the performance share plan awards granted to the executive directors on 24 March 2017 that will vest on
24 March 2020, based on 69.95% vesting of awards. The grant value is based on the share price on the grant date and the vesting value is calculated
Andrew Lewis
on the same basis as in the directors’ emoluments table on page 71.
Andrew Lewis
Grant
Vesting value
Grant
Andrew Lewis
Sarah Ellard
Sarah Ellard
Sarah Ellard
£0.0m
£0.0m
£0.0m
Grant
Grant
Vesting value
Vesting value
Grant
£0.3m
Vesting value
£0.3m
Accrued dividends
£0.1m
£0.2m
£0.1m
Value of shares vesting
£0.2m
Value of shares vesting
£0.1m
£0.2m
Accrued dividends
£0.3m
Value of shares vesting
Accrued dividends
Vesting value
Grant
Vesting value
£0.4m
£0.4m
£0.4m
£0.5m
£0.5m
£0.5m
£0.6m
£0.6m
£0.6m
70
Chemring Group PLC | Annual report and accounts 2019
Annual report on remuneration
This part of the report explains how the directors’ remuneration policy was implemented in 2019. The auditor has reported on certain sections of this
report and stated whether, in its opinion, those sections have been properly prepared in accordance with the Companies Act 2006. Those sections
subject to audit are clearly indicated.
Directors’ emoluments (audited)
The emoluments of all the directors who served during the year are shown below:
Salaries/
fees
£’000
Taxable
benefits 1
£’000
Bonus
(cash and
deferred
shares) 2
£’000
Deferred
share
awards 4
£’000
Pension
benefits 5
£’000
Executives
Michael Ord6
Andrew Lewis
Sarah Ellard
Non‑executives
Carl-Peter Forster
Laurie Bowen7
Andrew Davies8
Daniel Dayan9
Stephen King10
Nigel Young11
Total remuneration
Year
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
430
179
341
332
220
213
200
200
14
—
65
57
5
63
53
—
63
65
1,391
1,109
21
9
20
21
20
20
—
—
—
—
—
—
—
—
—
—
—
—
61
50
PSP 3
£’000
—
—
394
—
253
115
—
—
—
—
—
—
—
—
—
—
—
—
527
—
336
—
216
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
43
—
—
—
—
—
—
—
—
—
—
—
—
—
43
Total
£’000
1,021
206
1,159
419
753
434
200
200
14
—
65
57
5
63
53
—
63
65
43
18
68
66
44
43
—
—
—
—
—
—
—
—
—
—
—
—
1,079
—
647
115
155
127
3,333
1,444
Notes:
1. Comprises an annual car allowance of £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 March 2017, which were based on performance over the three years ended 31 October 2019, will vest in March 2020 and the estimated values, based
on the average share price over the three-month period ended 31 October 2019, equating to 189.77p per share, plus the value of accrued dividends on vesting shares, have been
included in the 2019 emoluments. PSP awards granted in January 2015 vested on 26 January 2018 and have been included in the 2018 emoluments, as they were not reflected in
the 2017 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 and the other executive directors receive a cash supplement of 20%
of salary.
6. Michael Ord joined the Board on 1 June 2018 and was appointed as Group Chief Executive on 1 July 2018. The single total figure shown for 2018 is in respect of the part year
he served.
7. Laurie Bowen was appointed as a non-executive director on 1 August 2019.
8. 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.
9. Daniel Dayan, who resigned as a non-executive director on 30 November 2018, 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.
10. Stephen King was appointed as a non-executive director on 1 December 2018 and was appointed as Chairman of the Audit Committee on 1 August 2019, for which he received
an additional fee of £10,000 per annum with effect from that date, included in the above figures on a pro-rated basis.
11. Nigel Young received an additional fee of £10,000 per annum, included in the figures above, in respect of his Chairmanship of the Audit Committee up until 31 July 2019.
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 2019
71
Governance Directors’ remuneration report continued
Annual report on remuneration continued
Base salary and benefits paid during the year (audited)
Salaries for Andrew Lewis and Sarah Ellard were reviewed in November 2018 and a 3% increase, with effect from 1 January 2019, was approved by the
Committee. The salaries of the executive directors during the year were therefore as follows:
Executive
Michael Ord1
Andrew Lewis
Sarah Ellard
Annual salary from
1 November 2018 to
31 December 2018
£430,000
£333,125
£214,261
Annual salary from
1 January 2019 to
1 October 2019
£430,000
£343,119
£220,689
Note:
1. Michael Ord joined the Board on 1 June 2018 and was appointed as Group Chief Executive on 1 July 2018.
Michael Ord receives a cash allowance of £20,000 per annum in lieu of a company car and the other executive directors receive a cash allowance of
£19,350 per annum. The cash allowances, which are reviewed every three years, were reviewed in December 2019 and have been frozen at current
levels for the next three years.
Details of variable pay opportunity in the year
Annual bonus (audited)
80% of the annual bonus opportunity for 2019 was based on financial targets (namely earnings per share and operating cash flow), with 20% 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 2019 bonus plan,
compared with actual performance, were as follows:
Underlying diluted earnings per share
(continuing operations1)
Underlying operating cash flow
(continuing and discontinued operations)
Note:
1. Excluding the commodotised energetics businesses
Weighting
(80% of overall bonus)
50%
50%
Performance
Target
Stretch
Target
Stretch
Target
9.8p
10.78p
£55.27m
£60.80m
Actual
11.0p
£77.6m
The personal objectives set in respect of the 2019 bonus plan were structured around a common set of strategic objectives which were shared
amongst the executive directors, members of the Executive Committee and each of the business unit leaders, focused as appropriate on their
respective businesses. Details of the key achievements of the executive directors against the common objectives are set out below:
Strategic objective
Safety
> Implementation of new Group HSE Management System
Framework Standard
Key achievements
> Framework Standard implemented Group-wide and first year of three-year
HSE Strategy delivered
> 2019 total recordable injury frequency rate reduced to 0.79, compared to
> Achievement of 50% reduction in recordable injuries
a prior year rate of 2.77, which is a 71% reduction
Excellence
> Delivery of operational excellence and continuous
improvement programme
Innovation
> Implementation of innovation framework encompassing people,
technology, business systems, business processes and infrastructure,
and alignment of the framework with strategy
Governance and assurance
> Implementation of the Operational Framework and establishment
of the operational assurance process
> Development of the internal audit programme
People
> Strengthening of senior leadership team
> Group-wide stocktake of operational excellence workstreams carried out,
with best practice captured and others retired
> Significant progress made across the Group on refocusing management and
resource into continuous improvement activities to improve competitiveness
> Innovation framework in development Group-wide, with projects linked to
continuous improvement activities
> Operational Framework and operational assurance process implemented
across the Group
> Executive directors are working with the Audit Committee to build an
enhanced internal audit plan aligned with the current business risk profile
> Significant changes made in all leadership teams across the UK and the US
> Chemring Development Framework established and talent management
> Establishment of talent management and succession planning activities
activities now being progressed across the Group
> Implementation of leadership and management
> Emerging Leaders Programme, Early Careers Conferences and Line
development programmes
Manager Training Programme delivered
72
Chemring Group PLC | Annual report and accounts 2019
Strategic objective
US operations
> Strengthening of US management organisation
Key achievements
> Significant changes made in all leadership teams across the US
> Chemring Military Products divested and conditional agreement signed for
> Complete disposal of the US commoditised energetics businesses
the sale of Chemring Ordnance
Sensors & Information
> Mobilisation of the US Programs of Record and secure next phase
of AVCAD
> Development of Sensors & Information sector growth strategy
Countermeasures & Energetics
> Complete disposal of UK commoditised energetics businesses
> Deliver UK countermeasures site restart plan
> Commission new production facilities at Kilgore
> Implementation of revised operating model for
Chemring Energetics UK
> Implementation of production capacity increase plan at
Chemring Nobel
> Development of Countermeasures & Energetics sector
growth strategy
> HMDS, JBTDS and EMBD programs mobilised
> All AVCAD milestones delivered, including significant product redesign to
improve performance and reduce cost
> Successful AVCAD customer design review completed with US DoD
customers and progressing to next phase of testing with seventy five
additional prototypes now ordered
> Growth strategy developed and approved by the Board
> Chemring Defence UK divested and Chemring Prime Contracts traded out
> All product lines restarted and automated MTV flare facility now operating 24/5
> Construction of new facilities is progressing well with new programme
leadership team in place, along with a fit-for-purpose governance framework
> New Managing Director appointed at Chemring Energetics UK, and
enhanced leadership team and business organisation established
> Capacity expansion plan developed for Chemring Nobel, with first steps
focusing on improving “right first time” production and programme of
replacement of legacy plant and systems
> Countermeasures & Energetics sector growth strategy developed and approved
by the Board
In addition to the common strategic objectives, Andrew Lewis and Sarah Ellard were also set additional personal objectives in their respective areas of
functional responsibility as follows:
Andrew Lewis
> Strengthening of central and business unit finance team
Key achievements
> New appointments made at head office and in a number of business unit
> Secure increased banking facilities
> Complete dissolution of legacy intra-group financing arrangements
> Develop investor relations strategy
finance teams
> Additional financial support provided by head office to various businesses
> Increased bank facilities secured to cover repayment of loan notes in
November 2019
> Overseas financing arrangements dissolved and EU State Aid claim
being managed
> Implemented investor relations strategy and maintained coverage by at
least six analysts
Sarah Ellard
> Strengthening of UK and US internal legal resource
Key achievements
> UK and US legal teams strengthened with appointment of additional lawyers
> Develop training programme to support the Operational Framework
> Various new training modules developed to support the Operational
> Implement enhancements to the Group’s anti-bribery policies and
Framework and further initiatives planned for 2020
procedures, and issue an updated Code of Conduct
> Completed termination of appointment of over one hundred third party
> Initiate a liability management programme for the legacy UK defined
sales partners
benefit pension scheme
> New Code of Conduct and updated Bribery Act Compliance Manual issued
> Trivial pension commutation exercise and GMP reconciliation completed;
implemented new investment strategy to reduce risk
The Committee assesses performance against the objectives using both qualitative and quantitative evidence. There are no specific weightings given
to each objective and the overall assessed percentage is based on the Committee’s judgement of performance in aggregate, and may reflect other
achievements and factors during the year.
Chemring Group PLC | Annual report and accounts 2019
73
Governance Directors’ remuneration report continued
Annual report on remuneration continued
Details of variable pay opportunity in the year continued
Annual bonus (audited) continued
Based on the above performance, bonuses are payable to the executive directors under the 2019 bonus plan as follows (audited):
Executive
Michael Ord
Andrew Lewis
Sarah Ellard
Maximum bonus
(% of salary)
125%
100%
100%
Bonus paid in
respect of
financial targets
(% of salary)
100%
80%
80%
Bonus paid in
respect of
personal
objectives
(% of salary)
22.5%
18%
18%
Total bonus
payment(£) 1
£526,750
£336,257
£216,275
Note:
1. 40% of bonuses payable are satisfied by way of an award of deferred shares, vesting of which is subject only to continued service.
The Committee reviewed the outcomes in light of broader company and individual performance and is satisfied that no discretion was necessary.
Performance Share Plan (audited)
Vesting of 2017 PSP awards
The PSP awards granted on 24 March 2017 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
5% p.a.
(25% vests)
Full vesting
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 on continuing operations over the three financial years ended 31 October 2019 was 14% p.a. and
100% of the part of the awards subject to the earnings per share measure will therefore vest. The Committee applied discretion to make appropriate
adjustments to the underlying earnings per share to reflect the disposal or closure of three of the commoditised energetics businesses completed during
the year, to ensure that performance was measured on a like-for-like basis.
The Company’s total shareholder return over the performance period ranked 4.6 against a median of 5.0 for the comparator group. 39.9% of the part
of the awards subject to the total shareholder return measure will therefore vest.
In total, 69.95% of the awards granted on 24 March 2017 will vest on 24 March 2020 subject to continued employment.
Details of the awards granted to the executive directors on 24 March 2017 are provided below (audited):
Vesting date
24 March 2020
24 March 2020
Executive
Andrew Lewis
Sarah Ellard
Executive
Andrew Lewis
Sarah Ellard
Note:
1. Value based on the average closing share price of 189.77p over the three-month period ended 31 October 2019.
Number of
shares
at grant
283,430
182,297
Number of
shares
to vest
198,259
127,516
Number of
shares
to lapse
85,171
54,781
Value of shares
to vest 1
£376,236
£241,987
Value of accrued
dividends
£17,446
£11,221
Total value of awards
to vest
£393,682
£253,208
74
Chemring Group PLC | Annual report and accounts 2019
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
Michael Ord
Andrew Lewis
Sarah Ellard
Value
of award
Date
of grant
22 March 2019 140% of salary
22 March 2019 140% of salary
22 March 2019 140% of salary
Closing
share price
on date
of grant
139.6p
139.6p
139.6p
Number of
conditional
shares
awarded
421,568
336,391
216,361
Face
value
£588,509
£469,602
£302,040
% that
vests at
threshold
Vesting
determined by
25% 50% EPS growth and 50%
25%
relative TSR performance
25%
as detailed below
Awards under the PSP are normally granted in January of each year, immediately 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. The grant date for awards made
in 2019 was deferred to after the Annual General Meeting in March 2019, when the new directors’ remuneration policy was approved by shareholders.
The Company’s share price fell over the period from January to March. If the awards had been made in January 2019, the award values would have been
calculated based on a higher closing share price on 17 January 2019 of 155p and a lower number of conditional shares would therefore have been
awarded. In order to address this, the Committee decided to make a one-off reduction in the values of the awards made to the executive directors and
the awards were therefore valued at 140% of salary, rather than 150% of salary. The Committee also agreed that, against this background, the TSR
performance condition associated with the awards would be measured over a three-year period commencing on the date of grant, i.e. 22 March 2019,
rather than from the beginning of the financial year.
Accordingly, the performance conditions applying to the awards made in March 2019 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 2018, and as to the other half of each award on the
Company’s total shareholder return performance over a three-year performance period commencing on date of grant i.e. 22 March 2019.
The earnings per share performance condition 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%
Note:
1. Earnings per share is calculated on an underlying, fully diluted and normalised basis, as specified by the Committee prior to grant.
The Group’s results for the year ended 31 October 2018 were below expectations as a consequence of the incident at the UK countermeasures site
in August 2018. In order to ensure that the baseline performance against which earnings per share growth would be measured was not inappropriately
low, the Committee decided to set an adjusted baseline earnings per share of 11.3p for the year ended 31 October 2018, to reflect the results which
would have been achieved by the Group had the incident not occurred.
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 PSP awards made in prior years has reduced in size over time, as the result of the acquisition of a number of the constituents.
The Committee therefore decided to review and update the comparator group for the 2019 awards to include a wider, more closely aligned group
of peers. The comparator group for the 2019 awards 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.
Any shares that vest in respect of the 2019 awards will be subject to a two-year holding period (after allowing for the sale of sufficient shares to meet
the tax and national insurance liability arising on vesting).
Deferred share awards (audited)
Vesting of deferred share awards
The deferred award over 32,944 shares granted to Sarah Ellard in part satisfaction of her annual bonus for the year ended 31 October 2016 is expected
to vest in full on 19 January 2020. Mrs Ellard will also receive £2,899 in respect of the dividends paid on these shares during the deferral period.
Chemring Group PLC | Annual report and accounts 2019
75
Governance Directors’ remuneration report continued
Annual report on remuneration continued
Pension (audited)
The following table sets out the pension benefits earned by the executive directors during the year. Only Sarah Ellard previously accrued benefits during
her former membership of the Chemring Group Staff Pension Scheme.
Cash in lieu of
pension
contributions
£’000
43
68
44
Total benefit accrued at
31 October 2018
Pension
£’000 p.a.
—
—
24
Cash
£’000
—
—
72
Transfer value
of accrued
benefit at
31 October
2018
£’000
—
—
461
Total benefit accrued at
31 October 2019
Pension
£’000 p.a.
—
—
24
Cash
£’000
—
—
72
Transfer value
of accrued
benefit at
31 October
2019
£’000
—
—
461
Increase in
transfer value
during year
(less members’
contributions)
£’000
—
—
—
Value of
benefit
for single
figure
£’000
43
68
44
Executive
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.
Payments to past directors
Michael Flowers stepped down as Group Chief Executive and as a director on 30 June 2018, although remained an employee until 31 October 2018
to provide transition support to Mr Ord as the incoming Group Chief Executive.
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 of £267,648, which was equivalent to his salary-in-lieu and the fair value for contractual benefits for the balance of his remaining six months’
notice period. Mr Flowers was also reimbursed £10,000 for relocation expenses on his relocation from the UK.
In accordance with the agreement reached with Mr Flowers on cessation of his employment, the deferred award over 80,633 shares granted to
Mr Flowers in part satisfaction of his annual bonus for the year ended 31 October 2016 is expected to vest in full on 19 January 2020. Mr Flowers
will also receive £7,095 in respect of the dividends paid on these shares during the deferral period.
The PSP award over 363,629 shares granted to Mr Flowers on 24 March 2017 is also expected to vest at 69.95% on 24 March 2020, following
satisfaction of the performance conditions as detailed on page 74.
Full details of the termination arrangements agreed with Mr Flowers are set out in the directors’ remuneration report included in the 2018 annual
report and accounts.
76
Chemring Group PLC | Annual report and accounts 2019
Additional statutory information on remuneration arrangements
Directors’ shareholdings (audited)
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 2019 are shown below. All are beneficial holdings.
Executive
Michael Ord
Andrew Lewis
Sarah Ellard
Carl-Peter Forster
Laurie Bowen
Andrew Davies
Stephen King
Nigel Young
Legally
owned
(number
of shares)
50,000
8,720
65,058
30,000
15,000
—
60,500
—
Value of
legally
owned
shares as %
of salary 1
23%
5%
59%
—
—
—
—
—
Guideline
met
No
No
No
—
—
—
—
—
Unvested and subject to performance
conditions under the PSP
2017
award
2018
award
— 394,495
265,791
170,952
—
—
—
—
—
283,430
182,297
—
—
—
—
—
2019
award
421,568
336,391
216,361
—
—
—
—
—
Total at
31 October
2019
816,063
885,612
569,610
—
—
—
—
—
Deferred
bonus share
awards
—
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 201p at 31 October 2019.
The directors’ share interests at 31 October 2019 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 2019.
Outstanding PSP awards (audited)
Number of shares under award
Executive
Michael Ord
Andrew Lewis
Sarah Ellard
At
1 November
2018
394,495
—
394,495
283,430
265,791
—
549,221
222,358
182,297
170,952
—
575,607
Awarded
during
the year
—
421,568
421,568
—
—
336,391
336,391
—
—
—
216,361
Lapsed
during
the year
—
—
—
—
—
—
—
(222,358)
—
—
—
216,361
(222,358)
Vested
during
the year 1
—
—
—
—
—
—
—
—
—
—
—
—
Date of
vesting
26 June 2021
22 March 2022
Closing
share price on
date of grant (p)
218.0
139.6
At
31 October
2019
394,495
421,568
816,063
283,430 1
265,791
336,391
24 March 2020
19 January 2021
22 March 2022
885,612
— 25 January 2019
24 March 2020
19 January 2021
22 March 2022
182,297 1
170,952
216,361
569,610
195.7
190.8
139.6
138.4
195.7
190.8
139.6
Note:
1. As explained above, these awards will vest at 69.95% on 24 March 2020 subject to continued employment.
Chemring Group PLC | Annual report and accounts 2019
77
Governance Directors’ remuneration report continued
Additional statutory information on remuneration arrangements continued
Outstanding PSP awards (audited) continued
Performance conditions for outstanding awards
Measure
Director
Awards to
executive directors
Threshold
vesting
Full
vesting
Awards made on
19 January 2018
Awards made on
26 June 2018
Total compound earnings per share growth
per annum over the three financial years ended
31 October 2020 (50% of award)
Rank of the Company’s total shareholder
return of the members of the comparator
group over the three financial years ended
31 October 2020 (50% of award)
Total compound earnings per share growth
per annum over the three-year period from
1 May 2018 to 30 April 2021 (50% of award)
Rank of the Company’s total shareholder return
of the members of the comparator group over
the three-year period from 1 May 2018 to
30 April 2021 (50% of award)
Andrew Lewis
Sarah Ellard
150% of salary
Michael Ord1
200% of salary
5% p.a.
(25% vests)
10% p.a.
(100% vests)
Median ranking
(25% vests)
Upper quartile
ranking
(100% vests)
5% p.a.
(25% vests)
10% p.a.
(100% vests)
Median ranking
(25% vests)
Upper quartile
ranking
(100% vests)
Note:
1. 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. Any shares which vest under this award will be subject to a two-year holding period.
Outstanding deferred bonus share awards (audited)
Number of shares under award
Executive
Andrew Lewis
Sarah Ellard
At
1 November
2018
41,143
41,143
32,944
25,795
58,739
Awarded
during
the year
—
—
—
—
—
Lapsed
during
the year
—
—
—
—
—
Vested
during
the year
—
—
—
—
—
Outstanding Sharesave options (audited)
Number of shares under award
Executive
Michael Ord
Andrew Lewis
Sarah Ellard
At
1 November
2018
16,853
16,853
12,162
12,162
7,297
7,297
Awarded
during
the year
—
—
—
—
—
—
Lapsed
during
the year
—
—
—
—
—
—
Vested
during
the year
—
—
—
—
—
—
At
31 October
2019
41,143
41,143
32,944
25,795
58,739
At
31 October
2019
16,853
16,853
12,162
12,162
7,297
7,297
Date of
vesting
18 January 2021
Closing
share price on
date of grant (p)
188.0
19 January 2020
18 January 2021
172.0
188.0
Exercise
price
178p
148p
148p
Exercise
date
1 October 2023–
31 March 2024
1 October 2020–
31 March 2021
1 October 2020–
31 March 2021
78
Chemring Group PLC | Annual report and accounts 2019
Total shareholder return performance graph
The following graph shows the Company’s cumulative total shareholder return over the last ten financial years relative to the FTSE 250 and FTSE
SmallCap 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.
The graph shows the value, by 31 October 2019, of £100 invested in Chemring Group PLC on 31 October 2009 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.
)
£
(
l
e
u
a
V
350
300
250
200
150
100
50
0
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
31 Oct 2019
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.
Total remuneration £’000
Annual bonus
(% of maximum)
PSP awards vesting
(% of maximum)
David Price
2011
1,239
2010
1,391
2012
1,325
62%
0%
0%
100%
100% 54.375%
Mark
Papworth/
Michael
Flowers
Mark
Papworth
2013
785
40%
0%
2014
841
50%
0%
Michael Flowers
2016
855
2017
831
68.3%
59.5%
Michael
Flowers/
Michael Ord
2018
969
0%
0%
0%
35%
2015
507
0%
0%
Michael Ord
2019
1,021
98%
0%
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 2018 and 2019 financial years, compared to that of the average for all eligible employees of the Group.
Group Chief Executive
Average of other employees
Salary
0.7%
4.1%
Benefits
(4.5%)
14.6%
Annual bonus
100.0%
107.3%
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. The reporting structure of our UK
entities has meant that collecting robust data on a Group-wide basis, which is in line with the statutory methodology, has been a challenging endeavour.
However, we have put in place processes which will provide the Committee with timely and accurate data from which we can publish our ratio as
required in next year’s report (i.e. for the financial year ending 31 October 2020). In the meantime, the Committee has considered pay ratios on a
simplified basis, using the Chief Executive’s single total figure for 31 October 2019 and the average staff cost at continuing operations as calculated from
note 6 to the Group financial statements (see page 100). This produces a ratio of 19:1.
Chemring Group PLC | Annual report and accounts 2019
79
Governance
Directors’ remuneration report continued
Additional statutory information on remuneration arrangements continued
Percentage change in the Group Chief Executive’s remuneration continued
Group Chief Executive
Average of staff cost1
£’000
1,021
55
Note:
1. Total staff costs at continuing operations of £127m divided by average number of employees of 2,312.
The Committee is mindful that pay ratios, however calculated, are a useful reference point but cannot be considered in isolation. Any movement in
ratios will be reviewed by the Committee to understand the causes and longer-term trends will be monitored.
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
2019
£m
138.1
9.5
8.5
2018
£m
129.2
8.7
7.1
% change
6.9%
9.2%
19.7%
The dividends figures relate to amounts payable in respect of the relevant financial year.
Advisers to the Remuneration Committee
During the year, FIT Remuneration Consultants LLP (“FIT”) were retained by the Remuneration 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 £38,400 (2018: £36,903). Fees were
determined based on the scope and nature of the projects undertaken for the Committee.
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), the Group Legal Director & Company Secretary (Sarah Ellard) and
the Chief People Officer (Clancy Murphy). No executive is involved in discussions on their own pay.
Shareholder voting on the directors’ remuneration policy at the 2019 Annual General Meeting
At the Annual General Meeting held on 21 March 2019, the resolution relating to the directors’ remuneration policy received the following votes
from shareholders:
For
Against
Total votes cast (for and against excluding withheld votes)
Votes withheld1
Total votes cast (including withheld votes)
229,177,007
23,500,902
252,677,909
33,392
252,711,301
90.70%
9.30%
100.0%
0.01%
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.
Shareholder voting on the directors’ remuneration report at the 2019 Annual General Meeting
At the Annual General Meeting held on 21 March 2019, the resolution relating to the directors’ remuneration report received the following votes
from shareholders:
For
Against
Total votes cast (for and against excluding withheld votes)
Votes withheld1
Total votes cast (including withheld votes)
227,060,621
25,617,288
252,677,909
33,392
252,711,301
89.86%
10.14%
100.0%
0.01%
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.
80
Chemring Group PLC | Annual report and accounts 2019
Directors’ remuneration policy
Key objectives
In developing a policy for the executive directors’ remuneration, the Remuneration Committee seeks to:
> maintain a competitive package of rewards required to promote the long-term success of the Company, without being excessive by reference to
market rates across comparator companies, and either encouraging or rewarding inappropriate risk taking;
> ensure performance-related elements:
> are 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; and
> set remuneration in the context of the core values of the business and with the aim of alignment with culture.
The remuneration policy for the executive directors and other senior executives is also 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.
Policy summary
The table overleaf provides a summary of the current directors’ remuneration policy. The full policy was approved by shareholders at the Annual
General Meeting held on 21 March 2019 and can be found in the 2018 directors’ remuneration report included in the 2018 report and accounts on our
website (https://www.chemring.co.uk/investors/annual-reports/2018). The policy remains valid until the 2022 Annual General Meeting.
Further details of the policy are set out on pages 82 and 83, and an explanation of how the policy will be applied in 2020 is set out on pages 84 and 85.
Chemring Group PLC | Annual report and accounts 2019
81
Governance Directors’ remuneration report continued
Directors’ remuneration policy continued
Executive directors
Operation
Element
Maximum
Salary
> Normally reviewed annually with effect from 1 January
> Salary increases will normally be in line with those received by the
> Benchmarked periodically against companies with similar
characteristics within the same sector
> Salaries take account of complexity of the role, market
competitiveness, Group performance and the increases
awarded to the wider workforce
wider workforce
> 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
Bonus
> Paid in cash, with up to 40% deferred as a conditional
> Chief Executive – 125% of salary
award of deferred shares
> 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
> The payment of any earned bonus remains ultimately at
the discretion of the Committee
> Non-pensionable
> 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
Long-term
incentive plan
(performance
share plan
–“PSP”)
> Annual grants of shares, which vest subject to the
Group’s performance measured over at least three years
> Any shares vesting must be held by the executives for a
further period of two years
> Executives are entitled to receive the value of dividend
payments that would otherwise have been paid on
vested awards
> All awards are subject to the discretions given to the
Committee in the plan rules during the vesting period
> Other executive directors – 100% of salary
> Normally 150% of base salary (although grants of up to 200%
of base salary may be made in exceptional circumstances such
as on recruitment)
All employee
share scheme
> The UK Sharesave Plan has standard terms
> Participation limits are those set out by HM Revenue & Customs
from time to time
Pension
> Ongoing pension provision is in the form of a cash
> Legacy arrangements: 20% of base salary cash supplement
supplement, subject to auto-enrolment in the Group’s
defined contribution scheme
> 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
Other benefits
> Main benefits currently provided to UK executives
are a car allowance, life assurance and private
medical insurance
> Executive directors are eligible for other benefits which
may also be introduced
contribution paid in lieu of occupational pension scheme membership
> New appointments: 10% of base salary cash supplement contribution
paid in lieu of occupational pension scheme membership
> 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%.
For information, pension arrangements across the UK workforce
range from 4% to 20% of salary
> Cash allowance in lieu of company car of up to £25,000 per annum
> 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
> Any reasonable business-related expenses (including tax thereon) can
be reimbursed if determined to be a taxable benefit
82
Chemring Group PLC | Annual report and accounts 2019
Chairman and non-executive directors
Element
Operation
Fees
> The Chairman is paid a single fee for all his 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
> 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
> Fee increases, if applicable, are normally effective from April of each year
> In exceptional circumstances, additional fees may be paid where there is a substantial increase in the temporary time commitment
required of non-executive directors
Benefits and
incentives
> Non-executive directors do not participate in any pension, bonus or share incentive plans
Expenses
> Non-executive directors may be compensated for travel, accommodation or hospitality-related expenses in connection with their
roles and any tax thereon
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:
> selecting the participants in the plans on an annual basis;
> determining the timing of grants of awards and/or payment;
> determining the quantum of awards and/or payments (within the limits set out in the remuneration policy);
> determining the extent of vesting based on the assessment of performance;
> 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
> 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).
Executive directors’ service contracts
The current executive directors have rolling service contracts, with effective dates as follows:
Executive
Michael Ord
Date of contract
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)
Further details on the executive directors’ service contracts and the Company’s policy on service contracts are set out within the full directors’
remuneration policy included in the 2018 annual report and accounts.
The executive directors’ service contracts are available for inspection at the Company’s registered office.
The Chairman’s and non-executive directors’ letters of appointment
The following table provides details of the terms of appointment for the Chairman and the current non-executive directors:
Name
Carl-Peter Forster
Laurie Bowen
Andrew Davies
Stephen King
Nigel Young
Date original term commenced
1 May 2016
Date current term commenced
1 May 2019
Expected expiry date of current term
30 April 2022
1 August 2019
17 May 2016
1 August 2019
17 May 2019
31 July 2022
16 May 2022
1 December 2018
1 December 2018
30 November 2021
1 May 2013
1 May 2019
30 April 2020
Chemring Group PLC | Annual report and accounts 2019
83
Governance Directors’ remuneration report continued
Directors’ remuneration policy continued
Application of the remuneration policy in 2020
This part of the report sets out how the approved directors’ remuneration policy will be implemented in 2020.
Executive directors
Element
Purpose and link to strategy
Implementation
Salary
> Reflects the performance
of the individual, their skills
and experience over time,
and the responsibilities of
their role
> The executive directors’ salaries were reviewed in December 2019, and the following salary
increases were agreed, effective 1 January 2020:
> Michael Ord – £440,750
> Andrew Lewis – £351,696
> Provides an appropriate
> Sarah Ellard – £226,206
Benefits
Bonus
level of basic fixed income,
avoiding excessive risk
arising from over-reliance
on variable income
> Provides a competitive
package of benefits that
assists with recruitment
and retention
> Incentivises annual delivery
of financial, strategic and
personal goals
> Maximum bonus only
payable for achieving
demanding targets
> The percentage increase of 2.5% applied to the executive directors’ salaries is below the average
budgeted salary increase for UK employees
> No changes are proposed to the structure of pension and benefits provision for 2020
> The annual bonus plan for 2020 will operate on a similar basis to 2019. The performance
measures and weightings for the annual bonus plan will therefore be as follows:
> Earnings per share
> Operating cash flow
> Personal objectives
40%
40%
20%
> Delivery of a proportion
> Personal objectives have been set to reflect performance in the following key areas:
of bonus in deferred shares
plus the ability to receive
dividend equivalents
provides alignment with
shareholders’ interests and
assists with retention
> Safety, including continuing implementation of the Group HSE Management System Framework
Standard and delivery of further reductions in the Group’s total recordable injury frequency
(“TRIF”) rate and frequency of process safety events
> Implementation of a continuous improvement plan to improve competitiveness
> Establishment of a framework for encouraging, capturing and rewarding innovation to
improve competitiveness
> Ongoing implementation of the Operational Framework and associated assurance processes
> People management, including talent management, succession planning and leadership
development, and promotion of “Employee Voice”
> Development of integrated global countermeasures organisation
> Progress new production facilities at Kilgore
> Deliver growth strategy for Roke
> Maximise value of the US Programs of Record and secure next phase of the AVCAD program
> Development of a growth strategy for the US market
> 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 2020 bonus plan is consistent with the directors’ remuneration policy detailed on pages 82
and 83, in terms of maximum bonus opportunity, deferred share arrangements and clawback
84
Chemring Group PLC | Annual report and accounts 2019
Element
Purpose and link to strategy
Implementation
Performance
Share Plan
(“PSP”)
> Incentivises executives to
achieve targets aligned to
the Group’s main strategic
objectives of delivering
sustainable growth and
shareholder returns
> Delivery of awards in
shares plus the ability to
receive dividend
equivalents helps align
executives’ rewards with
shareholders’ interests
> It is intended that the performance condition for the annual awards granted to the executive
directors under the PSP in 2020 will incorporate two equally-weighted metrics, namely growth in
adjusted EPS and relative TSR measured against the FTSE All-Share (excluding investment trusts)
> 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 2020 awards will be measured as follows:
Total compound earnings per share growth
over the three-year performance period
Less than 5% p.a.
% of earnings per share part that may vest
0%
5% p.a.
25%
Between 5% p.a. and 10% p.a.
On a straight line basis between 25% and 100%
10% p.a. or more
100%
> The TSR performance condition for the 2020 awards will be measured as follows:
Rank of the Company’s total shareholder return against
the total shareholder return of the FTSE All-Share
(excluding investment trusts)
Below median
% of earnings per share part that may vest
0%
Median
25%
Between median and upper quartile
On a straight line basis between 25% and 100%
Upper quartile or above
100%
Notes:
1. The comparator group used for the PSP awards previously comprised a small group of peer companies operating in the defence and technology sectors but with increasing
consolidation in these sectors, we have seen a number of companies delist in the last few years, which has reduced the size of the meaningful comparator group. Against this
background, relative TSR will be measured against the FTSE All-Share (excluding investment trusts) for future PSP awards.
2. The EPS target range is considered stretching when viewed against internal forecasts and a broader reflection of prevailing macroeconomic factors.
Fees for the Chairman and non-executive directors
As detailed in the directors’ 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 2020 are
set out below:
Chairman’s fee
Other non-executive directors’ base fee
Audit Committee Chair fee
Remuneration Committee Chair fee
Approval of the directors’ remuneration report
The directors’ remuneration report was approved by the Board on 16 December 2019.
Signed on behalf of the Board
Andrew Davies
Chairman of the Remuneration Committee
16 December 2019
Fee as at
1 January 2020
£200,000
£55,000
£10,000
£10,000
Percentage
increase
0%
0%
0%
0%
Chemring Group PLC | Annual report and accounts 2019
85
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 2019.
Employees and employee consultation
Details of the Group’s employment policies and employee consultation
practices are set out on pages 42 and 43.
The following sections of the annual report are incorporated into the
directors’ report by reference:
> strategic report on pages 7 to 45;
> corporate governance report on pages 48 to 59;
> Audit Committee report on pages 60 to 63;
> directors’ remuneration report on pages 66 to 85;
> directors’ responsibilities statement on page 89; and
> notes to the Group financial statements as detailed in this section.
Business review
The strategic report on pages 7 to 45 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 profit attributable to the Group’s shareholders for the year was
£21.9m (2018: £105.8m loss).
The directors are recommending the payment of a final dividend of
2.4p per ordinary share which, together with the interim dividend of
1.2p per share paid in September 2019, gives a total for the year of 3.6p
(2018: 3.3p). The final dividend is subject to approval by shareholders
at the Annual General Meeting on 4 March 2020 and has not therefore
been included as a liability in these financial statements.
Directors and their interests
The current directors are shown on pages 46 and 47.
Daniel Dayan stepped down as a non-executive director on 30 November
2018. Stephen King was appointed as a non-executive director on
1 December 2018 and Laurie Bowen was appointed as a non-executive
director on 1 August 2019.
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 4 March 2020.
Details of the service contracts entered into between the Company and
the executive directors are set out in the directors’ remuneration report
on page 83. 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 2019.
Information required in relation to directors’ shareholdings is set out
in the directors’ remuneration report on page 77.
86
Chemring Group PLC | Annual report and accounts 2019
Political donations
No political donations were made during the year (2018: £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 26.
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.
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.
Substantial shareholdings
At 13 December 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.
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 (2018: nil)
during the year. At 31 October 2019, 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 2019).
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.
Name
Invesco Limited
Schroders Plc
Old Mutual Asset Managers
FIL Limited
J O Hambro Capital Management Limited
Jupiter Asset Management Limited
BlackRock, Inc.
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
Sterling Strategic Value Fund S.A., Sicav-Raif
BT Pension Scheme Trustees Limited as Trustee of
the BT Pension Scheme
Norges Bank
% interest
8.1
7.2
5.1
5.1
5.0
Below 5.0
Below 5.0
4.9
4.9
4.8
4.8
4.8
4.8
4.8
4.6
4.0
3.8
3.3
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 29 July 2019.
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. All outstanding awards under the PSP lapsed during the year.
Chemring Group PLC | Annual report and accounts 2019
87
Governance Directors’ report continued
Employee share schemes and plans continued
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
22 March 2019.
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 56.
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:
> capitalised interest (see note 7);
> long-term incentive schemes (see directors’ remuneration report);
> allocation of equity securities for cash (see note 24);
> contracts of significance (see note 34);
> election of independent directors (see corporate governance report);
> contractual arrangements (see directors’ report);
> details of independent directors (see corporate governance report); and
> 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 Rule 6.1.2.A) and the Group complies with the
independence provisions of the Listing Rules.
88
Chemring Group PLC | Annual report and accounts 2019
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
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 4 March 2020, together with explanatory notes, appear in the separate
Notice of Annual General Meeting sent to all shareholders.
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:
> select suitable accounting policies and then apply them consistently;
> make judgements and estimates that are reasonable, relevant and reliable;
> for the Group financial statements, state whether they have been
prepared in accordance with IFRSs as adopted by the EU;
> for the parent company financial statements, state whether applicable
UK accounting standards have been followed, subject to any material
departures disclosed and explained in the parent company financial
statements;
> assess the Group and parent company’s ability to continue as a going
concern, disclosing, as applicable, matters related to going concern; and
> 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 report that comply 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.
Responsibility statement of the directors in respect
of the annual financial report
We confirm that to the best of our knowledge:
> 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
> 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 16 December 2019 and is signed on its behalf by:
Michael Ord
Group Chief Executive
16 December 2019
Sarah Ellard
Group Legal Director
16 December 2019
Chemring Group PLC | Annual report and accounts 2019
89
Governance Consolidated income statement
For the year ended 31 October 2019
Underlying
performance
£m
Note
2019
Non-
underlying
items 1
£m
Total
£m
Underlying
performance
£m
335.2
—
335.2
297.4
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
1,2
2,4
7
8
5
44.0
(4.6)
39.4
(7.9)
31.5
2.7
34.2
(12.7)
—
(12.7)
4.3
(8.4)
(3.9)
(12.3)
2019
2018
Non-
underlying
items 1
£m
—
(46.9)
—
(46.9)
(13.1)
(60.0)
(71.2)
(131.2)
2018
Total
£m
297.4
(15.9)
(6.1)
(22.0)
(18.8)
(40.8)
(65.0)
(105.8)
Total
(14.6)p
(14.6)p
(37.8)p
(37.8)p
31.3
(4.6)
26.7
(3.6)
23.1
(1.2)
21.9
Total
8.2p
8.1p
7.8p
7.7p
31.0
(6.1)
24.9
(5.7)
19.2
6.2
25.4
Underlying
performance
6.9p
6.7p
9.1p
8.9p
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
Note performance
10
10
10
10
11.2p
11.0p
12.2p
12.0p
90
Chemring Group PLC | Annual report and accounts 2019
Consolidated statement of comprehensive income
For the year ended 31 October 2019
Profit/(loss) 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
Tax on exchange differences on translation of foreign operations
Total comprehensive income/(loss) attributable to equity holders of the parent
Note
30
23
23
2019
£m
21.9
1.6
(0.7)
0.9
(5.2)
0.2
(5.0)
17.8
2018
£m
(105.8)
0.9
(0.1)
0.8
5.2
(0.5)
4.7
(100.3)
Chemring Group PLC | Annual report and accounts 2019
91
Financial statements Total
£m
294.2
21.9
(3.6)
(0.5)
17.8
0.8
2.5
(9.5)
—
—
—
—
—
—
—
—
—
(7.8)
305.8
Own
shares
£m
(9.6)
—
—
—
—
—
—
—
1.8
—
(7.8)
Total
£m
401.2
(105.8)
6.1
(0.6)
(100.3)
0.1
0.1
(8.7)
1.8
—
294.2
21.9
(5.0)
(0.5)
16.4
—
2.5
(9.5)
(8.0)
8.5
Retained
earnings
£m
113.5
(105.8)
8.5
(0.6)
(97.9)
—
0.1
(8.7)
—
0.1
7.1
Consolidated statement of changes in equity
For the year ended 31 October 2019
Share
premium
account
£m
305.4
Special
capital
reserve
£m
12.9
Revaluation
reserve
£m
1.0
Translation
reserve
£m
(27.2)
Retained
earnings
£m
7.1
Own
shares
£m
(7.8)
At 1 November 2018
Profit after tax
Other comprehensive income/(loss)
Tax relating to components of other
comprehensive income
Total comprehensive income
Ordinary shares issued
Share-based payments (net of settlement)
Dividends paid
Transfers between reserves1
Share
capital
£m
2.8
—
—
—
—
—
—
—
—
—
—
—
—
0.8
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1.4
—
1.4
—
—
—
8.0
At 31 October 2019
2.8
306.2
12.9
1.0
(17.8)
1. Transfer to reclassify exchange differences on translation of foreign subsidiaries included in retained earnings to the translation reserve.
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
Share
premium
account
£m
305.3
Special
capital
reserve
£m
12.9
Revaluation
reserve
£m
1.1
Translation
reserve
£m
(24.8)
—
—
—
—
—
—
—
—
—
—
—
—
—
0.1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(0.1)
1.0
—
(2.4)
—
(2.4)
—
—
—
—
—
(27.2)
At 31 October 2018
2.8
305.4
12.9
92
Chemring Group PLC | Annual report and accounts 2019
Consolidated balance sheet
As at 31 October 2019
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
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
2019
£m
£m
2018
£m
£m
11
12
12
13
30
23
15
16
17
21
29
18
19
22
21
29
18,33
22
23
18,24
21
24
25
25
25
26
108.5
26.1
25.3
170.0
9.6
18.5
78.1
53.7
1.3
0.2
(69.2)
(68.3)
(4.8)
(4.0)
(0.9)
(7.7)
(12.4)
(23.0)
(0.1)
(0.3)
109.2
24.0
37.6
148.1
7.5
36.8
358.0
363.2
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)
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
133.3
7.0
498.3
(147.2)
(1.8)
(43.5)
(192.5)
305.8
2.8
306.2
12.9
1.0
(17.8)
8.5
313.6
(7.8)
305.8
These financial statements of Chemring Group PLC (registered number 86662) were approved and authorised for issue by the Board of directors on
16 December 2019.
Signed on behalf of the Board
Michael Ord
Director
Andrew Lewis
Director
Chemring Group PLC | Annual report and accounts 2019
93
Financial statements Consolidated cash flow statement
For the year ended 31 October 2019
Cash flows from operating activities
Cash generated from continuing underlying operations
Cash impact of continuing non-underlying items
Cash generated from discontinued underlying operations
Cash impact of discontinued 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
Proceeds on disposal of subsidiary
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
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 (including bank overdraft)
Note
31
9
32
17,33
2019
£m
63.9
(5.3)
13.7
(7.1)
65.2
(0.4)
(2.9)
61.9
(3.8)
(41.0)
—
2.4
—
0.7
(41.7)
(9.5)
(4.9)
(0.3)
—
(18.1)
(32.8)
(12.6)
9.6
(0.3)
(3.3)
2018
£m
44.7
(7.5)
12.2
(0.1)
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
94
Chemring Group PLC | Annual report and accounts 2019
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
Rest of the world
UK
US
Europe
Asia Pacific
Rest of the world
Sensors
& Information
£m
60.8
57.5
4.0
5.0
4.6
Countermeasures
& Energetics
£m
30.2
125.5
26.6
19.7
1.3
131.9
203.3
Sensors
& Information
Restated
£m
46.7
25.6
3.8
7.3
3.9
Countermeasures
& Energetics
Restated
£m
35.5
112.0
31.3
30.7
0.6
87.3
210.1
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
Sensors
& Information
£m
49.0
82.9
Countermeasures
& Energetics
£m
202.2
1.1
131.9
203.3
Sensors
& Information
Restated
£m
22.6
64.7
Countermeasures
& Energetics
Restated
£m
205.4
4.7
87.3
210.1
2019
£m
91.0
183.0
30.6
24.7
5.9
335.2
2018
£m
82.2
137.6
35.1
38.0
4.5
297.4
2019
£m
251.2
84.0
335.2
2018
£m
228.0
69.4
297.4
All revenues recognised arose from contracts with customers.
As at 31 October 2019 £448.7m (2018: £393.7m) of revenue was outstanding in respect of obligations that were unfulfilled or only partially fulfilled as
at the year end. £287.0m (2018: £241.9m) of this revenue is expected to be recognised in the next financial year and £161.7m (2018: £151.8m) in future periods.
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, based on the products and services they offer. These
segments are the basis on which the Group reports its segmental information.
With effect from 1 November 2018, the Group revised its reporting segments to reflect the organisational changes announced in 2018. The Group
was previously organised under three operating segments – Countermeasures, Sensors and Energetics – whereas is now organised under two operating
segments – Sensors & Information and Countermeasures & Energetics. Financial information for 2018 has been represented to reflect these new reporting
segments. The results of the previously reported Countermeasures and Energetics segments have been combined in their management and internal
reporting to the Group Chief Executive and Board, therefore are reported here as a single operating segment.
The principal activities of each segment are as follows:
Sensors & Information Development and manufacture of Explosive Hazard Detection (EHD) equipment, chemical and biological threat detection
equipment, electronic countermeasures and network protection technologies.
Countermeasures &
Energetics
Development and manufacture of expendable countermeasures for air, sea and land platforms, cartridge/propellant actuated
devices, pyrotechnic devices for satellite launch and deployment, missile components, propellants, separation sub-systems,
actuators and energetic materials.
Chemring Group PLC | Annual report and accounts 2019
95
Financial statements Notes to the Group financial statements continued
2. Business segments continued
A segmental analysis of revenue and operating profit/(loss) is set out below:
Year ended 31 October 2019
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
Finance expense
Profit before tax
Tax
Profit for the year from continuing operations
Discontinued operations
Profit for the year
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 profit/(loss)
Finance expense
Loss before tax
Tax
Loss for the year from continuing operations
Discontinued operations
Loss for the year
Sensors
& Information
£m
131.9
Countermeasures
& Energetics
£m
203.3
Unallocated
£m
—
29.3
(2.3)
(0.7)
26.3
(6.6)
—
(6.6)
19.7
41.7
(13.5)
(0.7)
27.5
(5.5)
—
(5.5)
22.0
(9.8)
—
—
(9.8)
—
(0.6)
(0.6)
(10.4)
(4.6)
(15.0)
(3.6)
(18.6)
(1.2)
(19.8)
Sensors
& Information
Restated
£m
87.3
Countermeasures
& Energetics
Restated
£m
210.1
Unallocated
£m
—
18.5
(1.7)
(1.5)
15.3
(6.4)
(3.7)
(10.1)
5.2
39.6
(13.5)
(2.2)
23.9
(5.2)
(15.9)
(21.1)
2.8
(8.1)
(0.1)
—
(8.2)
—
(15.7)
(15.7)
(23.9)
(6.1)
(30.0)
(18.8)
(48.8)
(65.0)
Total
£m
335.2
61.2
(15.8)
(1.4)
44.0
(12.1)
(0.6)
(12.7)
31.3
(4.6)
26.7
(3.6)
23.1
(1.2)
21.9
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)
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
2019
£m
158.0
169.3
9.1
21.6
358.0
2018
£m
175.8
160.8
7.7
18.9
363.2
Information on major customers
Included in segmental revenues for continuing operations are revenues of £137.9m (2018: £92.4m), 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.
96
Chemring Group PLC | Annual report and accounts 2019
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 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
Amortisation of acquired intangibles 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
Non-underlying discontinued operations after tax
Impact of non-underlying items on profit after tax
Underlying profit after tax
Statutory profit/(loss) after tax
2019
£m
—
—
—
—
—
—
(0.6)
(0.6)
—
—
(12.1)
(12.7)
4.3
(8.4)
(3.9)
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)
(12.3)
(131.2)
34.2
21.9
25.4
(105.8)
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.
Amortisation of acquired intangibles
Included in non-underlying items is the amortisation charge arising from business combinations of £12.1m (2018: £11.6m). Amortisation of acquired
intangibles arising from business combinations is associated with acquisition costs under IFRS 3 Business Combinations. IFRS requires intangibles to be
recognised on acquisition that would not have been capitalised had the business grown organically under Chemring’s ownership. As such, these costs
are not reflective of the underlying costs of the Group and therefore, in order to provide an explanation of results that is not distorted by the history
of business units being acquired rather than organically developed, have been excluded from the underlying measures.
Derivative financial instruments
Included in non-underlying items is a £0.6m loss (2018: £0.4m loss) 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.
Acquisition and disposal-related costs
In 2018, acquisition and disposal-related costs of £4.1m related 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.
Business restructuring costs
In 2018, business restructuring costs of £8.1m related to the non-capital costs/asset write offs and demolition element of the Tennessee capacity
expansion programme.
Legal costs
In 2018, legal costs of £12.8m were in relation to ongoing investigations.
Change of Chief Executive
In the year ended 31 October 2018, the costs associated with the change of Chief Executive were £1.7m. As disclosed in the directors’ report contained
in the 2018 annual report and accounts, 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. An additional liability of £0.8m was recognised in our 2018 results.
Impairment of capitalised development costs
In 2018, an impairment of capitalised product development costs of £7.4m was recognised following the appointment of the 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.
Chemring Group PLC | Annual report and accounts 2019
97
Financial statements Notes to the Group financial statements continued
3. Alternative performance measures continued
Tax
The tax impact of non-underlying items in the year ended 31 October 2018 comprised 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 profit/(loss)
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
2019
£m
31.3
12.1
1.3
0.1
—
15.8
60.6
0.6
61.2
2018
£m
(15.9)
11.6
3.6
0.1
7.4
16.0
22.8
27.2
50.0
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 2019 at the average exchange rates for the comparative year ended 31 October 2018.
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 losses/(gains)
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
98
Chemring Group PLC | Annual report and accounts 2019
2019
£m
47.2
5.0
12.1
1.3
0.1
14.9
0.9
0.7
0.6
0.4
(0.5)
0.2
127.0
91.2
2019
£m
0.2
0.4
0.6
0.1
0.7
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
4. Operating profit continued
Included in the fees for the audit of the Company’s annual accounts is £0.1m (2018: £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 60 to 63, 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.
5. Results from discontinued operations
A strategic review of the Group’s energetics portfolio was conducted during the year ended 31 October 2018 resulting in a decision to exit the
commoditised energetics businesses. Accordingly, during the year the sale of Chemring Military Products, Inc. and Chemring Defence UK Limited were
completed and Chemring Prime Contracts Limited was closed. The sale of the remaining business in discontinued operations, Chemring Ordnance, Inc.,
was announced on 21 November 2019.
Revenue
Underlying operating (loss)/profit from discontinued operations
Tax on the underlying operating (loss)/profit from discontinued operations
Underlying profit after tax
Profit after tax is analysed as:
Before exceptional items
Exceptional items
Tax on exceptional items
Loss for the year from discontinued operations
2019
£m
43.4
(3.5)
6.2
2.7
2.7
(3.8)
(0.1)
(3.9)
(1.2)
2018
£m
138.6
8.0
(1.8)
6.2
6.2
(72.0)
0.8
(71.2)
(65.0)
In 2019 the exceptional items include a loss on disposal of £2.8m relating to the sale of Chemring Military Products, Inc. and Chemring Defence UK Limited,
an increase to the disposal provision in respect of the disposal of the European Munitions businesses in 2014 of £1.1m, business restructuring costs of
£0.8m and a £0.9m exceptional credit relating to the realisation of working capital that was previously impaired in respect of Chemring Ordnance, Inc.
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 and Engineering Limited
was recorded.
Amortisation of acquired intangibles arising from business combinations is associated with acquisition costs under IFRS 3 Business Combinations. IFRS
requires intangibles to be recognised on acquisition that would not have been capitalised had the business grown organically under Chemring’s ownership.
As such, these costs are not reflective of the underlying costs of the Group and therefore, in order to provide an explanation of results that is not
distorted by the history of businesses units being acquired rather than being organically developed, have been excluded from the underlying measures.
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 for improved comparability between reporting periods. This is in line with the
Group’s accounting policy.
The £6.2m tax credit in 2019 is comprised of a £1.3m current year tax credit and a £4.9m credit relating to prior year tax adjustments.
Details of the sale of the subsidiaries
The Group completed the sale of the entire issued stock capital of Chemring Military Products, Inc. to Global Ordnance LLC on 5 April 2019.
Under the terms of the agreement, the Group received £1.7m upon completion of the transaction. Deferred consideration of £0.7m is payable on
the first anniversary of the transaction. A further deferred consideration amount of £0.4m is payable on the second anniversary of the transaction.
All deferred consideration is considered recoverable.
The Group is entitled to further contingent consideration following the sale of up to £0.8m if certain performance-related and event-driven milestones
are achieved by Chemring Military Products, Inc. No value has been assigned to this consideration based on the probability assessment of the associated
milestones being reached.
The Group completed the sale of the entire issued share capital of Chemring Defence UK Limited to PWD Group Limited on 24 June 2019. Under the terms
of the agreement, the Group received £0.0m upon completion of the transaction. Contingent consideration is payable if certain performance-related
and event-driven milestones are achieved by Chemring Defence UK Limited. No value has been assigned to this consideration based on the probability
assessment of the associated milestones being reached.
Chemring Group PLC | Annual report and accounts 2019
99
Financial statements Notes to the Group financial statements continued
5. Results from discontinued operations continued
Details of the sale of the subsidiaries continued
Consideration received or receivable:
Cash
Fair value of deferred consideration
Total disposal consideration
Net assets and liabilities disposed of
Disposal costs
Loss on disposal before tax
Income tax on loss on disposal
Loss on disposal after tax
The carrying amount of assets and liabilities as at the date of sale were:
Trade and other receivables
Total assets
Trade and other payables
Total liabilities
Net assets
The cash flow from discontinued operations is disclosed in note 31.
6. Staff costs
The average monthly number of employees, including executive directors, was:
Direct
Indirect
Continuing operations
Discontinued operations
2019
£m
2019
£m
Chemring
Military
Products, Inc.
Chemring
Defence UK
Limited
1.7
1.1
2.8
(3.6)
(1.1)
(1.9)
—
(1.9)
—
—
—
(0.4)
(0.5)
(0.9)
—
(0.9)
5 April 2019
£m
24 June 2019
£m
Chemring
Military
Products, Inc.
14.3
Chemring
Defence UK
Limited
3.6
14.3
(10.7)
(10.7)
3.6
3.6
(3.2)
(3.2)
0.4
Total
£m
1.7
1.1
2.8
(4.0)
(1.6)
(2.8)
—
(2.8)
Total
£m
17.9
17.9
(13.9)
(13.9)
4.0
2019
Number
1,324
988
2,312
262
2,574
2018
Number
1,323
882
2,205
418
2,623
At the year end, the number of employees was 2,616 of which 163 were at discontinued operations (2018: 2,559 of which 353 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
2019
£m
106.8
12.5
5.2
2.5
127.0
2018
£m
94.8
10.6
5.8
1.1
112.3
100
Chemring Group PLC | Annual report and accounts 2019
7. Finance expense
Bank overdraft and loan interest
Loan notes interest
Amortisation of debt finance costs
Interest (credit)/cost of retirement benefit obligations (note 30)
Amount capitalised
Finance expense
2019
£m
1.2
3.7
0.2
(0.2)
4.9
(0.3)
4.6
2018
£m
1.2
3.5
1.3
0.1
6.1
—
6.1
The capitalisation rate used to determine the amount of borrowing costs to be capitalised is the weighted average interest rate applicable to the entity’s
general borrowings during the year, in this case 3%. During the year £0.3m (2018: £nil) of interest was capitalised in relation to the Tennessee capacity
expansion programme.
There are future contractual cash flows for finance expenses as at 31 October 2019 of £1.8m (2018: £5.8m) of which £1.8m (2018: £3.7m) is due within
one year and the remainder in future years.
8. Taxation
Current tax charge – current year
Current tax (charge)/credit – prior year
Deferred tax charge – current year (note 23)
Deferred tax credit/(charge) – prior year (note 23)
Tax charge for continuing operations
2019
£m
(3.1)
(6.8)
(0.3)
6.6
(3.6)
2018
£m
(9.1)
7.6
(14.7)
(2.6)
(18.8)
Income tax in the UK is calculated at 19.0% (2018: 19.0%) of the taxable profit for the year. Tax for other jurisdictions is calculated at the rates prevailing
in those jurisdictions. In 2018, the deferred tax charge of £17.3m above differed 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 for continuing operations can be reconciled to the income statement as follows:
Profit/(loss) before tax from continuing operations
Tax at the UK corporation tax rate of 19% (2018: 19.0%)
Expenses not deductible/income not taxable for tax purposes
Changes in tax rates
Tax losses not recognised/carried forward
Prior period adjustments
Adjustment to provision for interest restriction
Overseas profits taxed at rates different to the UK standard rate
Tax charge for continuing operations
2019
£m
26.7
(5.1)
1.5
—
2.3
(0.2)
(1.6)
(0.5)
(3.6)
2018
£m
(22.0)
4.2
(7.4)
(4.7)
0.6
5.0
(14.8)
(1.7)
(18.8)
In addition to the tax charge in the income statement, a tax charge of £0.5m (2018: £0.6m) has been recognised in equity in the year.
The effective rate of tax on the profit before tax of the Group is 13.5% (2018: 85.5%), and the effective rate of tax on the underlying profit before tax
of the Group is 20.1% (2018: 22.9%).
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.
Chemring Group PLC | Annual report and accounts 2019
101
Financial statements Notes to the Group financial statements continued
9. Dividends
Dividends paid on ordinary shares of 1p each
Final dividend of 2.2p per share for the year ended 31 October 2018 (2.0p per share for the year ended 31 October 2017)
Interim dividend of 1.2p per share for the year ended 31 October 2019 (1.1p per share for the year ended 31 October 2018)
Total dividends
2019
£m
6.2
3.3
9.5
2018
£m
5.6
3.1
8.7
Subject to approval at the Annual General Meeting, the final dividend of 2.4p per ordinary share will be paid on 24 April 2020 to all shareholders
registered at the close of business on 3 April 2020. The total dividend for the year will therefore be 3.6p (2018: 3.3p) 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 2019.
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 2019 and 31 October 2019.
10. Earnings per ordinary share
Earnings per share is based on the average number of shares in issue, excluding own shares held, of 280,061,053 (2018: 279,768,360).
Diluted earnings per share has been calculated using a diluted average number of shares in issue, excluding own shares held, of 286,092,818
(2018: 285,993,316).
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)
Profit/(loss) from continuing operations
Loss from discontinued operations
Total profit/(loss) after tax
2019
Basic EPS
(pence)
11.2
Diluted EPS
(pence)
11.0
8.2
(0.4)
7.8
8.1
(0.4)
7.7
£m
31.5
(8.4)
23.1
(1.2)
21.9
£m
19.2
(60.0)
(40.8)
(65.0)
(105.8)
2019
Ordinary
shares
Number
millions
280.1
6.0
286.1
2018
Basic EPS
(pence)
6.9
2018
Ordinary
shares
Number
millions
279.8
6.2
286.0
Diluted EPS
(pence)
6.7
(14.6)
(23.2)
(37.8)
(14.6)
(23.2)
(37.8)
102
Chemring Group PLC | Annual report and accounts 2019
11. Goodwill
Cost
At 1 November 2017
Foreign exchange adjustments
At 31 October 2018
Disposals
Foreign exchange adjustments
At 31 October 2019
Accumulated impairment losses
At 1 November 2017
Impairment
Foreign exchange adjustments
At 31 October 2018
Disposals
Foreign exchange adjustments
At 31 October 2019
Carrying amount
At 31 October 2019
At 31 October 2018
£m
196.1
4.7
200.8
(3.0)
(1.6)
196.2
(70.7)
(18.2)
(2.7)
(91.6)
3.0
0.9
(87.7)
108.5
109.2
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
within the operating segment descriptions on pages 20 to 23.
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% (2018: 7.3%) 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 1% to 3% (2018: 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.
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 1.5% 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.
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
2019
%
10.0
8.0
8.8
10.8
2018
%
11.9
10.6
10.9
13.3
2019
£m
28.4
14.6
36.3
16.1
13.1
2018
£m
28.4
14.6
36.8
16.3
13.1
108.5
109.2
The pre-tax discount rates used for other CGUs ranged from 8.0% to 10.0% (2018: 11.5% to 14.7%).
In 2018 the Board 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.
Chemring Group PLC | Annual report and accounts 2019
103
Financial statements Notes to the Group financial statements continued
11. Goodwill continued
In addition in 2018, the Board 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
Countermeasures & Energetics segment.
Following a detailed review, no other impairment losses were recognised in the years ended 31 October 2019 and 31 October 2018 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, 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 0.5% would not result in any CGUs requiring any further impairment.
12. Development costs and other intangible assets
Cost
At 1 November 2017
Additions
Disposals
Foreign exchange adjustments
At 31 October 2018
Additions
Disposals
Foreign exchange adjustments
At 31 October 2019
Amortisation
At 1 November 2017
Charge
Disposals
Impairment
Foreign exchange adjustments
At 31 October 2018
Charge
Disposals
Foreign exchange adjustments
At 31 October 2019
Carrying amount
At 31 October 2019
At 31 October 2018
Development
costs
£m
Acquired
technology
£m
Acquired
customer
relationships
£m
Patents and
licences
£m
61.7
3.0
(3.1)
1.1
62.7
4.0
(14.3)
(0.4)
52.0
(28.0)
(3.6)
2.8
(9.5)
(0.4)
(38.7)
(1.3)
14.0
0.1
93.7
—
(1.1)
3.3
95.9
—
—
(1.1)
94.8
(64.7)
(8.2)
0.8
(0.7)
(2.5)
(75.3)
(8.3)
—
1.1
77.3
—
—
2.5
79.8
—
—
(0.8)
79.0
(49.7)
(6.1)
—
(5.4)
(1.8)
(63.0)
(3.8)
—
0.7
0.5
—
(0.2)
0.1
0.4
—
—
—
0.4
(0.1)
(0.1)
0.1
—
(0.1)
(0.2)
(0.1)
—
—
Total
£m
171.5
—
(1.3)
5.9
176.1
—
—
(1.9)
174.2
(114.5)
(14.4)
0.9
(6.1)
(4.4)
(138.5)
(12.2)
—
1.8
(25.9)
(82.5)
(66.1)
(0.3)
(148.9)
26.1
24.0
12.3
20.6
12.9
16.8
0.1
0.2
25.3
37.6
Included within the development costs of £26.1m, individually material balances relate to Joint Biological Tactical Detection System £8.6m (2018: £8.9m)
and Next Generation Chemical Detector £11.1m (2018: £9.8m). 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.
During the year ended 31 October 2018, the Group recognised an impairment of capitalised development costs of £9.5m 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
related to discontinued operations. The £7.4m impairment charge, as disclosed in note 3, related to continuing operations, net of the release of an
associated government grant.
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.
104
Chemring Group PLC | Annual report and accounts 2019
12. Development costs and other intangible assets continued
Acquired technology of £12.3m includes individually material balances relating to Chemring Sensors & Electronic Systems £8.3m (2018: £12.6m),
Chemring Energetic Devices £2.1m (2018: £5.6m) and Roke £1.5m (2018: £2.1m). The remaining amortisation periods for these assets are four years,
eight years and three years respectively.
Acquired customer relationships of £12.9m include individually material balances relating to Chemring Energetic Devices £8.8m (2018: £10.5m),
Chemring Sensors & Electronic Systems £2.7m (2018: £3.4m) and Roke £1.0m (2018: £2.1m). The remaining amortisation periods for these assets are
seven years, four years and one year respectively.
In the year ended 31 October 2018, an impairment charge against acquired technology (£0.7m) and acquired customer relationships (£5.4m) was
recognised in respect of the disposal group, and formed part of the overall impairment loss of £69.3m as disclosed in note 29.
13. Property, plant and equipment
Cost or valuation
At 1 November 2017
Additions
Disposals
Foreign exchange adjustments
At 31 October 2018
Additions
Disposals
Foreign exchange adjustments
At 31 October 2019
Depreciation
At 1 November 2017
Charge
Impairment
Disposals
Foreign exchange adjustments
At 31 October 2018
Charge
Disposals
Foreign exchange adjustments
At 31 October 2019
Carrying amount
At 31 October 2019
At 31 October 2018
Land and
buildings
£m
Plant and
equipment
£m
117.2
7.1
(1.2)
1.8
124.9
13.6
(8.4)
(1.8)
128.9
14.0
(7.4)
2.3
137.8
27.1
(34.7)
(2.7)
Total
£m
246.1
21.1
(8.6)
4.1
262.7
40.7
(43.1)
(4.5)
128.3
127.5
255.8
(21.0)
(3.6)
(10.9)
0.6
(0.7)
(35.6)
(3.3)
8.3
0.5
(65.0)
(14.1)
(4.8)
6.6
(1.7)
(79.0)
(12.5)
34.2
1.6
(30.1)
(55.7)
98.2
89.3
71.8
58.8
(86.0)
(17.7)
(15.7)
7.2
(2.4)
(114.6)
(15.8)
42.5
2.1
(85.8)
170.0
148.1
During the year, £0.3m (2018: £nil) of interest was capitalised, as set out in note 7. £1.1m (2018: £1.1m) of capitalised interest was charged as
depreciation and £nil (2018: £0.4m) was disposed of. This results in a net book value for capitalised interest of £10.0m (2018: £10.8m).
Included within land and buildings and plant and equipment are assets under construction of £8.6m and £6.2m respectively (2018: £2.5m and £1.8m).
These assets are not depreciated.
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 2019
2019
£m
5.8
122.5
128.3
2018
£m
5.8
119.1
124.9
Chemring Group PLC | Annual report and accounts 2019
105
Financial statements Notes to the Group financial statements continued
13. Property, plant and equipment continued
If stated under historical cost principles, the comparable amounts for the total of land and buildings would be:
Cost
Accumulated depreciation
Historical cost value
All other tangible fixed assets are stated at historical cost.
2019
£m
126.3
(29.2)
97.1
2018
£m
122.9
(34.7)
88.2
At 31 October 2019, the Group had entered into contractual commitments for the acquisition of property, plant and equipment amounting to £20.7m
(2018: £10.8m).
14. Subsidiary undertakings
All subsidiary undertakings have been reflected in these financial statements. The subsidiary undertakings held at 31 October 2019, which have a single class
of ordinary shares 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
Operating segment
Subsidiary undertaking
Chemring Australia Pty Limited
B.D.L. Systems Limited
Chemring Countermeasures Limited
Chemring Energetics Limited
Chemring Europe Limited
Chemring Finance Europe 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
Greys Exports Limited
Kembrey Corporate Trustee Limited
Kembrey Engineering Limited
Kembrey Group Limited
Kembrey Limited
Parkway No 10 Limited
Richmond EEI Limited
Richmond Electronics & Engineering Limited
Roke Manor Research Limited
Chemring Nobel AS
Chemring Energetics UK Limited
Alloy Surfaces Company, Inc.
ASC Realty LLC
Chemring Energetic Devices, Inc.
Chemring North America Group, Inc.
Chemring Ordnance, Inc.
CHG Flares, Inc.
CHG Group, Inc.
Kilgore Flares Company LLC
Chemring Sensors & Electronic Systems, Inc.
Roke USA, Inc.
Tactical Systems and Ordnance, Inc.
Australia
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
Norway
Scotland
US
US
US
US
US
US
US
US
US
US
US
Countermeasures & Energetics
Dormant
Countermeasures & Energetics
Holding company
Dormant
Non-trading
Non-trading
Non-trading
Holding company
Countermeasures & Energetics
Sensors & Information
Dormant
Non-trading
Holding company
Non-trading
Dormant
Dormant
Dormant
Dormant
Non-trading
Non-trading
Dormant
Dormant
Sensors & Information
Countermeasures & Energetics
Countermeasures & Energetics
Countermeasures & Energetics
Property holding company
Countermeasures & Energetics
Holding company
Countermeasures & Energetics
Holding company
Head office
Countermeasures & Energetics
Sensors & Information
Sensors & Information
Sensors & Information
The sale of Chemring Ordnance, Inc. was announced on 21 November 2019.
CHG Overseas Limited, Chemring North America Unlimited, Parkway No 10 Limited, Chemring Investments Limited, Chemring Energetics Limited,
Chemring Finance Europe Limited, Chemring Limited, Kembrey Limited, Kembrey Group Limited, Chemring UAE Limited and CHG Overseas Investments
Limited are exempt from the requirement to file audited accounts for the year ended 31 October 2019 by virtue of section 479A of the Companies Act
2006. See page 141 for the registered offices of the subsidiary undertakings.
106
Chemring Group PLC | Annual report and accounts 2019
15. Inventories
Raw materials
Work in progress
Finished goods
2019
£m
38.8
25.1
14.2
78.1
2018
£m
30.9
21.9
18.6
71.4
There are no significant differences between the replacement cost of inventory and the carrying amount shown above. The Group recognised £2.7m
(2018: £9.6m) 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
Advance payments to suppliers
Other receivables
Prepayments and accrued income
All amounts shown above are due within one year.
2019
£m
30.6
(0.3)
30.3
4.4
7.0
12.0
53.7
2018
£m
45.8
(0.4)
45.4
0.7
3.5
12.6
62.2
The average credit period taken by customers on sales of goods, calculated using a countback basis, is 20 days (2018: 30 days). No interest is charged on
receivables from the date of invoice to payment.
Given the Group’s customer base, expected credit losses are typically not material, however 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. For the purposes of the statement of cash flows, cash and cash equivalents comprises of cash at banks
on hand of £1.3m (2018: £9.6m) less the bank overdraft included in short term borrowings of £4.6m (2018: £nil).
18. Borrowings
Within current liabilities
Loan notes
Bank overdrafts
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
– US dollar denominated
– US dollar denominated
– US dollar denominated
2019
£m
64.6
4.6
69.2
7.7
—
0.1
7.8
77.0
2019
£m
7.8
69.2
77.0
2018
£m
—
—
—
25.9
65.4
0.1
91.4
91.4
2018
£m
26.0
65.4
91.4
Chemring Group PLC | Annual report and accounts 2019
107
Financial statements Notes to the Group financial statements continued
18. Borrowings continued
The weighted average interest rates paid were as follows:
Bank overdrafts
UK bank loans
Loan notes
– Sterling denominated
– Sterling denominated
– US dollar denominated
2019
%
2.1
2.1
—
5.7
2018
%
2.1
2.1
6.8
5.7–6.3
An analysis of borrowings by maturity is as follows:
2019
2018
Borrowings falling due:
– within one year
Borrowings falling due:
– within one to two years
– within two to five years
– after five years
Bank
loans and
overdrafts
£m
4.6
—
7.7
—
7.7
Loan
notes
£m
64.6
—
—
—
—
Total borrowings
12.3
64.6
Preference
shares
£m
—
—
—
0.1
0.1
0.1
Bank
loans and
overdrafts
£m
—
—
25.9
—
25.9
25.9
Total
£m
69.2
—
7.7
0.1
7.8
77.0
Loan
notes
£m
—
65.4
—
—
65.4
65.4
Preference
shares
£m
—
—
—
0.1
0.1
0.1
Total
£m
—
65.4
25.9
0.1
91.4
91.4
The Group increased its existing revolving credit facility to £136.7m during the period. The revolving credit facility was first established in October 2018
and has a four-year initial term with options to extend by a further two years. 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
2019
£m
130.2
2018
£m
68.1
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 net 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
2019
£m
6.7
24.1
1.6
2.8
15.3
12.3
5.5
68.3
2018
£m
12.1
20.9
1.7
3.3
5.7
12.5
12.4
68.6
Trade payables and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. Advance receipts from customers
represent the obligation to transfer goods or services to a customer for which consideration has been received. The amount of £5.7m included in
advance receipts from customers recognised at 31 October 2018 has been recognised as revenue in 2019 (2018: £30.7m). No revenue was recognised
in 2019 from performance obligations satisfied in previous years.
The average credit period taken on purchases of goods is 16 days (2018: 34 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.
108
Chemring Group PLC | Annual report and accounts 2019
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 2019 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.
(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.
The Group increased its revolving credit facility to £136.7m during the period. The RCF was first established in October 2018 and has a four-year initial
term with options to extend by a further two years. As at 31 October 2019, the RCF was drawn by £8.5m. Private placement notes of $83.6m matured
in November 2019 and were repaid 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 ended 31 October 2019, 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.
Chemring Group PLC | Annual report and accounts 2019
109
Financial statements Notes to the Group financial statements continued
20. Financial risk management continued
IFRS 9 Financial Instruments
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,
the adoption of IFRS 9 is not assessed as having a significant impact on the Group.
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.
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
2019
2018
Carrying value
£m
Fair value
£m
Carrying value
£m
Fair value
£m
30.3
8.3
7.0
1.3
—
0.2
7.0
(1.2)
(1.8)
(6.7)
(24.1)
(1.6)
(2.8)
(12.3)
—
(77.0)
(17.2)
30.3
8.3
7.0
1.3
—
0.2
7.0
(1.2)
(1.8)
(6.7)
(24.1)
(1.6)
(2.8)
(12.3)
—
(77.0)
(17.2)
45.4
9.0
3.5
9.6
25.5
0.1
18.2
(0.5)
(10.2)
(12.1)
(20.9)
(1.7)
(3.3)
(12.5)
(16.7)
(91.4)
(20.7)
45.4
9.0
3.5
9.6
25.5
0.1
18.2
(0.5)
(10.2)
(12.1)
(20.9)
(1.7)
(3.3)
(12.5)
(16.7)
(95.8)
(20.7)
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
2019
£m
0.2
(0.9)
(0.3)
(1.0)
2018
£m
0.1
(0.3)
(0.2)
(0.4)
There was a £0.6m loss (2018: £0.4m loss) on the movement in the fair value of derivative financial instruments recognised in the income statement.
110
Chemring Group PLC | Annual report and accounts 2019
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
2019
Loans and
overdrafts
£m
0.7
0.3
—
1.0
69.2
—
7.8
77.0
Derivative
instruments
£m
2018
Loans and
overdrafts
£m
0.2
0.1
(0.1)
0.2
—
65.4
26.0
91.4
Total
£m
69.9
0.3
7.8
78.0
Total
£m
0.2
65.5
25.9
91.6
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:
> Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities;
> 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
> 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 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 3
Level 2
Level 3
2019
Carrying
amount
£m
Fair value
£m
2018
Carrying
amount
£m
Fair value
£m
0.2
7.0
(1.2)
(1.8)
4.2
0.2
7.0
(1.2)
(1.8)
4.2
0.1
18.2
(0.5)
(10.2)
7.6
0.1
18.2
(0.5)
(10.2)
7.6
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 2019 the closing exchange rate for the US dollar was 1.29 (2018: 1.28) and the average exchange rate was 1.26 (2018: 1.34).
For the year ended 31 October 2019 a 10 cent strengthening in the US dollar exchange rate would have increased reported net debt by approximately
£5.7m (2018: £5.6m).
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.
Continuing operations
Revenue
Underlying operating profit
Interest
Underlying profit before tax
+10 cents
US dollar impact
–10 cents
US dollar impact
2019
£m
(12.9)
(1.8)
0.2
(1.6)
2018
£m
(9.3)
(1.9)
0.2
(1.7)
2019
£m
15.1
2.5
(0.4)
2.1
2018
£m
10.8
2.2
(0.3)
1.9
As at 31 October, 84% of the Group’s gross debt is at a fixed rate of 5.68% and the remainder is at floating rates. The Group monitors its exposure to
movements in interest rates, having regard to prevailing market conditions and considers the use of interest rate swaps on an ongoing basis to manage this
exposure. The Group has not entered into any interest rate swaps as of 31 October 2019.
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.
Chemring Group PLC | Annual report and accounts 2019
111
Financial statements Notes to the Group financial statements continued
22. Provisions
At 1 November 2018
Provided
Foreign exchange adjustments
Paid
Released
At 31 October 2019
These provisions are classified on the balance sheet as follows:
Included in current liabilities
Included in non-current liabilities
Legal
provision
£m
9.0
—
—
(2.2)
—
6.8
Environmental
provision
£m
3.2
—
—
(0.1)
0.1
Restructuring
provision
£m
3.3
—
(0.1)
(1.7)
(0.2)
3.2
1.3
Disposal
provision
£m
2.2
1.1
(0.1)
(0.3)
—
2.9
Other
provision
£m
3.0
—
—
—
—
3.0
2019
£m
4.8
12.4
17.2
Total
£m
20.7
1.1
(0.2)
(4.3)
(0.1)
17.2
2018
£m
6.7
14.0
20.7
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 £1.0m and £7.2m.
The restructuring provision relates principally to the Tennessee capacity expansion programme which is expected to completed in 2021. The range of
possible outcomes is estimated between £1.0m and £2.0m.
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 £17.0m, and the risk of economic outflow relating
to these reduces with the passage of time. These are expected to be utilised over the next seven years.
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 £nil and £5.7m. A provision
of £3.0m (2018: £3.0m) 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 demolition and environmental remediation and these
will be impacted by the result of external assessments. 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.
112
Chemring Group PLC | Annual report and accounts 2019
23. Deferred tax
The following are the principal deferred tax assets/(liabilities) recognised by the Group and movements thereon:
At 1 November 2017
(Charge)/credit to income
(Charge)/credit to equity
Transfers
At 1 November 2018
(Charge)/credit to income
(Charge)/credit to equity
Transfers
At 31 October 2019
Analysed as:
Deferred tax assets
Deferred tax liabilities
At 31 October 2019
Deferred tax assets
Deferred tax liabilities
At 31 October 2018
Accelerated
tax
depreciation
£m
(12.3)
4.1
—
(0.6)
Pensions
£m
0.1
(1.2)
(0.1)
—
US interest
deductions
£m
22.6
(22.6)
—
—
(8.8)
1.7
—
(0.1)
(7.2)
1.5
(8.7)
(7.2)
1.7
(10.5)
(8.8)
(1.2)
(0.1)
(0.7)
0.1
(1.9)
—
(1.9)
(1.9)
—
(1.2)
(1.2)
—
—
—
—
—
—
—
—
—
—
—
Tax
losses
£m
1.5
1.1
—
—
2.6
5.1
—
(0.2)
7.5
7.5
—
7.5
2.6
—
2.6
Acquired
intangibles
£m
(10.3)
5.8
—
(0.5)
(5.0)
(2.0)
0.2
(1.0)
(7.8)
0.6
(8.4)
(7.8)
25.0
(30.0)
(5.0)
Other
£m
8.1
(5.3)
(0.5)
(0.2)
2.1
1.6
—
1.2
4.9
8.9
(4.0)
4.9
7.5
(5.4)
2.1
Total
£m
9.7
(18.1)
(0.6)
(1.3)
(10.3)
6.3
(0.5)
—
(4.5)
18.5
(23.0)
(4.5)
36.8
(47.1)
(10.3)
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 2019 has been calculated at the rates which will be in force when the assets and liabilities are
expected to reverse.
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 was recognised in the year ended 31 October 2018.
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 £11.0m (2018: £29.9m) and unrecognised interest deductions as a result of US
Interest limitations regulations of £28.0m (2018: £25.9m) potentially available for offset against future profits in certain circumstances. No deferred tax
asset has been recognised in respect of these amounts because of the unpredictability of future taxable qualifying profit streams.
24. Share capital
Issued and fully paid
282,489,995 (2018: 281,763,364) ordinary shares of 1p each
2019
£m
2.8
2018
£m
2.8
During the year, 726,631 ordinary shares (2018: 175,289) 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.
Chemring Group PLC | Annual report and accounts 2019
113
Financial statements Notes to the Group financial statements continued
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 £3.6m (2018: £3.7m) relating to the share-based payment reserve and £0.6m (2018: £0.7m) 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 2.4p per ordinary share for the year ended 31 October 2019.
26. Own shares
At 1 November 2018
Transactions
At 31 October 2019
2019
£m
7.8
—
7.8
2018
£m
9.6
(1.8)
7.8
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 (2018: nil) were acquired during the year and no
ordinary shares (2018: 410,104) were distributed following the vesting of awards under the PSP. The total number of ordinary shares held in treasury at
31 October 2019 was 1,788,710 (2018: 1,788,710), with an average cost of 439.0p (2018: 439.0p) per share.
This represents 0.6% (2018: 0.6%) 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
2019
£m
1.1
2018
£m
1.4
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
2019
£m
2.2
5.9
0.2
8.3
2018
£m
1.7
3.5
0.1
5.3
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.
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 £2.5m (2018: £1.1m) 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 outstanding at 31 October 2019 all now relate to the 2016 PSP as the vesting date of any remaining PSP awards was
reached during the year.
PSP
2016 PSP
Number of conditional shares
Number of conditional shares
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
114
Chemring Group PLC | Annual report and accounts 2019
2018
3,169,973
2019
1,699,869
—
— (410,104)
(1,060,000)
2019
3,853,797
— 2,952,924
—
(881,855)
(1,699,869)
2018
2,183,887
2,228,787
—
(558,877)
— 1,699,869
5,924,866
3,853,797
—
—
—
—
28. Share-based payments continued
The Chemring Group Performance Share Plan (the “PSP”) and The Chemring Group Performance Share Plan 2016
(the “2016 PSP”) continued
The following awards were outstanding at 31 October 2019:
Date of award
24 March 2017
19 January 2018
26 June 2018
22 March 2019
Number of
ordinary
shares
under award
1,591,317
1,042,039
481,147
2,810,363
Vesting price
per share
Pence
nil
nil
nil
nil
Date when
awards due
to vest
24 March 2020
19 January 2021
26 June 2021
22 March 2022
The Group has applied a discount to the share-based payments, to reflect the anticipated achievement of the stipulated targets for each 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 2019 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
22 March
2019
140p
nil
0.6%
30.0%
98.2p
Date awarded
26 June
2018
218p
nil
0.6%
36.1%
153.3p
19 January
2018
188p
nil
0.6%
34.7%
132.2p
24 March
2017
196p
nil
0.2%
28.8%
165.5p
The weighted average fair value of awards made during the year was 98.2p (2018: 136.9p).
In the year ended 31 October 2019 no awards vested (2018: 410,104). The charge recognised in respect of the awards is based on their fair value at the
grant date.
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 Chemring Group 2008 and 2018 UK Sharesave Plan (the “UK Sharesave Plan”)
Options were granted during the year on 29 July 2019.
Number of deferred shares
2019
50,000
—
(50,000)
—
—
2018
50,000
—
—
50,000
—
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
2019
2018
Number
of share
options
1,901,810
591,995
(717,423)
(347,638)
1,428,744
65,524
Weighted
average
exercise
price
Pence
135.1
154.0
108.1
150.4
152.8
106.2
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
Chemring Group PLC | Annual report and accounts 2019
115
Financial statements Notes to the Group financial statements continued
28. Share-based payments continued
The Chemring Group 2008 and 2018 UK Sharesave Plan (the “UK Sharesave Plan”) continued
The following options were outstanding at 31 October 2019:
Date of award
30 July 2014
30 July 2015
27 July 2016
27 July 2016
27 July 2017
27 July 2017
30 July 2018
30 July 2018
29 July 2019
29 July 2019
Number
of ordinary
shares under
award
2,100
33,848
63,424
71,997
311,725
54,322
235,770
67,068
549,921
38,569
Exercise price
per share
Pence
142.0
152.0
105.0
105.0
148.0
148.0
178.0
178.0
154.0
154.0
Dates between which
options may be exercised
1 October 2019–31 March 2020
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
1 October 2022–31 March 2023
1 October 2024–31 March 2025
The weighted average fair value of options granted in the year was 30.0p (2018: 44.0p).
The weighted average fair value of options exercised in the year was 26.9p (2018: 36.6p).
The weighted average share price on exercise of the options during the year was 108.1p (2018: 143.8p).
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.
29. Assets and liabilities classified as held for sale
In 2018, a strategic review of the Group’s energetics portfolio was conducted. 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 commoditised energetics businesses including;
Chemring Defence UK Limited, Chemring Prime Contracts Limited, Chemring Military Products, Inc. and Chemring Ordnance, Inc.. Accordingly,
these businesses were presented as held for sale as at 31 October 2018.
As of 31 October 2019 the sale of Chemring Defence UK Limited and Chemring Military Products, Inc. had been completed and Chemring Prime
Contracts Limited closed. The accounting on disposal is set out in note 5.
The net assets of Chemring Ordnance, Inc. continued to be held for sale at 31 October 2019. On 21 November 2019 the Group announced the
conditional divestment of Chemring Ordnance, Inc. See note 36 for further details.
Impairment losses relating to the disposal group
Impairment losses of £nil (2018: £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 2019, 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
2019
£m
—
4.7
2.3
7.0
—
(1.8)
—
(1.8)
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. £nil (2018: £25.5m) of the assets classified
as held for sale and £nil (2018: £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. £7.0m (2018: £18.2m) of assets classified as held for sale and £1.8m (2018: £10.2m) of liabilities classified as held for sale are shown at
fair value.
The costs to sell these businesses are estimated at £1.3m (2018: £0.8m).
116
Chemring Group PLC | Annual report and accounts 2019
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 £5.2m (2018: £5.8m) 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 2019, 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 £9.6m at 31 October 2019 (2018: £7.5m).
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 which was made in November 2018.
No further deficit recovery payments are required and the Group was released from the bank guarantee of £7.2m given to the Scheme in respect of
future contributions. 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 next actuarial valuation is due as at 6 April 2021 which the future funding requirements will be reassessed.
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 2019 by a qualified actuary using the projected unit credit method. The main assumptions used were a discount rate of 1.8% and rate
of increase in deferred pensions of 3%. The net surplus of the Chemring Nobel Scheme was £nil at 31 October 2019 (2018: £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
Administrative expenses
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
2019
£m
(83.4)
—
0.3
(2.3)
(2.0)
(7.1)
(0.1)
—
(7.2)
—
—
3.5
2018
£m
(83.8)
—
(0.8)
(2.3)
(3.1)
(0.8)
(0.1)
—
(0.9)
—
—
4.4
(89.1)
(83.4)
2019
£m
90.9
(0.4)
—
2.5
2.1
—
—
8.8
8.8
0.4
—
(3.5)
98.7
2018
£m
83.2
—
—
2.2
2.2
—
—
1.8
1.8
7.9
0.2
(4.4)
90.9
2019
£m
7.5
(0.4)
0.3
0.2
0.1
(7.1)
(0.1)
8.8
1.6
0.4
—
—
9.6
2018
£m
(0.6)
—
(0.8)
(0.1)
(0.9)
(0.8)
(0.1)
1.8
0.9
7.9
0.2
—
7.5
The Chemring Group Staff Pension Scheme had 948 members at the end of the year (2018: 966). Of these members 55.2% (2018: 53.2%) 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 2019
117
Financial statements Notes to the Group financial statements continued
30. Retirement benefit obligations continued
The pension schemes’ assets are analysed as follows:
Equities
Liability Driven Investment
Corporate bonds
Assets held by insurance company
Cash
2019
£m
42.5
21.8
22.8
2.0
9.6
98.7
2018
£m
27.9
22.5
34.9
2.3
3.3
90.9
2019
%
43.1
22.1
23.1
2.0
9.7
2018
%
30.7
24.8
38.4
2.5
3.6
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
2019
%
2.0
2.6
2.8
2.9
2.8
2018
%
2.8
2.1
3.1
3.2
2.1
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 2018 and a
1.25% long-term trend rate.
This results in the following life expectancies at age 65:
Future pensioners
Current pensioners
– male
– female
– male
– female
2019
89.0
90.6
87.6
89.1
2018
89.2
90.8
87.8
89.3
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 £1.4m. A change in the rate of inflation by 0.1% is predicted to change the deficit by approximately £0.5m and a
one year change to the longevity assumption would change the deficit by approximately £3.2m. 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 2020 will be £nil (2019: £0.4m).
118
Chemring Group PLC | Annual report and accounts 2019
31. Cash generated from operating activities
Operating profit/(loss) 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
Share-based payment expense
Operating cash flows before movements in working capital
(Increase)/decrease in inventories
Decrease 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
Tax paid
Net cash inflow from discontinued operating activities
Net cash inflow/(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
33. Analysis of net debt
Cash and cash equivalents (including bank overdraft)
Debt due within one year (excluding bank overdraft)
Debt due after one year
Preference shares
2019
£m
31.3
1.3
12.1
0.1
0.7
15.8
0.6
2.5
64.4
(7.9)
10.4
(2.7)
(0.3)
63.9
13.7
(7.1)
(0.7)
5.9
0.5
6.4
2019
£m
(12.6)
18.4
5.8
0.5
(0.2)
6.1
(81.8)
(75.7)
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)
At
1 November
2018
£m
9.6
—
(91.3)
(0.1)
Cash flows
£m
(12.6)
—
18.4
—
Non-cash
changes
£m
—
(64.6)
64.4
—
Exchange
rate effects
£m
(0.3)
—
0.8
—
At
31 October
2019
£m
(3.3)
(64.6)
(7.7)
(0.1)
(81.8)
5.8
(0.2)
0.5
(75.7)
Accrued interest is included in the carrying amount of financial liabilities measured at amortised cost and therefore is not presented as a separate line item.
Chemring Group PLC | Annual report and accounts 2019
119
Financial statements Notes to the Group financial statements continued
34. Contingent liabilities
At 31 October 2019, 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 have not issued
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 (2018: £1.0m) 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. On 2 April 2019 the European
Commission delivered a judgement which concluded in some circumstances the UK’s CFC exemption may breach state aid rules. The UK government
disagrees with the conclusion that the UK’s CFC rules were partially in breach of EU law, and has therefore applied to the EU courts for annulment of
the Commission’s decision. Given the early stage of this process, 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
In accordance with the Serious Fraud Office (“SFO”) News Release dated 18 January 2018, an investigation was opened by the SFO into Chemring
Group PLC (“CHG”) and its subsidiary, Chemring Technology Solutions Limited (“CTSL”), following a self-report made by CTSL. The investigation
relates to bribery, corruption and money laundering arising from the conduct of business by CHG and CTSL including any officers, employees, agents
and persons associated with them. 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.
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.
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 71 to 85.
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 85.
2019
£m
3.3
2018
£m
2.2
36. Events since the end of the year
On 21 November 2019, the Group announced that a conditional agreement had been entered into for the sale of Chemring Ordnance, Inc. to Nammo
Defense Systems Inc. The sale, which is subject to regulatory approval by the US authorities, is expected to complete no later than the end of Q2 FY20.
The consideration of $17m is payable in cash on completion, subject to normal working capital and other closing adjustments. Chemring Ordnance, Inc.
was treated as discontinued and held for sale in these financial statements, see notes 5 and 29.
On 19 November 2019 the Group repaid $83.6m of private placement loan notes. This was funded from existing bank facilities and cash.
120
Chemring Group PLC | Annual report and accounts 2019
Parent company balance sheet
As at 31 October 2019
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
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
9
10
2019
£m
£m
2018
£m
£m
0.2
634.6
395.1
5.1
21.5
25.1
(64.6)
(322.1)
—
(25.7)
(2.9)
(0.4)
(0.1)
0.2
652.8
436.9
3.1
1,035.0
1,093.0
46.6
1,081.6
8.1
—
—
(294.0)
8.1
1,101.1
(386.7)
(294.0)
(84.6)
(63.0)
(5.0)
(0.1)
(0.1)
(29.1)
(415.8)
665.8
2.8
306.2
12.9
351.7
673.6
(7.8)
665.8
(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 2019 of £18.1m (2018: £28.2m).
These financial statements of Chemring Group PLC (registered number 86662) were approved and authorised for issue by the Board of directors on
16 December 2019.
Signed on behalf of the Board
Michael Ord
Director
Andrew Lewis
Director
Chemring Group PLC | Annual report and accounts 2019
121
Financial statements Parent company statement of comprehensive income
For the year ended 31 October 2019
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/(losses) on pension scheme, net of deferred tax
Total comprehensive income attributable to the equity holders of the parent
2019
£m
18.1
0.6
18.7
2018
£m
28.2
(0.2)
28.0
Parent company statement of changes in equity
For the year ended 31 October 2019
At 1 November 2018
Profit after tax
Other comprehensive income
Total comprehensive income
Ordinary shares issued
Share-based payments (net of settlement)
Dividends paid
At 31 October 2019
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
Share capital
£m
2.8
—
—
—
—
—
—
Share
premium
account
£m
305.4
—
—
—
0.8
—
—
Special
capital
reserve
£m
12.9
—
—
—
—
—
—
Retained
earnings
£m
341.0
Own shares
£m
(7.8)
18.1
0.6
18.7
—
1.5
(9.5)
—
—
—
—
—
—
Total
£m
654.3
18.1
0.6
18.7
0.8
1.5
(9.5)
2.8
306.2
12.9
351.7
(7.8)
665.8
Share capital
£m
2.8
—
—
—
—
—
—
—
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)
305.4
12.9
341.0
(7.8)
654.3
The auditor’s remuneration for audit and other services is disclosed in note 4 to the Group financial statements.
A final dividend of 2.4p per ordinary share has been proposed. See note 9 to the Group financial statements.
As at 31 October 2019 the Company had distributable reserves of £348.1m (2018: £336.3m). When required, the Company can receive dividends from
its subsidiaries to further increase distributable reserves.
122
Chemring Group PLC | Annual report and accounts 2019
Notes to the parent company financial statements
1. Property, plant and equipment
Cost
At 1 November 2017 and 31 October 2018
At 31 October 2019
Depreciation
At 31 November 2017
Charge
At 31 October 2018
Charge
At 31 October 2019
Carrying amount
At 31 October 2019
At 31 October 2018
Land and
buildings
£m
Plant and
equipment
£m
0.1
0.1
—
—
—
—
—
0.1
0.1
0.3
0.3
0.1
0.1
0.2
—
0.2
0.1
0.1
The Company had no capital commitments as at 31 October 2019 or 31 October 2018. Land and buildings represent leasehold improvements.
2. Investments in subsidiaries
Cost
At 1 November 2017
Additions
At 31 October 2018 and 31 October 2019
Impairment
At 1 November 2017
Impairment
At 31 October 2018
Impairment
At 31 October 2019
Carrying amount
At 31 October 2019
At 31 October 2018
Shares in
subsidiary
undertakings
£m
Loans to
subsidiary
undertakings
£m
662.5
30.0
692.5
43.9
2.4
46.3
18.2
64.5
628.0
646.2
6.6
—
6.6
—
—
—
—
—
6.6
6.6
Total
£m
0.4
0.4
0.1
0.1
0.2
—
0.2
0.2
0.2
Total
£m
669.1
30.0
699.1
43.9
2.4
46.3
18.2
64.5
634.6
652.8
The additions of £30.0m in the year ended 31 October 2018 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 within the operating segment descriptions on pages 20 to 23.
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 2019 the Company concluded that the investment relating to Chemring Europe Limited and Chemring International Limited was fully impaired and
a charge of £18.2m was recorded.
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.
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 impairment of £36.5m 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 impairment of £54.0m to CHG Overseas Limited
being required.
Setting long-term growth rates beyond the five-year forecast period to 0.5% would result in an impairment of £30.4m to CHG Overseas Limited being required.
Chemring Group PLC | Annual report and accounts 2019
123
Financial statements Notes to the parent company financial statements continued
3. Investments in Group undertakings
Details of the Group undertakings at 31 October 2019 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
2019
£m
—
19.7
1.3
—
0.5
21.5
2018
£m
0.1
5.7
0.9
0.7
0.7
8.1
395.1
395.1
436.9
436.9
An asset of £0.2m (2018: £0.1m) 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 4%-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
2019
£m
1.1
0.9
0.3
313.4
4.6
0.2
1.6
322.1
0.3
25.4
25.7
2018
£m
—
0.3
0.8
287.7
3.3
0.2
1.7
294.0
0.2
62.8
63.0
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.
6. Borrowings
Within current liabilities
Loan notes – US dollar 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
124
Chemring Group PLC | Annual report and accounts 2019
2019
£m
64.6
64.6
—
—
—
64.6
2018
£m
—
—
19.2
65.4
84.6
84.6
6. Borrowings continued
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
The interest incurred on the above borrowings is detailed within notes 7 and 18 to the Group financial statements.
7. Provisions
At 1 November 2018
Provided
Released
Paid
At 31 October 2019
2019
£m
64.6
—
—
64.6
Legal
provision
£m
5.0
—
—
(2.1)
2.9
2018
£m
—
65.4
19.2
84.6
Total
£m
5.0
—
—
(2.1)
2.9
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)
2019
£m
0.1
2018
£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
282,489,995 (2018: 281,763,364) ordinary shares of 1p each
2019
£m
2.8
2018
£m
2.8
During the year, 726,631 ordinary shares (2018: 175,289) 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.
10. Own shares
At the beginning of the year
Transactions
At the end of the year
2019
£m
7.8
—
7.8
2018
£m
9.6
(1.8)
7.8
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 (2018: nil) were acquired
and no ordinary shares (2018: 410,104) 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 2019 was 1,788,710 (2018: 1,788,710), with an average cost of 439.0p (2018: 439.0p) per share.
This represents 0.6% (2018: 0.6%) of the total issued and fully paid ordinary share capital.
Chemring Group PLC | Annual report and accounts 2019
125
Financial statements Notes to the parent company financial statements continued
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
2019
£m
(0.1)
—
(0.3)
(0.4)
2018
£m
(0.4)
0.3
—
(0.1)
(0.4)
(0.1)
At the balance sheet date, the Company had unrecognised tax losses of £nil (2018: £17.5m) potentially available for offset against future profits
in certain circumstances.
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 31 November 2017, retirement benefit obligation
Contributions
Other finance costs
Actuarial movements
At 31 October 2018, retirement benefit surplus
Transfer of retirement benefit surplus from subsidiary
Contributions
Other finance costs
Actuarial movements
At 31 October 2019, 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
Disclosures in respect of directors’ emoluments can be found in the directors’ remuneration report on pages 66 to 85.
Total
£m
(0.2)
3.5
—
(0.2)
3.1
0.8
0.4
(0.1)
0.9
5.1
2019
Number
30
2018
Number
29
2019
£m
4.9
0.6
0.5
1.9
7.9
2018
£m
3.9
0.5
0.4
0.6
5.4
126
Chemring Group PLC | Annual report and accounts 2019
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 86 to 89. These financial statements are the consolidated financial
statements of Chemring Group PLC and its subsidiaries (the “Group”).
Chemring Group PLC and the companies in which it directly and indirectly
owns investments are separate and distinct entities. In this publication
of the annual report and accounts, the collective expressions “Chemring”
and “the Group” may be used for convenience where reference is made
in general to those companies. Likewise, the words “we”, “us”, “our” and
“ourselves” are used in some places to refer to the subsidiaries of the
Group in general. These expressions are also used where no useful
purpose is served by identifying any particular company or companies.
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 56.
2. Adoption of new and revised standards
The following standards, amendments and interpretations have been
issued by the International Accounting Standards Board (IASB) or by the
IFRS IC. The Group’s approach to these is as follows:
i) The following International Financial Reporting Committee (“IFRIC”)
interpretations, amendments to existing standards and new standards
were adopted in the year ended 31 October 2019 but have not
materially impacted the reported results or the financial position:
› Amendments to IFRS 2 Classification and Measurement of Share-based
Payment Transactions;
›
IFRS 9 Financial Instruments Recognition and Measurement;
› Annual Improvements to IFRSs 2014–2016 Cycle; and
›
IFRIC 22 Foreign Currency Transactions and Advance Consideration.
ii) At the date of authorisation of this announcement, the following standards
and interpretations that are potentially relevant to the Group and
which have not yet been applied in these reported results 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 2019
> IFRS 16 Leases;
> Amendments to IAS 19 Employee Benefits;
> Annual Improvements to IFRSs 2015–2017 Cycle; and
> IFRIC 23 Uncertainty over Income Tax Treatments.
Effective for periods beginning on or after 1 January 2021
> IFRS 17 Insurance Contracts.
The directors do not expect the adoption of these standards and
interpretations will have a material impact on the results of the Group
in future periods except as follows:
> IFRS 16 Leases will impact the measurement, recognition, presentation
and disclosure of leases, particularly operating leases where the term is
longer than 12 months.
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 an 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 Group intends to apply the modified retrospective approach and
measure the right of use assets based on the lease liability value calculated
at 1 November 2019, with no restatement of prior periods.
The Group expects to recognise a lease liability and right-of-use asset of £6.9m
at 1 November 2019 as a result of applying IFRS 16, with no impact on
retained earnings or total cash flows. The impact on the income statement
of reclassifying operating costs to finance costs is expected to be immaterial.
The standalone parent financial statements of Chemring Group PLC expect
to recognise a lease liability and right-of-use asset of £0.4m at 1 November 2019
as a result of applying IFRS 16, with no impact on retained earnings or
total cash flows. The impact on the income statement of reclassifying
operating costs to finance costs is expected to be immaterial.
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 2018 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.
Chemring Group PLC | Annual report and accounts 2019
127
Financial statements Accounting policies continued
3. Group accounting policies continued
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.
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 and as applicable, customer acceptance
received, 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 divided up to ensure that each element is a separate and valid performance
obligation. If they are not, the relevant revenue amount is allocated across
the other obligations as appropriate. There are no contracts with a significant
financing component.
At the start of the contract, the total transaction price is estimated as the
amount of consideration to which the Group expects to be entitled in
exchange for transferring the promised goods and services to the customer,
excluding sales taxes. This is based on the agreed contract price and
therefore significant judgment is not required.
The Group provides warranties to its customers to give them assurance
that its products and services will function in line with agreed-upon
specifications. Warranties are not provided separately and, therefore,
do not represent separate performance obligations.
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:
> the Group has identified a sales contract with a customer;
> the performance obligations within this contract have been identified;
> the transaction price has been determined;
> this transaction price has been allocated to the performance obligations
in the contract; and
> 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.
128
Chemring Group PLC | Annual report and accounts 2019
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.
Another significant source of Group revenue, especially within the Sensors
& Information segment, arises from time and materials contracts, where
revenue is typically billed on a monthly basis based on work performed
to date.
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:
> 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;
> 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
> 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.
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.
3. Group accounting policies continued
Discontinued operations and assets held for sale continued
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:
> technology
– average of ten years
> 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 eight years (2018: eight 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 (2018: eight 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:
> freehold buildings
– up to fifty years
> leasehold buildings
– the period of the lease
> plant and equipment – up to ten years
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 a weighted average cost basis. 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.
Chemring Group PLC | Annual report and accounts 2019
129
Financial statements Accounting policies continued
3. Group accounting policies continued
Tax continued
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.
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
expected credit losses.
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.
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.
130
Chemring Group PLC | Annual report and accounts 2019
3. Group accounting policies continued
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.
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.
Chemring Group PLC | Annual report and accounts 2019
131
Financial statements Accounting policies continued
3. Group accounting policies continued
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 metrics 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:
> amortisation of acquired intangibles;
> material exceptional items, for example relating to acquisitions and
disposals, business restructuring costs and legal costs;
> 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;
> gains or losses on the movement in the fair value of derivative financial
instruments; and
> 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.
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.
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Chemring Group PLC | Annual report and accounts 2019
The following exemptions from the requirements of IFRS have been applied
in the preparation of these financial statements, in accordance with FRS 101:
> share-based payments;
> financial instruments;
> fair value measurements;
> presentation of comparative information in respect of certain assets;
> IFRSs issued but not yet effective;
> related party transactions;
> assumptions and sensitivities for impairment review; and
> 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.
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:
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 2019 there is a provision of £5.8m 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 £nil and £5.8m.
The key uncertainties impacting taxation arise from potential changes
to legislation such as the OECD’s Base Erosion and Profit Shifting
(BEPS) project.
Defined benefit pension scheme
Included in the Group’s defined benefit pension scheme’s assets is an insurance
policy asset that falls under the Level 3 fair value hierarchy category, where
inputs for the asset are not based on observable market data. The asset is
offset exactly with a corresponding liability for the same value that is included
in the defined benefit pension obligation. The complex nature of the
valuation of the Level 3 insurance policy asset is subject to estimation
uncertainty in relation to the methodology and assumptions used.
Estimation is required in the determination of the discount rate and
inflation assumptions underpinning the valuation of the liabilities of the
Group’s defined benefit pension schemes. There is a range of possible
values for each of the actuarial assumptions and small changes in assumptions
may have a significant impact on the size of the deficit. Note 30 provides
information on the key assumptions and analysis of their sensitivities.
5. Accounting judgements and sources of estimation
uncertainty continued
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 £108.5m at
31 October 2019.
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 £26.1m at 31 October 2019. Included in this balance are
individually material balances relating to Joint Biological Tactical Detection
System (£8.6m) and Next Generation Chemical Detector (£11.1m).
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 2019 are set out in note 22.
Chemring Group PLC | Annual report and accounts 2019
133
Financial statements 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 2019 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 to 5.
In our opinion:
> 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 2019 and of the
Group’s profit for the year then ended;
> the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the
European Union;
> the parent Company financial statements have been properly prepared in accordance with UK accounting standards, including FRS 101 Reduced
Disclosure Framework; and
> 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 two financial years
ended 31 October 2019. 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:
Key audit matters
Recurring risks
Revenue recognition
£1.8m (2018: £1.8m)
5% of underlying profit before tax (2018: 5% of three year average underlying profit
before tax) normalised to exclude this year’s non-underlying items
94% of total profits and losses that made up Group profit before tax including
continuing operations only (2018: 88% of total profits and losses that made up Group
profit before tax (including all operations classed as continuing and discontinuing))
vs 2018
◄►
◄►
▲
Recoverability of parent Company’s investments in and intergroup receivable balances with subsidiaries
New risk
The impact of uncertainties due to the UK exiting the
European Union on our audit
134
Chemring Group PLC | Annual report and accounts 2019
2. Key audit matters: our assessment of risks of material misstatement
Key audit matters are those matters that, in our professional judgment, 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 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
The impact of uncertainties due
to the UK exiting the European
Union on our audit
Refer to page 61 (Audit Committee report),
page 127 (accounting policy) and page 123
(financial disclosures).
Unprecedented levels of uncertainty:
All audits assess and challenge the reasonableness
of estimates, in particular as described in
recoverability of parent Company’s investments
in and intergroup receivable balances with
subsidiaries below, and related disclosures and
the appropriateness of the going concern basis
of preparation of the financial statements
(see below). All of these depend on assessments
of the future economic environment and the
Group’s future prospects and performance.
In addition, we are required to consider the
other information presented in the annual report
including the principal risks disclosure and the
long-term viability statement and to consider the
directors’ statement 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.
Brexit is one of the most significant economic
events for the UK and at the date of this report
its effects are subject to unprecedented levels of
uncertainty of outcomes, with the full range of
possible effects unknown.
We developed a standardised firm-wide approach
to the consideration of the uncertainties arising
from Brexit in planning and performing audits.
Our procedures included:
> Our Brexit knowledge: we considered the
directors’ assessment of Brexit related sources
of risk for the Group’s business and financial
resources compared with our own understanding
of the risks. We considered the directors’ plans
to take action to mitigate the risks;
> Sensitivity analysis: when addressing parent
Company’s investments in and intergroup
receivable balances with subsidiaries risk and
other areas that depend on forecasts, we
compared the directors’ analysis to our
assessment of the full range of reasonably
possible scenarios resulting from Brexit
uncertainty, and where cash flows are required
to be discounted, considered adjustments to
discount rates for the level of remaining
uncertainty; and
> Assessing transparency: as well as assessing
individual disclosures as part of our procedures
on parent Company’s investments in, and
intergroup receivable balances with subsidiaries
we considered all of the Brexit related disclosures
and disclosures in relation to going concern
together, including those in the strategic report,
comparing the overall picture against our
understanding of the risks.
Our results
> As reported under parent Company’s
investments in and intergroup receivable
balances with subsidiaries we found the
resulting estimates and related disclosures in
relation to going concern to be acceptable.
However, no audit should be expected to
predict the unknowable factors or all possible
future implications for a company and this is
particularly the case in relation to Brexit.
Chemring Group PLC | Annual report and accounts 2019
135
Financial statements 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
Revenue recognition
(£335.2m; 2018: £297.4m)
Refer to page 61 (Audit Committee report),
page 128 (accounting policy) and page 95
(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 judgment with
respect to determining the timing of the
satisfaction of the performance obligations.
A number of service contracts are recognised
‘over time’ based on the estimate of the stage of
completion of the service. This estimate requires
a determination of the future costs to complete
the service which is both inherently uncertain
and open to manipulation as changes in the
estimate directly impact the amount of revenue
to be recognised in current accounting period.
Our procedures included:
> Control design: Evaluating controls over the
revenue process for goods recognised at a point
of time and services delivered over time,
including their operating effectiveness;
> Corroborating terms: assessing management’s
assumptions behind the timing of when control
transfers to the customer against the customer
contract for a sample of ‘point in time’ contracts.
Assessing management’s assumptions behind
the timing of revenue recognition based on
percentage of completion including reviewing
the sample of ‘over time’ service contracts to
the proportion of revenue recognised relative
to the stage of completion;
> Tests of detail: for the ‘point in time’ contracts
comparing the timing of revenue recognition for
a sample of goods revenue transactions in the
final month of the accounting period against the
point at which control transfers to the customer.
For a sample of ‘over-time’ service contracts
assessing the costs incurred and forecast to
assess stage of completion and comparing this
to other indicators such as customer certified
milestones and settled invoices;
> Challenging management’s assumptions: making
enquiries of contract project teams to obtain an
understanding of the performance of the
project throughout the year and at year-end
where revenue is recognised ‘over time’ based
on the estimate of percentage of completion.
Performing forecasting accuracy check by
comparing the previously forecast costs for
a sample of service contracts with the actual
results. Considering contract progress after
the reporting date to determine if the outturn
result had been accurately forecasted; and
> Assessing transparency: assessing the adequacy
of the Group’s disclosures about the degree of
judgment and estimation involved in determining
the timing of revenue recognition for ‘point in
time‘ and ‘over time’ revenue, accordingly.
Our results
> We found the timing of revenue recognition
to be acceptable (2018: acceptable).
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Chemring Group PLC | Annual report and accounts 2019
Recoverability of parent Company
investments in and intergroup
receivable balances with subsidiaries
(Investments in subsidiaries: £634.6m;
2018: £652.8m, inter-group receivables
with subsidiaries £395.1m; 2018: £436.9m)
Refer to page 61 (Audit Committee report),
page 132 (accounting policy) and pages 123
(financial disclosures).
The risk
Forecast-based valuation
A history of business combinations results in
significant 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 and assumptions that underpin the valuation
of future cash flows generated by subsidiaries.
The estimated recoverable amount of parent
Company investments and intragroup receivables
is subjective due to the inherent uncertainty
involved in forecasting and discounting future
cash flows for CGUs.
Our response
Our procedures included:
> Extrapolating past forecasting accuracy: assessing
three years’ historical accuracy of the cash flows
forecasting and building comparable variations
in forecasting accuracy into our own models
that were used to re-perform the valuation;
> Our sector experience: evaluating assumptions
used, in particular those relating to operating
cash flow forecasts;
> 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;
> Sensitivity analysis: performing sensitivity analysis
by reviewing the impact of reasonable downward
changes to the assumptions noted above;
> Comparing valuations: comparing the carrying
amount of the investments and intergroup
receivables with the expected value of the business
based on the Group’s market capitalisation and
the fair value of the net debt; and
> Assessing transparency: assessing whether
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 parent Company’s investments in and
intergroup receivable balances with subsidiaries.
Our results
> We found the resulting estimate of the
recoverable amount of parent Company
investments in and intergroup receivable
balances with subsidiaries to be acceptable
(2018: acceptable).
We continue to perform procedures over recoverability of Group goodwill and Group other intangibles. However, due to a lower risk of valuation
errors following impairment charges recorded in the prior year, we have not assessed this as one of the most significant risks in our current year audit
and, therefore, it is not separately identified in our report this year.
Chemring Group PLC | Annual report and accounts 2019
137
Financial statements Independent auditor’s report to the
members of Chemring Group PLC continued
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
(2018: £1.8m), determined with reference to a benchmark of underlying
Group profit before tax, normalised to exclude this year’s non-underlying
items as disclosed in note 3, of which it represents 5% (2018: 5%).
Materiality for the parent Company financial statements as a whole was
set at £1.35m (2018: £1.4m) determined with reference to a benchmark
of parent Company net assets, of which it represents 0.2% (2018: 0.2%).
We agreed to report to the Audit Committee any corrected or
uncorrected identified misstatements exceeding £0.1m (2018: £0.1m), in
addition to other identified misstatements that warranted reporting on
qualitative grounds. We use a higher threshold of £250,000 for matters
only related to reclassification.
Underlying profit before tax
£39.4m (2018: £24.9m)
Group materiality
£1.8m (2018: £1.8m)
£1.8m
Whole financial
statements materiality
(2018: £1.8m)
(2018: £100k to £1.4m)93+7+M
£1.35m
Range of materiality
at ten components,
including parent Company
(£50k to £1.35m)
Of the Group’s eleven continuing trading components, we subjected eight
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 10% of total Group revenue, 4% of total profits and
losses that made up Group profit before tax and 5% of total Group
assets is represented by one component. For this residual component,
we performed analysis at an aggregated Group level to re-examine our
assessment that there were no significant risks of material misstatement
within this.
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 £50k to £1.35m, having regard to the mix
of size and risk profile of the Group across the components. The work on
six of the ten 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.
The Group team visited two overseas components located in Australia
and the US to assess the audit risk and strategy. Additionally we performed
inspection of the work covering key audit matters at all component audit
teams performing audit for Group reporting purposes.
Teleconference meetings were held with all component auditors. At these
meetings, the Group audit team provided further input into audit risk and
strategy, and the findings reported to the Group audit team were discussed
in more details, and any further work required by the Group team was
then performed by the component auditors.
138
Chemring Group PLC | Annual report and accounts 2019
Underlying profit before tax
Group materiality
Group revenue*
£0.1m
Misstatements reported
to the Audit Committee
(2018: £0.1m)
Total profits and losses
that made up Group
1
2
89
78
12
69
94
69
69
14
14
14
(2018: 83%)
(2018: 90%)
90%
96%
Group total assets*
profit before tax*78+
94+
89+
69+
89+
84+
66+
72+
Full scope for Group audit purposes 2019
95%
92%
Specified risk-focused audit procedures 2019
(2018: 77%)
(2018: 85%)
14
11
14
13
69
69
89
72
84
11
66
4
Total profits and losses
that made up Group profit
before non-underlying
items and tax*
Full scope for Group audit purposes 2018
Specified risk-focused audit procedures 2018
Residual components
* In 2019 audit coverage has been calculated on the above measures including only
continuing operations. In 2018 audit coverage has been calculated on the above
measures, including all operations classed as continuing and discontinuing.
12
+
10
+
L
11
+
5
+
L
2
+
4
+
L
4
+
7
+
L
14
+
17
+
L
13
+
15
+
L
1
+
10
+
L
11
+
23
+
L
4. We have nothing to report on going concern
The directors have prepared the financial statements on the going
concern basis as they do not intend to liquidate the Company or the
Group or to cease their operations, and as they have concluded that the
Company’s and the Group’s financial position means that this is realistic.
They have also concluded that there are no material uncertainties that
could have cast significant doubt over their ability to continue as a going
concern for at least a year from the date of approval of the financial
statements (“the going concern period”).
Our responsibility is to conclude on the appropriateness of the directors’
conclusions and, had there been a material uncertainty related to going
concern, to make reference to that in this audit report. However, as we
cannot predict all future events or conditions and as subsequent events
may result in outcomes that are inconsistent with judgements that were
reasonable at the time they were made, the absence of reference to a
material uncertainty in this auditor’s report is not a guarantee that the
Group and the Company will continue in operation.
In our evaluation of the directors’ conclusions, we considered the inherent
risks to the Group’s and Company’s business model and analysed how
those risks might affect the Group’s and Company’s financial resources
or ability to continue operations over the going concern period. The risks
that we considered most likely to adversely affect the Group’s and
Company’s available financial resources over this period were:
> manufacturing facilities safety incidents; and
> the impact of political considerations on defence spending budget cuts.
As these were risks that could potentially cast significant doubt on the
Group’s and the Company’s ability to continue as a going concern, we
considered sensitivities over the level of available financial resources
indicated by the Group’s financial forecasts taking account of reasonably
possible (but not unrealistic) adverse effects that could arise from these
risks individually and collectively and evaluated the achievability of the
actions the directors consider they would take to improve the position
should the risks materialise. We also considered less predictable but
realistic second order impacts, such as the impact of Brexit and the
erosion of customer or supplier confidence, which could result in a rapid
reduction of available financial resources.
Based on this work, we are required to report to you if:
> we have anything material to add or draw attention to in relation to
the directors’ statement on pages 88 and 89 of 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 twelve months
from the date of approval of the financial statements; or
> the related statement under the Listing Rules set out on page 88
is materially inconsistent with our audit knowledge.
We have nothing to report in these respects, and we did not identify
going concern as a key audit matter.
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:
> we have not identified material misstatements in the strategic report
and the directors’ report;
> in our opinion the information given in those reports for the financial
year is consistent with the financial statements; and
> 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:
> the directors’ confirmation within the long-term viability statement on
page 56 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;
> the principal risks disclosures describing these risks and explaining how
they are being managed and mitigated; and
> 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.
Our work is limited to assessing these matters in the context of only the
knowledge acquired during our financial statements audit. As we cannot
predict all future events or conditions and as subsequent events may result
in outcomes that are inconsistent with judgments that were reasonable at
the time they were made, the absence of anything to report on these
statements is not a guarantee as to the Group’s and Company’s longer-
term viability.
Corporate governance disclosures
We are required to report to you if:
> 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
> 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 eleven provisions of the UK Corporate
Governance Code specified by the Listing Rules for our review.
We have nothing to report in these respects.
Chemring Group PLC | Annual report and accounts 2019
139
Financial statements Independent auditor’s report to the
members of Chemring Group PLC continued
Secondly, the Group is subject to many other laws and regulations where
the consequences of non-compliance could have a material effect on
amounts or disclosures in the financial statements, for instance through
the imposition of fines or litigation or the loss of the Group’s licences to
operate. We identified the following areas as those most likely to have
such an effect: health and safety, environmental and anti-bribery and
corruption, recognising the nature of the Group’s activities and the
governmental nature of many of Group’s customers. Auditing standards
limit the required audit procedures to identify non-compliance with these
laws and regulations to enquiry of the directors and other management
and inspection of regulatory and legal correspondence, if any. Through
these procedures, we became aware of actual or suspected non-compliance
and considered the effect as part of our procedures on the related financial
statement items. The identified actual or suspected non-compliance was
not sufficiently significant to our audit to result in our response being
identified as a key audit matter. Our procedures included examination of
legal advice provided from management experts, evaluating directors’ and
other management estimates of outflow taking into account latest
available information, considering the adequacy of the Group’s disclosures
in respect of associated provisions and contingent liabilities recorded.
Owing to the inherent limitations of an audit, there is an unavoidable risk
that we may not have detected some material misstatements in the
financial statements, even though we have properly planned and performed
our audit in accordance with auditing standards. For example, the further
removed non-compliance with laws and regulations (irregularities) is from
the events and transactions reflected in the financial statements, the less
likely the inherently limited procedures required by auditing standards
would identify it. In addition, 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. We are not responsible for preventing non-compliance and cannot
be expected to detect non-compliance with all laws and regulations.
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
16 December 2019
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:
> 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
> 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
> certain disclosures of directors’ remuneration specified by law are not
made; or
> 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 pages 88 and 89,
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
general commercial and sector experience and through discussion with
the directors and other management (as required by auditing standards),
and discussed with the directors and other management the policies
and procedures regarding compliance with laws and regulations.
We communicated identified laws and regulations throughout our
team and remained alert to any indications of non-compliance throughout
the audit. This included communication from the Group to component
audit teams of relevant laws and regulations identified at Group level.
The potential effect of these laws and regulations on the financial
statements varies considerably.
Firstly, the Group is subject to laws and regulations that directly affect the
financial statements including financial reporting legislation (including related
companies legislation), distributable profits legislation and taxation legislation
and we assessed the extent of compliance with these laws and regulations
as part of our procedures on the related financial statement items.
140
Chemring Group PLC | Annual report and accounts 2019
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 the US:
23031 Ladbrook Drive
Dulles
Virginia
20166
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
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:
> Current share price
> Shareholder services and notices
> Analysts’ forecasts
> Key financial information
> Corporate governance
> Regulatory news
> Financial calendar
> Results and presentations
Chemring Group PLC’s 2019 annual report and accounts 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.
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.
Chemring Group PLC | Annual report and accounts 2019
141
Other information
Chemring Group PLC
Roke Manor
Old Salisbury Lane
Romsey
Hampshire SO51 0ZN
United Kingdom
Tel: +44 (0)1794 833901
Email: info@chemring.co.uk
www.chemring.co.uk